Merger Part 3

As we mentioned in our last column, we are going to visit a couple of questions that have been posed to us by several of our younger partner readers on this topic. At the end of the day, remember that just because junior and senior partners may be in different positions, have diverse perspectives, and at times, opposite expectations, that doesn’t necessarily mean that you can’t find resolution in the same solutions. So, let pick up with a question/comment or two.

Young Partner Question:

My generation is going to inherit a lot of the issues you have been covering, like senior partners making so much money, they don’t really care about how the firm survives beyond them, or if the organization is built around specific individuals rather than process and interchangeable roles. As junior partners, many times we don’t have the power or authority to “fix” these issues unless the senior partners are willing to take action and/or spend the money. What steps can junior partners take now to convince Senior Partners to take action? In other words, what leverage do we have?

Our Response:

Let’s start with leverage. Younger partners, and even soon-to-be incoming partners, have tons of leverage. For a long time in my life, I would constantly see myself on the wrong end of a negotiation. When I was buying something, it seemed like it was a seller’s market and I should feel lucky to even be able to acquire whatever I was after -- regardless of the cost. And then when I would be in a position to sell something, I felt like my timing was terrible because it always seemed like I was selling in a buyer’s market and would be fortunate to find anyone who even wanted what I had to offer -- regardless of the loss I had to take.

Most of the time, this perspective was wrong. It was driven by my anxiety, not reality. We tend to overlook whatever positive attributes, skills, products or service that we have to offer and assume they are abundant and ubiquitous. And whatever we don’t have, or whatever we want, we similarly assume that everyone else wants exactly the same things, so scarcity drives our thought process and decision making.

So, to put this back into the context of this question, there is no greater asset to a firm than its young leaders, whether they are current or incoming partners. If you can’t see that, you are being blinded by your own anxiety or insecurity. Just think how happy you would be to find a talented available manager or senior who wants to join your firm. Or, think about how often you have had discussions about the shortage of new partner candidates. Or what about the last time one of your top people wanted to go part time, or move to a different city – how long did it take your group to create a position that would allow that person to stay with the firm in newly defined role? Keeping talent is the life-blood of the professional service firm.

While the senior partners may often act like the younger partners don’t have choices, you need to understand that you have more power than you ever dreamed. For example, the senior partners couldn’t make the money they make without the younger and future partners carrying a significant load of the firm’s work. The senior partners wouldn’t have anyone internally to buy them out if they weren’t grooming younger partners to take over. In any professional service business, volume and profit are driven by the number of hours available from talented people who work within the organization. And after working with firms for three decades, I can tell you that firms will do almost anything to keep their talented people around. So, for the young talented people reading this, the short answer is that you probably have all the leverage you want. You just have to be willing to use it.

Now, let me make this clear. There is a difference between leverage and stupidity. Just because you have leverage, it doesn’t mean you want to slap someone across the face in public with it. You need to start your discussions and argument from a position of what is best for the firm, not what is in your selfish best interest. You need to understand that the fixes you want to make are going to come out of your pocket too. You have the right, and should exercise your right, to demand that the firm you are going to eventually take over is being run in a way that gives you a reasonable chance of success. Based on our experience, when younger partners are having dialogue with the senior owners about how to invest in the firm so that succession, firm continuation and value are enhanced, synergy is created. All sides want the same thing. So, if you want today’s profits invested for tomorrow’s gain (to make the firm more secure and valuable in the future), then stop trying to negotiate the lowest buyout possible with those nearing retirement.

In every firm we have ever dealt with, what is good about the firm is pervasive in all of the partners. And what is bad about the firm is equally pervasive. As a younger partner, you need make sure you are not getting caught in the same trap you mention that the senior partners are in by wanting the problems of the firm to be fixed before you take over, but not on your dime, and not requiring your time. You need to verify that you are striving to do the right things for the firm’s long term effectiveness … not just defaulting to short-term efficiency and personal gain.

But if you are willing to put in the time, the dime, and do the right things for the firm, if you find yourself constantly stalemated by your senior partners, then it is time to teach them the most important lesson of all -- that they need you a lot more than you need them. For example, when a firm merges or sells and has a dearth of leadership talent beyond the retiring partners, the value of that transaction plummets. We are not aware of a firm in the country that is not interested in finding more talented young partners. You have all the leverage you need, unless you are just looking for a gift and a guarantee, and if this is the case, you are not likely the partner material that you think you are.

Young Partner Question:

Based on numerous discussions with my peers, it seems that the issue of having senior partners who may be five to seven years away from retirement who DO NOT WANT to invest profits in talent, technology, marketing, niche development, etc., is pervasive. Instead, they want to maximize their take home pay for a few more years, and then they expect to be bought out at some healthy multiple of their book. The elephant in the room is, “What will the firm look like in five to seven years if we continue on this path, and do we want to buy-in to a firm that looks like that?” If the senior partners decide to milk this cash cow until they the last day they can, shouldn’t that impact our “buy-in” and their “buy-out?”

Our Response:
It is time for an important reality check. If you are in an organization where the senior partners are milking the firm as a cash cow, not investing in the future, and trying to elicit a premium buyout price, why are you still there? It is not too late. Out of the last 20 years, there were probably only 18 months where firms experienced major personnel cuts. The rest of that time, including today, firms are investing in growth and always on the lookout for talented experienced people. You are not stuck in your firm … you are simply stuck in your mind. Your options are significant.

Now, before you jump ship, let me come back to the hundreds of discussions we have had with partner groups on this topic. First, are you looking for your senior partners to invest in the firm while guaranteeing and maintaining all of your pay? Second, are you doing what a partner needs to be doing every day to make the firm better, faster and stronger, or do you feel what you do is fine and that it’s just everyone else that is falling short? Third, are you investing your time in developing others, or are you just doing the work in whatever way that makes you the most money? Fourth, are you looking for other people to do the heavy lifting in improving technology, formalizing marketing around roles, responsibilities and process, building new niches, etc.? And I could go on. The point is … are you thinking like an owner? Are you doing what is right for the firm even though you personally might sacrifice income today to create a better firm for tomorrow? Or are you thinking like an employee and wanting everyone else to fix all of this for you in order to make your life easier?

I am going to come back to the key phase used in this question. It is “five to seven years.” In that time, you can scale mountains when it comes to building a new culture in your firm, creating talented people with capacity at every level, instilling processes that everyone follows, creating accountability to reward the people who are carrying the load and put a spotlight on those who just want to be carried. The point is … this is your time to start building a better firm. And because the efforts to build a better firm will consume additional resources (time, money and skill), then that means the senior partners are giving up something now in return for something better later. You can’t have it both ways … you can’t expect the senior partners to give up short-term earnings and then additionally discount long-term value. If we maximize profits now, then what you inherit will be an organization with a great deal of deferred maintenance. If this is the case, you should expect to pay a little less than market for the organization since the firm is in disrepair. One the other side, if your firm makes the necessary investments, then you should expect to pay full market because you are buying a smooth running operation that you are already part of and fully familiar with. This is a fantastic position to be in.

Wrap-Up Comment:
As a younger partner, it is time to stop being passive about the firm you are building to buy. It is in your best interest to build a better firm. Start lobbying hard for the changes you feel would be in the best interest of your firm. Start making changes in the way you operate so you are building a better, faster, stronger firm every day. Stop worrying about whether you might end up paying a little too much for a firm that operates on the best practices you will exemplify over the next five years, and start worrying about the current track you might be on to inherit a firm not worth buying.

Stop being a victim of your senior partners, and start building something of real value to your future. And if you find you can’t make it happen where you are … then change where you are. It is your life and you are in the driver’s seat … don’t live it merely as a passenger. If you can’t see the opportunity all around you, it is probably because you are not looking at the road right in front of you. As always, we wish you the best of luck where ever your path takes you.