RSS feedsWatching all your carefully laid plans falling apart at the seams is an extremely unpleasant experience for anyone, but especially galling when the failure of those plans effectively means the demise of a business that has been a local institution for two generations.
Our founding partners must be turning in their graves to see what has become of the firm they started.
Like many independent practices we woke up to the fact that we had a succession problem some years ago when our two oldest partners retired. However, over the years we have built up an extremely attractive client base with good opportunities for specialisation so we had little difficulty in recruiting two young high flyers.
The firm thus remained at seven partners and the agreement was that the two youngest would join us in an MBO at the end of 2008 to buy the equity and create an exit route for two partners retiring in 2009 and 2010. This would leave us with a good age balance in the partnership and excellent prospects of attracting additional partners when we needed to.
Unfortunately, our two high-flyers have had a change of heart. Earlier this year they announced they were no longer prepared to invest in the MBO and, furthermore, were intending to leave the practice.
I suspect the economic crisis played a part in that decision, but I also think that, having bedded themselves firmly in with many of our clients, they saw an opportunity to use the money they were supposed to invest with us as seed capital for their own business; with the added prospect of poaching some of our clients.
This was not an eventuality that I or the other partners had anticipated when we were drafting the partnership agreements for these two and so we found ourselves with very little in the way of legal sanctions to fall back on. The retiring partners are more concerned about their payouts than the plight of the remaining partners, or the business and the effects of all this upheaval and acrimony on the rest of the firm has been extremely depressing: staff morale has never been lower.
The only realistic solution to this debacle was a merger, which would be more of a fire sale than a merger of equals. With all the problems we were facing, we were lucky to find a practice willing to take us on and I am sure that the firm’s past reputation played a very significant part in their decision.
But have we jumped out of the frying pan into the fire? As we investigate the financial aspects of this deal, some major issues have become apparent.
In the first place, there is our office building. The firm we are merging with expect us to move to their offices which are far more modern and were purpose built for them. Not only do we not own our building, but we signed a new 15-year lease in 2000. There is plenty of office space available in our city so the chances of finding a tenant are not good. We have also invested a considerable amount of money in developing our IT, but will we get much of a return on that investment? Again, the firm we are merging with expects us to conform to their systems and although there is some synergy, a lot of what we are currently using will be redundant – along with some of our staff whose redundancy payments will probably also be our responsibility.
Then there are the two partners who retired some years ago. They still receive an annuity which we will have to fund for the remainder of the term.
Would we have been better off trying to raise the capital needed to soldier on and saddle ourselves with debt? Is it too late to abandon the merger and try this route? We have to make a decision soon or the other firm may pull out. If ever I needed a crystal ball it is now.
