Succession planning is often viewed as a future problem – something to be addressed when retirement is on the horizon. But in reality, it’s a strategic imperative that professional firms must tackle early and revisit often. Whether operating as a partnership, LLP, or company, the absence of a clear succession strategy can lead to operational disruption, financial strain, and reputational damage. This article explores the risks of inadequate planning through illustrative scenarios and offers practical guidance on how to build a resilient, future-ready firm.
When planning fails: what can go wrong
Scenario 1: the small firm shock
Picture a small professional firm with three senior leaders. One retires as expected and the remaining two believe they can manage the increased workload. But, when one of them falls ill unexpectedly, the firm is left with a single leader juggling all responsibilities. Deadlines are missed, quality suffers, and stress levels soar. Clients begin to lose confidence and the firm’s reputation takes a hit. Without a succession plan, the firm struggles to attract new leadership or investment, and the risk of professional indemnity claims rises – making the firm even less appealing to potential successors.
Scenario 2: the mid-sized firm squeeze
In a larger firm, with a dozen or more principals, several are approaching retirement within a short timeframe. Without a coordinated plan, some may focus on extracting profits rather than ensuring the firm’s long-term health. This can lead to significant capital repayment obligations, draining cash reserves and limiting investment in systems, staff, and innovation. The firm’s ability to deliver consistent service may decline, damaging its brand and making it harder to recruit or retain the next generation of leaders.
Scenario 3: the corporate conundrum
In a company structure, a senior shareholder is preparing to exit. Historically, profits have been fully distributed, leaving little in reserve. The company’s articles require a buyback of shares if no successor is ready to step in. With no funds available, the firm is left with a non-working shareholder entitled to dividends, placing financial strain on the remaining directors. Delays in resolving the situation can also create tax complications for the departing shareholder, adding further complexity.
Building a resilient succession strategy
1. Attracting and retaining future leaders
Younger professionals today are often more cautious about investing large sums into ownership. Firms need to rethink how they structure entry – considering phased buy-ins, share schemes, or lockstep models that align with modern expectations. Clear progression pathways, mentoring, and leadership development can help retain talent and prepare future leaders.
Culture also plays a pivotal role. Millennials and Gen Z professionals are drawn to firms that align with their values and offer a sense of purpose. Firms that invest in technology, flexible working, and continuous learning are more likely to attract and retain the right people. Embedding values into everyday operations – not just marketing – can make a real difference.
2. Planning for exits – before they happen
Understanding the intentions of current leaders is essential. Regular, open conversations can help avoid surprises and ensure smooth transitions. Governance documents – such as partnership agreements or articles of association – should clearly define retirement terms, notice periods, non-compete clauses, and exit protocols. Some firms also include provisions to limit the number of leavers in any given period, helping to manage financial and operational impact.
Firms should also consider the terms of any post-retirement consultancy arrangements. These can provide continuity and knowledge transfer, but they need to be structured carefully to avoid blurring lines of responsibility or creating tax issues.
3. Funding the transition
One of the most overlooked aspects of succession planning is how to fund it. Understanding the financial implications of partner exits is crucial. Cash flow forecasting can help assess whether current capital contributions are sufficient – or whether external financing might be needed. Firms should also look at improving working capital by reducing debtor days or managing WIP more effectively.
For companies, share buybacks and employee ownership schemes require careful planning. While EMI schemes may not be available to many professional firms, alternatives like CSOPs or unapproved share plans can be explored. However, these come with tax and legal implications, so specialist advice is essential.
Looking ahead: a continuous process
Succession planning isn’t a one-off exercise – it’s an ongoing process that should evolve with the firm. Regular reviews, scenario planning, and stress testing can help identify gaps and prepare for the unexpected. Whether it’s a planned retirement or an unforeseen departure, having a clear, flexible plan in place can make all the difference.
Firms that embrace succession planning as a strategic priority – not just a compliance task – are better positioned to grow, adapt, and thrive in a competitive landscape.
So, what’s your firm’s plan for the future?
If the answer isn’t clear, now might be the perfect time to start the conversation.
To hear more on this topic, join Max Masters (Accounts Senior Manager, Kreston Reeves LLP) and Gus Teunissen-High (Tax Manager, MHA) at the Solicitors Community annual conference, where they will explore some of the key challenges legal firms face in succession planning, focusing on practical, commercial, and tax considerations, along with strategies to effectively manage and mitigate the associated risks.
*the views expressed are the author's and not ICAEW's