Our first article on risk management and business succession planning set out the key risks faced by professional service businesses. This follow up takes a look at some real-world examples which illustrate how failures in succession planning can affect businesses, be that through professional indemnity claims or simply a devaluing of the business or damage to its reputation.
1. Vacancy/transition risk
A claim arose in relation to a will where a partner started the process of revoking a survivorship destination, then left the firm. A solicitor in the team arranged for it to be signed but failed to lodge it in good time. Unknown to him, the evacuation was only lodged after the testator's death, so her share of the property had already transferred to her husband, rather than her brother as had been intended. The brother brought an unsuccessful action to uphold the revocation and made a claim against the solicitors for half the value of the very expensive property.
This could have been avoided by the business and the departing partner being required to plan and execute a thorough handover before leaving, but it also speaks to the importance of filling vacancies timeously and ensuring the firm has identified and if necessary, recruited the right candidates for any role. Forward planning to identify an appropriate successor would have gone some considerable way to reducing the risk of this claim arising.
2. Readiness/transition risk
A firm (out with the legal sector) had been marketed for sale when mid-transaction a key manager died. Not only did this put an end to the deal, it also significantly reduced the marketability and value of the business, since the goodwill resided principally in the deceased's customer and client connections, standing in the industry, and operational knowhow. A subsequent sale was achieved by the remaining owners and the deceased's executors, but at a substantially reduced price which reflected both the absence of continuity and impaired ability to manage the handover and preserve goodwill. This also reduced the number of potential buyers and therefore the ability to negotiate on price.
It was acknowledged that the value of the business had been overly dependent on one individual, despite that individual nearing retirement and planning an exit. There was a substantial and competent team capable of forming the "next generation" and allowing the exiting owners to achieve much greater value for the business, but there had been a failure to plan and implement the transition much further in advance.
3. Readiness/portfolio risk
A claim was made against a firm relating to data protection and GDPR advice given to a major client. The firm had been known to have a well-recognised expert in the field; however, he had retired for health reasons without any real successors at the firm of equivalent technical expertise or experience. The major client encountered an issue with a data subject access request and an alleged breach of GDPR and data protection, and the firm continued to provide that advice. Unfortunately, those doing so missed several key points and the client was later issued with a very large (six figure) penalty by regulators. The client then made a claim against the firm alleging it had been provided with negligent advice. The claim in turn was settled for a substantial sum.
The firm did not have the requisite succession plan in place and so, when the expert retired, was left with a skills gap. Those remaining dabbled in an area they were ill-equipped to advise on, and the failure to plan cost the firm and its insurers a considerable sum, significant reputational issues in what had been an area of market focus, and harmed a key client relationship, no doubt at the further cost of lost future revenue.