Succession impasse at a Colombo quantity surveying practice
A 42-person quantity surveying practice in Colombo is owned 55% by its founding partner, who is 68 and plans to retire in nine months. The remaining shares are held by two directors: a commercial director (35%) and a technical director (10%). The board has three seats and decisions require a simple majority. Over the past 18 months, six graduate quantity surveyors have resigned, citing unclear promotion paths and partner politics. Revenue is LKR 310 million, but 58% comes from one property developer. The founding partner wants to sell his stake to an outside investor; the commercial director wants a management buy-in; the technical director wants to split the firm into two units. No shareholder agreement exists, and the firm's bank has asked for a succession plan before renewing a LKR 25 million overdraft. Staff have heard rumours and two key project teams are unsettled.
1. As the independent adviser, diagnose the governance and leadership failures that created this succession impasse. For each failure, explain the business risk it creates.
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The impasse is a governance failure, not merely a disagreement about valuation.
- No shareholder agreement. There is no exit mechanism, valuation method, deadlock-breaker or reserved-matters list. Risk: the founder can block any sale, the minority directors can be ignored, and the bank may withdraw the overdraft while the parties argue.
- Ownership and management are conflated. The 55/35/10 split with a simple-majority board lets the founder control ordinary decisions but not legitimacy. The commercial director carries the commercial relationships yet cannot protect his position. Risk: key-person dependency and factional decision-making.
- No independent chair or transition authority. Board meetings become negotiations between shareholders rather than oversight of the firm. Risk: delays in client commitments, hiring and bank covenants.
- Talent and succession neglect. Six graduate resignations and unclear promotion paths show the firm has not built a leadership pipeline. Risk: loss of project teams, client fee income and the next generation of partners.
- Client concentration. With 58% of revenue from one developer, any succession uncertainty is also a client-retention risk. The bank and the developer will both read instability as a credit issue.
The first task is therefore to install a process: independent chair, standstill with the bank, valuation protocol and a decision timetable.
2. Recommend a nine-month succession process that protects the bank relationship, retains key staff and produces a durable ownership structure. Include the decision rules and the first three actions.
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Process design
- Weeks 1-2: Appoint an independent chair or mediator with authority to run a transition committee. Freeze major capital spending, new shareholder loans and profit distributions until the bank position is clear. Meet the bank with a written timetable, not a promise.
- Weeks 2-6: Commission an independent earnings-based valuation with a clear formula for goodwill, work-in-progress and debt. Obtain a standstill or temporary renewal of the LKR 25 million overdraft.
- Weeks 4-12: Negotiate a term sheet covering staged buyout, tag-along and drag-along rights, reserved matters (new shareholders, borrowing, partner remuneration, sale of the firm), and deadlock resolution by mediation then expert determination.
- Months 3-9: Evaluate the three routes against client consent, bank support and staff retention. An outside investor may bring capital but can destabilise clients; a split may destroy economies of scale; an MBO is likely to be the most stable if the commercial director can finance a staged purchase.
Decision rules: no route proceeds without bank confirmation, written client consent where contracts require it, and retention agreements for the top eight fee-earners. First three actions: appoint the independent chair; commission the valuation; sign a bank standstill. Staff should hear the timetable from the chair, not from rumours.