Lawyers who are approaching retirement and practice in firms with multiple partners will need to delve into some issues separate from those faced by solos and the smallest firms.
The Crucial Role of the Partnership Agreement
It is essential, of course, to develop a strategy for successfully transitioning client relationships and other responsibilities to other partners or qualified associates in the firm. However, the first step for those who work in multi-partner firms is to review their partnership agreement. Of course, this raises the issue that far too many law firms do not have a written partnership agreement.
But putting that issue aside for now, focus on understanding your rights and options as you begin to plan your exit from the firm—especially as this will have a significant impact on both the timing and the financial aspects of your retirement plans. Too few lawyers understand their partnership agreement, having leapt at the chance to become partner but not actually reading the agreement itself. Or they read it years ago, but do not remember pertinent provisions. Lawyers nearing retirement age in a multi-partner firm, however, should be able to answer certain questions about their partnership agreement.
You will need to first consider whether is the agreement has a buyout provision for the firm’s partners. Your potential movement into an “of counsel,” “counsel emeritus,” or equivalent position, or out of the firm entirely, will also be governed by such provisions (or the statutory equivalent in the absence of a written agreement).
But, of course, there are other questions to ask about the partnership agreement’s terms so that senior lawyers can know what the answers may mean for their financial future. Some key issues include:
- How much did you actually pay to join the firm?
- Does the firm consider there is goodwill for your interest in the firm?
- Will you receive severance and a share of the firm’s receivables when you leave?
- Presuming there is a buyout provision, will the money be paid to you in a lump sum, or in monthly or other increments?
- Are you a personal signatory to the firm’s line of credit or lease?
- Would you have to pay anything if you left in six months? In one year? In five years?
- Will you be able to continue your health, disability or similar insurance coverage through the firm?
You should ask other, broader, questions also, particularly if the firm has been experiencing financial difficulties. For one, do you know if your up-front contribution has gone for the improvement of the firm, or is it being split among the other partners? Do you know if there are only certain times of the year (for example, your anniversary date or the last day of the fiscal year) when you can leave and get your full investment back? The partner who can’t answer such questions is probably guilty of personal financial negligence—and may find that retirement plans need to be altered considerably.
Here’s an important story about the timing of the agreement’s review and why it is such a critical early step: A number of years ago, one of my clients, who was a founding partner of her small law firm, wanted to retire from the firm to take a position on the bench. I advised her to review the firm’s partnership agreement before I started on a course of action to guide her in the transition. She procrastinated on the review as I moved forward on her work, still urging her to review the agreement. It was only when my assignment was close to completion that she finally reviewed the details of her partnership agreement. To her horror, she found that while the partners had agreed to take their proportionate share of the then-existing accounts receivable upon their exits, it was only if the notice of termination came in December of each year. The reasons for this are irrelevant here, but the net result was that a move would have cost her several hundreds of thousands of dollars—a cost that effectively put an end to her opportunity to leave the firm for the bench at that time.
Assuming, however, that you review your partnership agreement and separation or termination is economically feasible, you can then announce your wishes to the remaining stakeholders and work with them to structure a specific time frame for your departure. Importantly, this needs to include a mechanism to decide which remaining lawyers in the firm will be primarily responsible for the clients with whom you currently are the relationship-and-billing manager.
This pass-off or transition will be essential for the firm’s future health, a concern for you especially if you will be receiving payments from the firm over time.
What to Do If There Is No Partnership Agreement
If no partnership agreement controls the buyout of your interest in the firm, then you will need to broach the subject for consideration by the group as to how to deal with your interest, what the value of your interest actually is, and how to pay for your interest as it may be valued.
Comparing this to a solo practitioner’s options, it comes very close (if not exactly identical) to selling a law practice. But major differences between the two processes are as follows:
- Solos who, short term or long term, are unable to sell the practice can continue to operate until a sale does occur, or they can close the practice on their own terms and at their own pace. In a partnership, however, if you can’t agree on the elements of a buyout, including the value of your interest, there may be no easy way to vacate the premises. And your liability to creditors (most importantly to the bank on a line of credit and to the landlord on a lease) may do more than haunt you; it may substantially affect your net worth. Some lawyers in this situation find themselves chained to their desk for several years until the liabilities dissipate or get renegotiated without them. They may also find themselves now working among lawyers with adverse interests.
- A sale agreement is prepared after the major terms of a transaction have been negotiated. In a buyout, with no plan already in place, a negotiation must begin among partners who are still in a fiduciary relationship with one another—and who may have to “walk on eggs” to create a workable resolution while still practicing law together, representing clients, and seeking to be as profitable as possible for the benefit of all. Emotionally, this can be very trying, with tempers perhaps on edge and ready to explode at any moment, depending on the relationship among the principals and the others’ reaction to the reasons for the desired departure by the one partner.
- As mentioned, a sale will be negotiated and documented at the end of the practice’s life. A buyout, if there is an agreement on the entrance of each new partner, is set in place at the very beginning or at the time of entry of each new partner. Assuming that the partnership continues for years after such an agreement is created, a departing partner may have second thoughts about the low value of the interest in the partnership to which he or she is entitled. Plus, the remaining partners may have second thoughts about how high the price is for the departing partner’s interest and how they will be able to both run the ongoing operation and incur the new cash flow drain to pay the departing partner. After all, this payment is not one covered by insurance, as is the case in death with a key-man insurance policy in place. And rarely is any agreement drafted with the deftness of the U.S. Constitution. A mechanism for periodic review and possible modification is a must for the agreement to be seen as fair to all parties over time.
A firm’s senior lawyers are typically not only its key rainmakers but also its leaders in other respects. Most firms, however, are not addressing the issue of formal leadership transitions with urgency. While the various mechanisms for transferring the management reins in larger firms are outside the scope of this article, suffice it to say that as the population ages overall, law firms need to find ways to help their senior leaders retire gracefully.
The leadership structure of any law firm should be considered carefully and changed to meet today’s sophisticated needs. No longer can the larger firm follow the relaxed country club model of firms from decades past. They must have clearly defined leadership roles, for lawyer-managers and for professional administrators, and mechanisms by which leadership transfers. Failure to operate in this way causes poor economic results and unhappy lawyers. If all firm members are not clear about the issue of transition, there can be no real firm leadership—and ultimately there may be no firm.