You have become the lawyer you always wanted to be, and you ought to be commended! You are a trusted advisor to some great clients who rely on you when their lives turn upside down. You have established a legal practice that, though occasionally a runaway train, is generally financially stable and yields stimulating work. No, it hasn’t always been easy—you have made sacrifices, and have contended with some ridiculous opposing counsel. But your practice is not in danger of going under on a weekly basis, and you even have a personal life.
In those fleeting moments when you lift your eyes out of the workday fog and dream far down your career trajectory, what does the end look like? Before you quickly click over to the next email, don’t escape the magnitude of that question. Your answer will have a profound impact on all that you have built.
You must identify what succession option best suits you and your clients. If you own a solo practice, do you already have a fellow practitioner on staff whom you’re grooming to take over when you’re gone? Though this classic example of a succession plan (the “internal sale”) sounds simple enough, a multitude of loose ends will still need to be tied up before hanging it up: What happens when they don’t or can’t take over, whether through a change in life circumstance or simply preference? What is the financial arrangement that leads to an orderly transition within the practice? Is it written down anywhere?
If you are solo, or no willing successor is in your practice already, have you identified another lawyer or firm who will take over your practice through an external sale (e.g. buyout, merger, or acquisition)? Assuming that your intent is not to simply close the doors and let the buzzards have at your clients and let the wind absorb your forthcoming profits, you have some serious decisions to contemplate.
Whatever path you ultimately take, our panel of practice management advisors offers guidance you can apply no matter where you are in planning the finale of your practice.
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Charity Anastasio (CA) is the practice and ethics counsel at the American Immigration Lawyers Association in Washington, DC. She was a Women in Legal Tech Honoree in 2020 and is a frequent presenter at the ABA TECHSHOW. Find her at @charityanas. |
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Laura L. Keeler (LK) is the law practice advisor at Lawyers Concerned for Lawyers, Massachusetts Law Office Management Assistance Program in Boston, Massachusetts. To prepare for this piece, she interviewed people with a range of perspectives, including those who have sold their small businesses to successors, those who assist others in selling their business, and those who consult for law firm succession planning. Contact her at Laura@MassLOMAP.org |
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Catherine Sanders Reach (CSR) is the director for the Center for Practice Management at the North Carolina Bar Association in Cary, NC. Catherine has been talking to lawyers about practice management issues for 20 years, with three bar associations. She just recently organized and spoke on a 6.5 hour CLE program on succession planning and retirement. Contact her at csandersreach@ncbar.org |
LPT: What is the most critical component of creating a business succession plan?
LK: First, the mindset to create and commit to a business succession plan in earnest is critical. Too many lawyers have an abstract perspective that “someday” they will bring on an associate to train to become a successor or sell the practice to, but don’t commit with concrete timelines to allow adequate time for identification, onboarding, training, or selling. Allow time for plans to be started and refined a few years before you want to wrap up shop, rather than expecting that plans will fall into place in your final weeks or months of practice.
Second, if lawyers seek to sell their business as part of their business succession plan, talk to industry experts about realistic valuation. Consider the “Endowment Effect”—people place extra value on property they already own, so what an owner expects their firm to be worth is not the same as what someone else will be willing to pay once the principal leaves.
CSR: Develop a succession plan that is easy to access–ensure that you aren’t the only person who knows of its existence—and that is kept up to date. Of course, both components assume that you have one at all.
CA: The most critical components are the people selected to help actualize the plan and the communication the lawyer has with them. There’s a difference between basic disaster planning and a succession plan, and lawyers need both. Further to Laura’s comment on training, for a disaster plan, small firm lawyers should choose a lawyer who will triage cases and oversee the wind-down of the firm (“assisting attorney” or “custodian”), as well as lawyers who will take cases (at least two “assuming attorneys”). Sometimes a lawyer wants to have the same person assist and assume cases. But that leaves too much to fate. Take a hint from estate planning and don’t just pick one—have first, second, and even third choices. Have a whole flock of assuming attorneys if you need them. Find lawyers who you highly respect and trust, and have real, in-depth, and continuing conversations about what their role will entail.
LPT: What are the most prevalent pitfalls for solos and small firms when implementing their business succession plan?
CSR: Sadly, I often get calls because an attorney has died or become incapacitated. Their family, legal assistant, or associate is left wondering what to do. They are either unaware of a succession plan or one doesn’t exist.
CA: To Catherine’s point, the most common pitfall is not getting started until things are already problematic. Doing a succession plan after getting a disappointing diagnosis or having a serious life change is so much harder. Do it before you need it. The second most common pitfall is probably not having enough communication with key stakeholders about what you are deciding—both in work and life. Talk through your plans with everyone it will influence. The third pitfall is not being organized or doing the leg work. Get a handle on finances and document them thoroughly. Map the office, index the files, and put pertinent information in one secure place that the assisting attorney has access to and knows about. That map should include your passwords, employee and contractor contact information, vendor contacts and products, active case file list, copy of leases, contracts, and insurance policies, and anything else essential to the business.
LK: Law firms’ most significant value is often in their goodwill and book of business. It is in the best interest of both original owners and successors to have a smooth transition. To facilitate trust, plans for a successor should begin well in advance, so that the clients can trust you earnestly recommend the successors and they will remain in good hands. Such trust doesn’t come overnight; it takes time to build. If the owner is indispensable to the firm and wants (or needs) to retire quickly, they may not find a strong buyer for their firm.
Logistically, recognize that, while current staff knows how to perform day-to-day operations, such knowledge will not transfer with osmosis to the new owner. Like Charity explained, rather than rely on omniscience transfer at contract signing, document all of your firm operations, logistics, and processes and procedures in detail.
LPT: What is the single best tip you would offer to a solo practitioner or small firm when structuring a buyout to a party outside of the practice?
LK: The valuation of the sale goes beyond cash on the barrelhead. If you sell for cash upfront, you will likely sell for a fraction of what you might if you structure the sale with residuals or an installment plan over several years. As an example, perhaps you agree that the business is worth $250,000. That payment might be spread out via installment loan for $25,000 per year for 10 years. Or, you might strike an arrangement that a few percentage points of gross income for a decade will flow to the original owner.
Clients are more likely to stay with the firm and be more attractive for the buyout owners if you warmly help foster a relationship between existing clients and new owners, and promise to stay on as a consultant for a year or two. Also, avoid lingering issues; for instance, clear up outstanding accounts receivable.
CSR: Consider what value beyond your book of business you have to offer. Clients may or may not stay. Is it real estate? Well-documented processes? A killer domain? A memorable phone number? A trade name?
CA: The best advice for someone planning to sell a law practice to an outside buyer is to start working on it early—10 years before your goal retirement date is good—and manage expenses carefully to sell at the top of your game. The firm is worth the most when you are making the most. A well-organized, procedurally sound, and technologically advanced practice is obviously worth more and attractive to a buyer than a disorganized, understaffed, technologically lagging practice. So, sell when it’s still running smoothly and you haven’t gone part-time and let go of most of your staff, and you will have more success with the sale.
LPT: How would you coach a solo practitioner or small firm owner when negotiating a buyout to a party or parties within the practice?
CSR: I have worked with many firm owners who assume their associates will have an interest in buying them out when they want to retire, only to find that they don’t. These are conversations to have early and often, and you will need to let them feel like they have invested in the firm before talk of a buyout.
LK: As with any negotiation, go into the meeting having done in-depth preparation. (As Catherine astutely notes, that includes not simply assuming associates’ interest.) In advance, talk to some people who specialize in selling businesses to obtain a firm grasp on a reasonable range for company valuation.
There is usually ease for both attorneys and clients when negotiating a buyout to parties within the practice; often, the parties already have familiarity and strong relationships. Embrace the shared history, but both sides should also look at this as a business venture. Go in to advocate for your position, and expect your colleagues to likewise advocate zealously for their position. Don’t take differences too personally.
In addition, if the party within the practice is someone you mentored over time, remember how far they’ve come over time, that they’re not still that green associate you remember from their first days. If they’re looking to take on the buyout, they’re ready to take on the helm.
CA: Exactly, Laura. Trust your successor and let go. Do everything you can to transition clients to the new owner, teach her what she needs to know to be successful, make a good deal, then step away. Lawyers often have their personality and sense of self enmeshed with their law practice, and have a hard time walking away. But there is another wonderful phase of life waiting for you. Find a hobby that fulfills you and cut the cord.
LPT: What resources do you frequently recommend for small firms or solos as they confront these issues?
As with any stage of a business in transition, consult with a range of pertinent experts, including lawyers that specialize in business law and succession planning, experts in company valuation, financial professionals, and even malpractice insurers to discuss possible tail coverage.
Recognize the value of networking with trusted colleagues who have gone through this. Seek out practitioners from your local bar association who have retired in the last decade and ask how they structured the sale or succession of their own business.
Finally, turn to the specialists. Susan Letterman White wrote an excellent recent article on succession planning, “Succession Planning: What’s Your Next Step?” in February’s issue.
The ABA has compiled succession planning resources from many jurisdictions. ABA also has published Being Prepared: A Lawyer’s Guide for Dealing with Disability or Unexpected Events, by Debra Cohen and Lloyd D Cohen. This fabulous workbook can help lawyers make important decisions.
The Washington State Bar Association has a page open to the public that has some practical samples: Transition Your Practice.
The North Carolina Bar Association has a publication called “Retire, Reset, Reinvent: Planning for the Next Stage of Your Law Practice” which includes forms and other downloads.
Lastly, the State Bar of Michigan created a handbook, the EZ Practice Management Resource Center: Planning Ahead: A Guide to Protecting Your Clients’ Interests in the Event of Your Disability or Death.
Winding Down
When we began our careers, our trajectory pitched to the heavens; what we would achieve was vast enough to obstruct the most basic steps of how to get there. As time and experience has yielded wisdom and practical skills, the expanse of our ambition becomes focused on the realm of practical possibilities – limited perhaps, though no less admirable. Whether the time horizon for sunsetting your practice is decades or months away, now is the time to finalize a plan and get busy implementing it.
You may be enjoying the fruits of your labor and the struggles of a small practice, but it simply isn’t too early to consider your exit strategy. Granted, it may be 35 years from now. Those who set goals supported by strategic milestones along the way have a chance at accomplishing them all. However, if you aim at nothing you are likely to accomplish just that.
About the Author
John D. Bowers is the chief operating officer at Patterson Intellectual Property Law, PC in Nashville, Tennessee. He also serves as executive director of the Tennessee Intellectual Property Law Association and is a former editor-in-chief of Law Practice Today, continuing to serve on its editorial board. Contact him at JDB@iplawgroup.com.