Succession Planning Scenarios for Solos & Small Law Firm Owners
September 13th, 2017
For solo practitioners and small law firm owners seeking retirement, here is a quick, down-and-dirty summary of the succession plan strategies available to you. Put another way, here are three structural ways that soon-to-be retired lawyers can “sell” their practices.
Remember, there is no way that “everybody does it.” The individual situations of most lawyers, combined with the fact that practice areas vary significantly, preclude a one-size-fits-all approach. With that said, here are the most common succession planning scenarios for solo lawyers and small law firm owners.
The Associate Buy-Out Scenario
If you have an attorney working for you who you think has the “right stuff” to take over your firm, this is the first option you should consider for a few reasons.
- First, clients will often already have some relationship with this lawyer. You will not need to introduce someone completely new to clients.
- Second, you already know the strengths and weaknesses of your successor. You are not buying a “pig in a poke.”
- Third, it’s a nice way to reward a long-time, loyal employee.
There is no ideal length of time for the transition. It will depend on how soon your successor will be ready to step to the plate and take over. It will also depend on how soon you want out. In most cases, the time range can be as much as 5-7 years or as little as 1-2 years. The owner usually remains in an “of counsel” role during the last part of the transition.
In many associate buy-outs, the owner receives money for the practice from the successor. Frequently, the money would come in the form of payments during the latter portion of the buy-out period—while you are “of counsel” and working part-time (or hardly at all). In essence, the deal’s funds stem from law firm revenues instead of bank loans or the successor’s own savings.
Repeat after me. Consider this option only if you have an associate or minority owner attorney already working for you. Do not, I repeat, do not hire someone solely with the idea that this person can and will ultimately buy you out. This fundamentally flawed strategy of "recruiting your successor" is destined to fail.
The Sale Scenario
Here, the successor is someone who has not previously worked for you. Oftentimes, the successor is a competitor of yours, someone who hopes to expand their practice.
The driving reason behind these deals is owners who have no desire to slowly wind down, or cannot due to health reasons. The transition period can be as little as a few months, but can be as long as a year or so.
There are two common payment options that you can choose from within this scenario. In the first, the successor agrees to make a series of payments to you for your practice. In the second, the successor pays you an earn-out (an agreed-upon percentage of future revenue) for an agreed-upon timeframe.
Law firm sales are governed by each state’s Rules of Professional Conduct. Be sure to dot the “i’s” and cross the “t’s” to meet the requirements of Rule 1.17.
The “Of Counsel” Scenario
This is a variation of the sale option and works best if you would prefer a more gradual transition to complete retirement. In this scenario, you would join another law firm and become “of counsel” during the transition period. If you are currently a solo practitioner, you would close your firm (only after you collect all open receivables, of course) and work your remaining years at a new firm.
You negotiate the payments you receive for your practice as part of your “of counsel” agreement. Like the sale scenario, you would receive an agreed-upon percentage of future revenue for an agreed-upon time. Of course, the amount you receive will also vary depending upon the amount of actual legal work performed by the previous owner.
There are two main advantages to this approach:
- It offers a great amount of flexibility. It is flexible for both seller and buyer. There is no need to determine any fixed dates of complete retirement unless the parties want to.
- There are no Rule 1.17 compliance requirements to worry about. There is technically no sale. You are simply closing one entity and becoming an employee at another.
One final word of caution. Do your planning sooner rather than later.
Health issues for you or your spouse will inevitably occur. When they do, they will be very disruptive to clients and staff, to put it mildly. Proper succession planning avoids the disruptions, while also enhancing your retirement nest egg. Feel free to reach out to me to discuss this process further. You can reach me at 612-524-5837 or you can contact me online.