Law Practice Management Asked and Answered Blog

Category: Succession/Exit Strategies

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Oct 25, 2017


Law Firm Equity Partner Succession – Transition in a Multi-Partner Firm

Question:

I am an equity partner in a thirty-six attorney firm in Miami. We have seven equity partners, eight non-equity partners, and twenty one associates. Our practice limited to civil litigation defense and our clients are institutional clients consisting of business firms, governmental agencies, and insurance companies. The ages of our equity-partners are: 64 62, 60, 58, 54, 48, and 44. The firm does not have a succession plan for the senior partners and has not even discussed the matter. I am not sure what the partnership agreement provides. I am concerned about our future if we don’t start addressing this. I would appreciate your thoughts.

Response:

With three members already in their sixties you are going to have some retirement bunching issues before long and I agree that you should start planning and deal with this sooner than later.

The partners as a group need to start talking and the senior partners should begin sharing their ideas and plans concerning their retirement goals. There should be an ongoing dialog with your senior partners. Review the firm’s partnership/operating/shareholder agreement. After reviewing these documents, determine how the firm’s policy regarding retirement, if there is one, will affect various partner’s retirement timelines, compensation, and payout. Does the policy require mandatory retirement at a certain age? Ascertain whether the policy provides for phase-down. How does the phase-down handle management and client transition? Is there an “Of Counsel” provision after retirement? The firm needs to reach an agreement with its senior partners nearing retirement concerning their retirement timelines, client and management transition, and retirement payout or return on invested capital.

The initial challenge in a larger firm is to determine who the successor or successors will be to transition clients and management responsibilities. This may be no easy task especially if the firm is in first generation and the retiring partner is one of the founders.

Client Transition

In firms your size, clients are more likely to be large sophisticated clients, possibly Fortune 500 companies, which refer many matters to the firm during the course of a year. Often such clients may be both a blessing and a curse for the firm. A blessing in that their business provides the firm with huge legal fees during the course of a year. A curse in that their business represents a large percent of the firm’s annual fee collections and a significant business risk if the firm were to lose the client. An effective client transition is critical, takes time, and must be well planned.

Successful client transition – moving clients from one generation to the next – is a major challenge for larger firms. Shifting clients is not an individual responsibility but a firm responsibility. To effectively transition clients the individual lawyer, with clients, must work together with the firm to insure the clients receive quality legal services throughout the transition process. Both the individual lawyer and the firm must be committed to keeping clients in the firm when the senior attorneys retire. Potential obstacles include:

Management Transition

In larger firms, partners may have management responsibilities as well as client responsibilities. A retiring partner may be a managing partner, executive committee chair or member, or serve as a chair or member on other firm committees. Retiring partners will have to transition these responsibilities to other partners in the firm.

Transitioning client relationships and management responsibilities effectively can and where possible should take a number of years – preferably five years – typically not less than three years. For this reason, many firms use five-year phasedown programs for retiring partners. These plans provide detailed timelines and action steps for transitioning client relationships and management responsibilities.

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John W. Olmstead, MBA, Ph.D, CMC

Sep 13, 2017


Institutionalizing Your Law Practice

Question: 

I am the sole owner of a six-attorney estate planning practice in Phoenix, Arizona. The five associates have been with me from five to fifteen years. I just turned fifty-five and would like to retire when I am sixty-five either by selling my practice to another firm or to one or more of my associates. I would like to receive some remuneration for the sweat equity that I have invested (goodwill). I have tried over the years to setup my practice in a way that it is not “just me.” I changed the name of my firm to a trade name that does not include my name, arranged the lawyers names on our letterhead and website alphabetically, and eliminated designations such as principal and associate. I believe that I have made it difficult for clients and prospective clients to know who the boss is. I hope that this will make my firm more salable and appealing in the future. I would appreciate your comments.

Response:

I took a look at your website and thought it was pretty easy to see that you are the firm. For example:

I suspect that you are the rainmaker and in spite of any advertising that the firm does and your website most of the firm’s business comes from your referral sources, past clients, and your reputation.

I believe you have to do more than what you have done to institutionalize your practice. Here are a few suggestions:

  1. Motivate and push if necessary your associates to write and publish and get these works posted to the website.
  2. Motivate and push if necessary your associates to give presentations at bar and other professional association and community events.
  3. Motivate and push if necessary your associates to present firm seminars.
  4. Post your associates works to your website and to their bios.
  5. Require your associates to become certified as estate and trust attorneys with the Arizona Bar.
  6. Consider revamping your compensation system to motivate and reinforce the above activities.
  7. Incorporate the above as “performance factors” in annual performance reviews.
  8. As time passes if you find that your associates are unwilling to step up to the plate consider hiring different type of lawyers in the future.
  9. Do more advertising to increase the business that comes into the firm from other than your personal reputation.
  10. If you have not already, fully document your office procedures and automate your practice.

If you are able to accomplish many of the above suggestions you will be on your way to institutionalizing your practice.

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John W. Olmstead, MBA, Ph.D, CMC

 

 

 

 

 

Jul 26, 2017


Law Firm Succession Planning – Impact of Firm Size for a Solo

Question: 

I am a solo practitioner in upstate New York. I am 66 years old and I am looking to retire and am trying to figure out what to do with my practice. My practice is a general practice and there is just me and one secretary. I welcome you suggestions:

Response:

The size of the firm will present different retirement succession, transition, and exit challenges. Firm size will affect the number of moving parts, specific steps that a firm will have to take, and the overall timeline. Solo practitioners and sole owners will have the most moving parts and face the greatest challenges.

You will have the greatest challenge since you have no associates or anyone in place to transition the practice. Therefore, you could both hire and groom an associate that could buy the firm or become a partner and buyout your interests, sell the firm to another firm, or merge with another firm. Other options would be to become Of Counsel with another firm or simply close down the practice. This takes time.

Hiring and grooming an associate can be problematic for the solo. If he or she does not have sufficient business and does not originate business, the associate will be an expense and the your net earnings will suffer. Other issues include:

You could sell the firm to another lawyer or law firm. This option works best when the practitioner is actually ready to retire and quit practicing. Often this is not the case and the restrictions on sale of law practice levied by a state’s rules of professional conduct, in particular Rule 1.17, may make this option undesirable. Locating desirable candidates will take time and a well-planned search process may have to initiated.  Our experience has been that this can take a year or longer.

Merger with another lawyer or law firm is another option. This is often a better option for solos that want to gradually phase-down yet continue to practice for a few more years. In essence, they join another firm as either an equity or non-equity partner, member, or shareholder and subsequently retire from that firm under agreed terms for the payout. The odds are improved for clients and referral sources staying with the merged firm and the merged firm is more committed that a buyer might be under a payout arrangement based upon collected revenues. The solo practitioner has more flexibility with regard to the ability to continue to practice longer, reduced stress, additional support and resources, and gradual phase-down to retirement.

Forming an Of Counsel relationship with another firm is an option that many solos are taking. Sometimes it is a final arrangement where a solo winds down his or her practice and then joins another firm as an employee or independent contractor. He or she is paid a percentage of collected revenue under a compensation agreement with different percentages depending upon whether the practitioner brings in the business, services work that he or she brings in, or services work that the firm refers to the practitioner. In other situations, an Of Counsel relationship is used as a practice continuation mechanism that provides the solo with additional resources and support if needed. An Of Counsel relationship can also be used to “pilot test” a relationship prior to merging with another firm. We have had several law firm clients that has taken a phased approach to merger with Phase I being an Of Counsel “pilot test” exploratory arrangement and Phase II being the actual merger.

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John W. Olmstead, MBA, Ph.D, CMC

 

May 23, 2017


Solo Practitioners Best Friend – Law Practice Continuation Plan

Question: 

I am a sole practitioner in Peoria, Illinois. My firm is a general practice firm that services clients throughout Central, Illinois. I have four staff members. I am fifty eight. While I have enjoyed having my own practice for the past twenty years I am concerned – what if something were to happen to me today or tomorrow – what is my backup plan in the event of short-term illness, disability, death, and even vacations. How would the firm keep operating? Who would take care of the client’s needs? How would my staff be taken care of?

Response: 

Sound practice continuation arrangements can solve this dilemma and preserve practice value and can help prevent a lawyer’s spouse or immediate heirs from facing a hasty sale or disposition of the practice in an emergency. A practice continuation arrangement can also give lawyer practitioners, their staff, and their family’s peace of mind.

A practice continuation arrangement is an arrangement – typically in the form of an agreement or contract made between an individual lawyer or a small law firm and another lawyer or law firm. The arrangement describes a course of action to transfer a lawyer’s practice and sets payment for its value. In the event of vacation, temporary or permanent disability, or death, a practice continuation arrangement protects the practice, the business interests of the lawyer or law firm’s clients and the financial interest of the lawyer and his or her family.

Approaches

There are different kinds of practice continuation arrangements. Typically, a lawyer enters into a one-on-one agreement with another sole proprietorship, partnership, limited liability company, or professional corporation in the community. Agreements can range from simple “dual coverage for each other” for vacation or other temporary absences to sale of the practice in the event of long-term disability or death.

A practice continuation agreement’s provisions for the sale of a practice must contain a reasonable valuation and a realistic payment structure. What lawyers really want is to leave to their surviving spouses or heirs is something from all the hard years of work it took to build the practice. To accomplish this end, selling the practice at a buyer friendly price may be necessary. Law practices can lose value very quickly, so timing is vital.

Lawyers must invest time and effort to find suitable successors for their firms and to create useful, equitable, practice continuation agreements. The key is to finding the right person or firm. The investment of time is a good investment, however, because a good practice continuation arrangement will ensure that if a lawyer is unable to continue managing the practice, the value he or she has built over the years will not be lost. An orderly transfer of a practice to another lawyer or law firm is a substantial financial benefit to the lawyer’s family. At the same time, through the handpicked successor, the lawyer fulfills his professional responsibility to his clients. Lawyers who do not have these agreements should learn more about preserving the value they have created.

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John W. Olmstead, MBA, Ph.D, CMC

Apr 18, 2017


Law Firm Succession/Exit Plan – Merger, Selling, Laterals, or Promoting Associates to Equity

Question:

I am the owner of a small estate planning firm in Worcester, Massachusetts. I have three associates and three staff members. I am fifty five and am wanting to begin putting in place my succession/exit plan. I would like to retire and exit the practice in ten years. Would I be better off selling to another firm or attorney, merging the practice, bringing in laterals, or selling to one or both of my associates? I am interested in your thoughts.

Response: 

The biggest challenge for many firms, is finding the right WHO.

The who dictates the what – the actual succession/transition/exit strategy. In other words, many law firms find that they start down one path and end up on another. Not all non-equity partners and associates want to own a law firm. Not all lateral and merger candidates will be a good fit for your firm and culture. The key is the right relationship and sometimes that takes the form of making someone at the firm a partner, bringing in a seasoned lateral, merging with another firm, or selling the practice. Therefore, succession/transition plans have to be flexible and often the key is not get stuck in creating complex succession plans at the onset. Establish timelines, outline a general course of action, generate some momentum and see where that takes you. Then build the plan when you can see where the firm is headed.

Unless the retiring partner in a larger firm has a unique practice that requires the firm to conduct a search for lateral or merger candidates, larger firms will not have to embark on a search. However, solo practitioners and often sole owners will have to explore their options and conduct a search for the following:

This search and exploration often is the most time consuming and difficult part of the process and often the options identified through this process ends up dictating the succession/transition/exit strategy.

If a firm has associates, does the firm have the right associates on the bus for the long term? In other words, has the firm hired associates that want to be business owners and own a law firm? Many owners and senior partners in law firms are approaching retirement age and are beginning to think about succession strategies. As they examine their associate lawyer ranks, some partners are often surprised to learn that there may be few takers. While their associates may be great lawyers, they may not bring in business and may not be interested in ownership or partnership. Such firms have hired a bunch of folks that just wanted jobs and have no interest in owning a law firm. While this hiring approach may have satisfied the firm’s short-term needs – it may fall short in the long term.

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John W. Olmstead, MBA, Ph.D, CMC

 

 

 

Apr 11, 2017


Client and Management Transition in a Larger Law Firm

Question:

I am a member of the executive committee of a seventy-five attorney firm in Houston, Texas. We are a first generation firm. Several of our founders are in their sixties and we have recently begun discussing succession planning and how clients and management duties will be transitioned. We would appreciate your thoughts in these areas.

Response:

In larger firms, clients are more likely to be large sophisticated clients, possibly Fortune 500 companies, which refer many matters to the firm during the course of a year. Often such clients may be both a blessing and a curse for the firm. A blessing in that their business provides the firm with huge legal fees during the course of a year. A curse in that their business represents a large percent of the firm’s annual fee collections and a significant business risk if the firm were to lose the client. An effective client transition is critical, takes time, and must be well planned.

Successful client transition – moving clients from one generation to the next – is a major challenge for larger firms. Shifting clients is not an individual responsibility but a firm responsibility. To effectively transition clients the individual lawyer, with clients, must work together with the firm to insure the clients receive quality legal services throughout the transition process. Both the individual lawyer and the firm must be committed to keeping clients in the firm when the senior attorneys retire. Potential obstacles include:

In larger firms, partners may have management responsibilities as well as client responsibilities. A retiring partner may be a managing partner, executive committee chair or member, or serve as a chair or member on other firm committees. Retiring partners will have to transition these responsibilities to other partners in the firm.

Transitioning client relationships and management responsibilities effectively can and where possible should take a number of years – preferably five years – typically not less than three years. For this reason, many firms use five-year phase down programs for retiring partners. These plans provide detailed timelines and action steps for transitioning client relationships and management responsibilities.

Click here for our blog on succession

Click here for out articles on various management topics

John W. Olmstead, MBA, Ph.D, CMC

 

Jan 24, 2017


Law Firm Practice Sale – Selling a Personal Injury Plaintiff Practice

Question:

I am the owner of a personal injury plaintiff practice in downtown Chicago. I am the only attorney in the firm. I have two legal assistants. I am sixty-six years old and am starting to think about retirement and how to exit my practice. I would like to sell the practice to another law firm or practitioner. Does my practice have any value and can it even be sold?

Response:

After you pull out all the cash and pay down any liabilities the general the value of your practice will be the value of your fixed assets, goodwill (if any), and the value of your contingency fee cases in process. The largest asset of value is your cases in process and often that value cannot be determined until the cases are concluded. If you are an advertising type firm and have   built a sustainable brand beyond your individual reputation there could be a goodwill value. However, since you are a solo I doubt that there is a goodwill value beyond the value of your cases – it all depends whether you end up farming out your cases to another firm or whether you can find someone to come in and take over your practice.

If you have to sell your practice to another firm they will probably not have a need for your fixed assets. You will have to sell or otherwise dispose of them. More than likely you will not be able to come to an agreement with the other firm on a specific sale price for the cases in process. Therefore, you will have to agree on a fee split formula where you are paid as the cases are concluded. This formula will need to consider a percentage of completion factor based on how much work was done while a case was in your possession and while in the possession of the new firm.

Your best bet would be to find an attorney that would come in and take over your practice. He or she would have a need for the fixed assets, your employees, and if you transition properly could benefit from the goodwill that you have generated. In this situation you could receive payment for fixed assets, goodwill, and cases in process. This would also provide continued employment for your employees.

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John W. Olmstead, MBA, Ph.D, CMC

Dec 20, 2016


Law Firm Succession Planning – Selling My Stock to Several Associates

Question:

I am the sole owner of a five attorney personal injury plaintiff firm in the Dallas suburbs. Over the years I have built a sustainable brand through advertising. I have helped my associates develop their reputations, handle substantial cases, and be involved in various areas of firm management. I am planning on retiring in five years and I would like to begin the transition early next year by selling some stock (minority interests) to deserving associates with the remainder of my shares to be purchased upon my retirement. Originally, I had through about selling shares to two associates that have been with the firm for over fifteen years – now I am thinking about selling shares to all four associates. I think it would be easier for the four to come up with the required money. I welcome your thoughts.

Response:

If you are asking for a goodwill value plus cash-based book value as well as a percentage of completion estimated value of your contingency fee cases in process, the amount you are asking for your stock could be considerable. This would indeed be difficult for one or two people to raise and on its face it would make sense to sell your shares to all the associates. If this is not the case if may be possible to the two senior associates to raise the required funds.

Here are my thoughts:

  1. You know your people best but give consideration to the future partner dynamics. You are going from a sole owner structure to a five attorney ownership structure if you bring them in all at the same time. This will require some major adjustments in governance, compensation, etc.
  2. Are the two newer associates deserving of ownership? Have they developed their skills and earned the respect of the other associates in the firm and others outside of the firm?
  3. What do the two senior associates think? Do they want to be future partners with each other? Are they able to come up with the money? Do they initially, after your retirement, want other partners? Do they want the other associates to be their partners – initially or down the road?
  4. Interview your two senior associates and get their thoughts on the above questions. They may want to enjoy the benefits of leverage from having less partners as you have over the years. 
  5. My guess is that your senior associates would prefer to go it alone if they can swing it.

Don't try to force future partners on your two senior associates. I will rather see you initially admit the two senior associates as partners and let them admit other partners after your retirement when they are ready.

Click here for our blog on succession

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John W. Olmstead, MBA, Ph.D, CMC

 

Nov 08, 2016


Law Firm Retirement – Planning Retirement

Question:

I am a partner in a six-attorney firm in downtown Chicago. I am sixty four and starting to think about retirement and would appreciate your thoughts on how where to start.

Response:

Begin to visualize getting older, your mortality, and retirement. Think about the amount of time that you have left on this earth. If you are sixty-five you may live to be eighty. Thus, you have fifteen years left and this is your planning horizon.

Retirement planning is deciding on how to use this time. It is about the process of deciding what you will do in your retirement and putting a plan into practice. As the amount of time left to you decreases, its value increases to the point where it will be more valuable than monetary assets.  It will be more valuable that a new house, a new car, a new boat, or a chest full of cash. Time enjoying life, being with your family, and spiritual renewal will become more important than earning money. The greatest change when you retire is how you will use your time.

Retirement planning begins with taking the time to think about how you will use you time. If you live fifteen years beyond your retirement your will have 28,800 hours that will have to be filled with retirement activities. (five days a week, eight hours a day, 48 weeks, for fifteen years)  Start by creating an interest activity list, a time plan, and then DECIDE, PLAN, and ACT.

You options include:

1. Continue working in your present situation;
2. Continue to work for compensation but in another occupation; or
3. Retire and pursue recreational and other retirement activities without compensation.

Click here for our blog on succession

Click here for out articles on various management topics

John W. Olmstead, MBA, Ph.D, CMC

 

 

 

Oct 11, 2016


Law Firm Management – Valuing a Personal Injury Practice

Question:

I am the firm administrator for a small personal injury five attorney practice in Des Moines, Iowa. The firm's owner is approaching retirement and is planning on approaching other law firms regarding sale of the practice or merger. He has asked me for reports in order that we can value the practice. QuickBooks is the only software that we use. What reports should I use to establish a value for the practice?

Response:

You will want to start by generating a profit and loss statement and a balance sheet from your software. I would run five years of profit and loss statements and the most recent balance sheet. The profit and loss statements will help you illustrate the revenue, expenses, and profit picture for the past five years. The balance sheet will provide a current financial snapshot of the firm's cash-based financial position. However, since most law firms keep their books on a cash-based basis the largest asset – contingency fee cases in progress – is not reflected on the balance sheet. Neither is any value for practice goodwill. Since you do not have a case management system you will have to setup a spreadsheet with columns for the name of the case, date opened, estimated settlement, estimated fee, client costs/advances, and projected date of receipt of fee. You will have to have the attorneys managing the cases help you with the estimates. These will be the key reports you will need initially.

Click here for our blog on succession

Click here for out articles on various management topics

John W. Olmstead, MBA, Ph.D, CMC

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