Law Practice Management Asked and Answered Blog

Category: Succession/Exit Strategies

Sep 14, 2016

Law Firm Succession – Transition of Partners and Transition Plan

Question:

Our firm is a twenty-five lawyer firm with ten partners. Six of these partners are in their sixties. What should we be doing concerning planning the succession of these partners?

Response:

In a larger firm with multiple partners, shareholders, or members, succession and transition involves transitioning client relationships and management roles. Such transitions take time. Many larger firms have five-year phasedown retirements for this reason and require equity owners to properly transition clients and management responsibilities. Some firms tie retirement pay or compensation to completing a successful transition program.

A plan might included the following:  

• The Transition Partner becomes a Transition Partner as of the commencement of the phasedown and begins client and management transition at that time and ending on his/her retirement date, at which time he/she retires and withdraws from the partnership. Compensation of the Transitioning Partner is proportionately reduced by the amount of reduction in the Transitioning Partner’s present work schedule.
• Transitioning Partner is responsible for the collection of his/her accounts receivable and billing of his/her Work-in-Process throughout the entire transition phase unless delegated to his/her Co-Responsible Partners.
• Transitioning Partner’s purchase price (payout) is to be calculated immediately prior to the beginning of the transition period and in the same time and in the same manner in accordance with the Firm Partnership Agreement, and will be paid only upon the completion of the transition period.

Some firms are providing economic incentives for the transitioning partner to handoff work to others.

The internal succession/transition plan provides a mechanism for the firm to outline a general timeline for a senior partner’s retirement, a process to effect an orderly transition of clients and management responsibilities, and a vehicle for starting initial discussions.

Aug 24, 2016

Law Firm Acquisition – Acquiring Another Practice

Question:

Our firm is a twelve lawyer firm in Austin, Texas. We have been approached by the owner of a three attorney firm in an adjacent city who has a complimentary practice consisting of institutional business clients. He is looking to retire within the next thirty days and he would like us to acquire his clients. We have reviewed his practice and we would be willing to take over his clients but not his personnel or other fixed assets. He has no interest in a merger or an lengthy relationship with us. It could add $800,000 per year to our practice. We would appreciate your thoughts.

Response:

It sounds like a great opportunity if there are no conflicts, the clients actually transition, and the billing rates are in line. Start with conflicts checks. Then ask for five year's of financial statements and tax returns, internal financial reports, schedule of billing rates, client lists, copy of building and equipment leases, and malpractice applications. Assess the stability of the revenue stream, repetitive ongoing clients, client dependency, etc. Prepare a letter of intent with terms for acquiring the practice. I would lead with a down payment of say $25,000 and then a percentage of collected revenue for say five years at 20% and see how he responds. He will want more certainty and a fixed price. If you have to go with a fixed price to seal the deal structure it with an initial down payment, payments over three to five years with provisions for reduction in the purchase price if the clients and revenues don't materialize. Make sure there are no pending malpractice claims or other liability issues.

Jul 06, 2016

Law Firm Strategy – Building a Firm Brand

Question:

I am the owner of a fourteen attorney firm in the western suburbs of Chicago. I am 45 years old and I started my practice as a solo ten years ago. The firm focuses on business litigation exclusively. Like many law firms the name of the firm is My Name, LLC. The firm has grown rapidly and we have been successful. However, I am concerned that I should be building more of a "firm brand" and the firm is too much about me. I would appreciate your thoughts?

Response:

This is a common issue for solos and sole owners. While it may be an ego booster for you in the early days of your practice it can be a negative in future years, especially when you approach retirement and want to exit the practice. In essence the firm is all about you and the goodwill is you. This can have negative consequences when you:

1. Try to merge with another firm.
2. Try to sell your practice.
3. Try to approach certain clients.

I suggest that you consider the following to develop more of a firm image or brand rather than just you.

1. Do all you can to insure that the firm is not uniquely you.
2. Consider a firm name that does not include just your name. You might consider more of a trade name or a name that includes other partners or members if associates are made partners or members in the future .
3. Encourage your associates to develop their individual reputations/brands and feature their accomplishments in their bios on your website. (Writing, Speaking, CLE Presentations, Certifications, etc.)
4. Help your associates grow.
5. Consider at non-equity partnership for deserving associates.
6. Feature other attorneys in the firm in your marketing efforts and events.

Jun 28, 2016

Law Firm Succession – What to do When No One is Interested in Equity Ownership

Question:

I am the owner of a fourteen attorney insurance defense practice in Baltimore. I started the firm twenty years ago after leaving behind my partnership in another firm. Of the other thirteen attorneys there are four non-equity partners and the rest are associates. I am sixty three years old and beginning to think about retirement and how I am going to transition out of the practice. Two of the non-equity partners are well seasoned attorneys, have major case responsibility, and have developed solid relationship with clients. I have discussed equity partnership vaguely with two non-equity partners but their interests seem lackluster and they have been non-committal. I would appreciate your thoughts and advice on what my next steps should be.

Response:

It sounds like your non-equity partners are on the fence as a result of the "vague" nature of your discussions. It is hard for non-equity partners or associates to commit to equity and taking on the risk of ownership when they don't know what the deal is. This is a scary proposition for them and they need detailed information so they can evaluate and make an informed decision. A vague discussion doesn't cut it. I suggest that you put together an equity partnership proposal that includes:

1. Profit and loss statements for past the five years.
2. Balances sheets for the past five years.
3. A current accounts receivable and unbilled work in process report.
4. Tax returns for the past five years.
5. Malpractice insurance application.
6. Building and other leases.
7. Proposed Partnership Agreement
8. Proposed Equity Partner Compensation Plan
9. Planned date of admission
10. Governance and management plan
11. Ownership percentage being offered
12. Capital contribution or buy-in requirement

May 31, 2016

Law Firm Succession – Transitioning Clients to the Next Generation

Question:

I am a member of a three-member executive committee for a 34 lawyer firm in Austin, Texas. We have been in practice for over one hundred years. While we have had partners retire in the past with no issues we are now facing a situation where seven partners are approaching retirement at the same time and each of them controls significant books of business. What can the firm do to ensure that retiring partners properly transition their clients so the firm can continue to flourish after the partners are no longer here? We would appreciate your thoughts.

Response:

This is problem that many law firms are facing as baby boomers approach retirement. Rather than one or two partners coming up for retirement many firms are experiencing a "bunching of retirees" all at the same time. This can have a significant impact upon cash flow planning, client development, and attorney talent management.

Here are a few thoughts:

1. Access your lawyer talent pool to insure that you have people in place that can service the needs of the retiring partner's clients. If your talent pool is insufficient develop a strategy (lateral recruitment, merger, etc.) and develop a plan for locating lateral/merger opportunities.
2. If the firm does not have a plan for dealing with the upcoming partners retirements and the transition of their clients write a client transition plan and commence its implementation. The plan should include an action plan that is structured like a project plan with beginning and ending dates, specific times, and individuals assigned to specific tasks. The plan should serve to keep things moving over a three to five year transition time period.
3. Your committee should be communicating with your partners approaching retirement, talking with them about their goals and timelines concerning retirement, and getting them to commit to a date certain even if it is many years into the future.
4. The compensation should include incentives that encourages retiring partners to transition rather than hoard clients.
5. Determine a shortlist of who in the firm should take over clients.
6. Begin client introductions to successor attorneys early. Go deep with relationship building – not just a simple introduction. Your committee and the retiring partners should monitor and follow-up with successors to insure that they are developing relationships with these clients.
7. Assign co-responsible attorneys to all matters that a retiring partner is assigned.

There are a lot of other ideas that you can explore. The key point is to communicate with your senior partners, get them thinking about retirement rather than pushing it under the rug so there is a three to five year transition period, and start early. I have seen too many situations where a partners walks in and announces that he wants to retire in the sixty days, six months, or one year. This is not enough time if the firm wants to retain retiring partner's books of business.

Click here for our blog on succession

Click here for out articles on various management topics

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

Mar 22, 2016

Law Firm Partner Retirement Buyouts – How to Keep from Breaking the Bank

Question:

Our firm is a 14 lawyer firm in the Boston suburbs with 4 founding partners and 10 associates. Two of the partners are in their 50s and two are in their 60s. Several years ago we adopted a retirement buyout plan for the founding partners where each partner upon retirement is paid the balance of his cash-based capital account and a multiple of one times an average of his last three years earnings paid out over a five year period. I am concerned that when partners begin to retire the retirement payouts will place undue stress on operating funds and the firm's ability to continue to be successful. I would appreciate your thoughts.

Response:

If nothing else you should consider a cap that places a limit on how much can be paid out in a single year where aggregate payments to all retired partners in any one year are capped at 10 percent or less of distributable net income. Any obligations that cannot be paid in one year as a result of the cap would be rolled forward to the next year also subject to the same cap.

Unfunded plans can present problems down the road if they become unaffordable for the next generation of attorneys as they have to be funded out of future earnings. You should look into ways to fund your partner's retirements as much as possible through 401k and other retirements plans, life insurance policies (on each of the partners that can fund the buyout in the event of death or where paid up cash values can be used upon retirement to apply toward buyouts, and sinking funds (Rabbi Trusts, etc.) where funds have been set aside out of current earnings.

We all have been witnessing what is happening with governmental unfunded pension programs. The same thing is happening with law firms that have unfunded retirement programs as baby boomers are retiring in record numbers.

Click here for our blog on succession

Click here for out articles on various management topics

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

Feb 16, 2016

Law Firm Acquisition – Acquiring a Personal Injury Plaintiff Practice

Question:

I am a partner in a two owner personal injury plaintiff firm in Los Angeles. We have four other attorneys. We do traditional personal injury work with a high volume of medical practice and products liability. One Hundred percent of our fees are contingency fees. My partner has expressed an interest in retiring and selling his interest to me. How do I go about determining a fair price to offer him for his shares? I would appreciate your thoughts.

Response:

It would be nice if the two of you could agree on a fair price. However, often it is not possible in a contingency fee practice. Often the primary value of a practice such as yours is the value of the pending cases on the books and those values are unknown until the cases are concluded in the future. It all depends on the extent of fluctuations in the annual revenue stream. I just completed two assignments where a dollar amount was agreed to based upon a gross revenue multiple. However, in both cases the revenue streams were fairly consistent over a five-year period. When there are extreme swings in revenue over a three to five year period there often is no choice but to base the acquisition price upon a payment arrangement as cases are completed. A percentage of completion ratio (how long the case was opened before the acquisition and when the case is concluded) or other method will have to be considered as well as overhead paid.

While cases in progress may be the major asset you also should expect to purchase your partner's cash-based capital account or shares of stock as well.

There are a variety of other approaches. I have never seen the same approach used twice.

Click here for our blog on succession

Click here for out articles on various management topics

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

Feb 02, 2016

Law Firm Succession – Should I Close My Doors

Question:

I am a lawyer from Carbondale, Illinois area. Last week I attended you Illinois State Bar Association CLE Webinar – Law Practice Succession and Transition – Ideas for Getting Started. I am 66 years old and I fit the "Sole Owner" model that you discussed. I am the practice. I have one associate and one legal assistant and my associate has neither the desire or the ability to take over my practice. I am tired and want to retire by the end of the year. With no successors in site I am thinking that I should just close the doors at the end of the year. I welcome your thoughts.

Response:

It could come to that if you cannot find someone interested in taking over your practice. However, since you have almost a year before your planned retirement I would at least try to see if you can find another lawyer or law firm to buy or otherwise takeover your practice – preferable "buy". Start now as it often takes a year. Make a short list, make some phone calls, have some lunches, get to know some folks, and see what kind of interest there might me. Keep a continual momentum going. Since you are the practice – this will be a concern to a potential buyer especially if you are unwilling to stay on after the sale in a consultative transition capacity. You might want to rethink your timeline – otherwise you may have to simply close the doors and refer out the work and strike the best arrangement that you can.

Click here for a link to my book – The Lawyers Guide to Succession Planning – published this week by ABA

Click here for our blog on succession

Click here for out articles on various management topics

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

Dec 01, 2015

Law Firm Partner Compensation – Arrangement When Buying a Senior Partner’s Interest

Question:

I am the owner of a solo practice family law firm in Jackson, Mississippi. I  have been in practice four years. I have been approached by a senior solo attorney that has a well established family law practice that generates $800,000 annually and is looking to sell his practice. We envision a merger where I would make an initial payment upon merging my firm with his and then buyout his interest over a five year period. We have agreed on a fixed price for his ownership interest. However, we are not sure how to handle compensation. He wants to continue to work for another five to seven years. We would appreciate your thoughts.

Response:

Your approach will depend upon how you are going to structure your initial ownership percentages and whether the other attorney plans on continuing to work fulltime or whether he plans on scaling back. Are you going in with a minority interest and then acquiring additional interest as you make the agreed payments?

Here are a few ideas:

1. Base compensation totally on ownership interests. As you acquire additional interest your compensation would increase.
2. Agree to a base salary for each of you and then allocate excess firm profits after your salaries based on ownership interest percentages.
3. Create two profit pools. One pool would be 70% of total profit called performance profit pool and the other pool would be 30% of total profit. The 70% pool would be allocated to each partner based upon individual performance as determined by a weighted average of each partner's origination/working attorney collected fee receipts. The 30% pool would be allocated to each partner in accordance with ownership interest percentages.
4. Create two profit centers (one for each partner) and allocate income and expenses to each profit center. Each partner's compensation would be based upon their individual profit center.

Oct 27, 2015

Law Firm Succession/Transition/Exit Planning – Two Phase Deal Arrangement for Sole Owners

Question:

I am the solo owner of a five attorney estate planning firm in Los Angeles consisting of myself and four associates. I am approaching retirement and looking at my exit options. Since there are no heirs apparent in the firm I am looking to sell the practice. However, the potential buyer that I have been speaking with is nervous and concerned about client defections, proper transition, etc. Also, I would like to continue to practice for a few years and don't want to run afoul of the rules of professional conduct. I would appreciate your thoughts.

Response:

You might want to consider a two-phased approach. Merge with the other firm, continue to work for a few years, work on transitioning relationships, retire and sell your interests, and continue to work as an Of Counsel after that if you so desire.

For Example. A sole proprietor was generating $500,000 in annual revenues with one full-time senior attorney, a full-time paralegal, and a clerical person while netting 40%, including perks and benefits. This owner wanted to work three more years full time and several more years in a part-time role thereafter. The firm interested in acquiring the practice was a three-partner firm generating $2.2 million a year working with similar clients, under a similar culture and fee range.

Phase One consisted of a merger with the retiring owner agreeing to retire in three years and sell his ownership interests for an agreed amount. At its inception, the two practices were combined. The successor firm provided the practice with the same amount of labor required in the past through a combination of retaining and replacing staff, as both were deemed necessary by the parties. The successor firm took over most of the administration, and the deal was announced to the public as a merger. 

The transitioning owner was able to come and go reasonably as he saw fit, run his practice through the successor firm’s infrastructure, and retain significant autonomy and control. Because he historically generated a 40% margin, the successor firm agreed to assume all the operating costs of the practice and pay 40% of gross collections from the transitioning owner’s original clients as compensation. Phase One was set to terminate on the first of the following events: (1) the end of three years; (2) the death or disability of the transitioning owner; or (3) the election of the transitioning owner.

Phase Two was the buyout of the retiring partner's ownership interest, and it was set up in a traditional fashion. Phase Two kicked in at the end of Phase One. By deferring the buyout until the full-time compensation ceased, the transitioning owner could extend the period for his full-time compensation, and the successor wasn’t being asked to pay for the practice and full-time compensation at the same time."

Many firms have taken this approach and we have found that it increases the likelihood of successful client transitions, reduces the risk of client defections, and increases the value for the retiring owner.

Click here for our blog on succession

Click here for out articles on various management topics

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

• « Later
• 1
• …
• 5
• 6
• 7
• 8
• 9
• …
• 12
• Earlier »

Copyright © 1996 - 2026 Olmstead & Associates, All Rights Reserved

Home – Resource Center – News Releases – About Olmstead – Services Provided – Contacting Olmstead – Sitemap