Law Firm Succession and Exit Strategy – Referring Out Work too Soon

Question:

I am an estate planning attorney in Chicago. I am currently 72 and have been in practice and owned my own firm for 45 years. In the past I had an associate attorney in the firm and a couple of legal assistants. Currently I have one part time associate no assistants. I do all of my own paralegal and administrative work. My associate has no interest in taking over my practice. Therefore, I am considering options as what to do with my practice. I have wound down over the last few year by cutting back on my time and hours and referring out almost all of the new prospective clients that contact the office to several other law firms. In fact, I quit taking on new clients three years ago and have referred out a substantial amount of work – gratis – without any form of compensation or referral fee.

I plan on speaking with a firm other law firms concerning joining as an “Of Counsel” with a transition plan for my retirement and taking over my practice. I would like to receive some compensation for the “sweat equity” for building the practice.

I would appreciate your thoughts.

Response:

Of Counsel arrangements are the most common arrangements for sole owners/solos in situations such as yours. While practice sale is an option, I find the OC route the most common approach acceptable to other law firms. Your financial performance over the last five years often has a lot to do with the level of interest that there will be from other law firms, the compensation arrangements they are willing to offer, and if and whether they will be willing to compensate you for your “sweat equity” or book of business either while you are there as OC or post retirement. Unfortunately, your early winding down and referral of clients has resulted in your financial performance over the last three years dropping from what it was in the past. You have also referred out clients which also would be future referral sources to other law firms which would be a major selling point for establishing a “sweat equity” value for your practice. I often advise my clients – don’t wind down or referral out clients too early – do so when you have an arrangement with another firm.

This does not mean there is not hope or that any other firm’s will have an interest in you or your practice. It could be that another firm is interest in you, especially if you have a unique skill set that the other firm does not have, and what you can do to help take their firm to the next level in a couple of years. When you are asked to provide financials to prospective law firms you might want to provide a list (redact the names of the clients) illustrating the value of referrals you have made to other firms over the last few years with fee estimates.

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

Posted at 10:54 AM in Succession/Exit Strategies

Aug 14, 2024

Law Firm Succession and Exit Strategy – Referring Out Work too Soon

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