I am the managing partner in a fourteen attorney firm in Austin, Texas. Our firm represents hospitals in their defense against malpractice claims. We have four equity partners, six non-equity partners, and four associates. The four equity partners started the firm thirty years ago and we are all in our late fifties and early sixties. We plan on working another eight years and then plan on retiring approximately at the same time. We may remain on as Of Counsel. Of our six non-equity partners, five are in their early and late sixties. We are considering making one an equity partner in the near future. Our associates are all recent law graduates that we hired right out of law school and all have been with the firm less than five years. What is our best succession strategy – merger or growing our own future partners?
Most firms, and I agree with this, prefer an internal strategy and would like to grow their own and leave a legacy of the firm. Mergers can be fraught with problems and are often not successful. Depending on the size of the other firm, many firms are not willing to provide any compensation for practice goodwill beyond the compensation and benefit package. It sounds like you have had your independence for thirty years and you may not be comfortable giving that up and working in a merged firm environment for eight years.
However, a merger is often easier. You have a challenge on your hands since you have to replace four partners and only have one possible future equity-partner candidate on deck. In part it will depend upon the age and the experience of the one non-equity partner. Is he even willing to step-up to equity, invest in the firm, and buyout your interests? My experience these days is that a lot of non-equity partners are saying “no” to equity. With your type of clients you probably need at least three or four seasoned partners in order to convey to the clients that you have adequate “bench strength”. When the four of you retire unless you can build up the bench strength the firm will be also lacking leadership and firm management experience.
You have five years in which to build up your talent pool. You will have to first see if you can recruit and bring in some lateral talent – attorneys in their forties with fifteen to twenty years experience. Look for attorneys that want to be more than just worker-bees – that want to have future equity interest in a firm. If this strategy works out, begin bringing them into equity as soon as possible to ensure that the commitment is there by having them buy shares upon admission. Begin client and management transition no later than three years prior to your retirements.
If you are not able to bulk-up your talent pool or you have no one interested in equity ownership, then you will have to consider a merger strategy. I would begin a merger search three years prior to your retirements.
John W. Olmstead, MBA, Ph.D, CMC
I am the owner of a criminal defense practice in Bloomington, Illinois. I have been practicing for forty years and I have just turned sixty-five. I have one associate that has been with me for two years and two staff members. I would like to retire by the end of this year and I would like to receive some value from my practice. Would I be better off to sell my practice to my associate or another firm?
One year is a very short timeline for putting together an effective exit strategy. Criminal defense practices are often based on the reputation of the owner-practitioner and more difficult to sell to other firms than other practices. I believe the best option for most firms is an internal exit strategy via sale of the practice to other attorneys working in the firm (non-equity partners or associates). However, this assumes that the firm has attorneys that have the skills and competencies to carry on the practice and have an interest in owning a law firm. Often this is not the case. The other problem is that most associates don’t have any money so any sale usually has to be paid out of future revenues after the owner retires. Other options include selling the practice to another law firm, merger with another firm, or winding down the firm and joining another firm as an Of Counsel for a few years and then retiring from that firm with a payout in the form of a percent of revenue from your clients for a few years.
Your associate has only been with the firm for two years. If he or she is straight out of law school you will have to assess whether he or she has the skills, competencies, and desire to take over your firm? If he or she does, this might be your best option. If not, you will need to explore an external exit option – sale, merger, or Of Counsel arrangement. I have had clients that have had successful exits from their practices with each of these arrangements.
John W. Olmstead, MBA, Ph.D, CMC