Law Practice Management Asked and Answered Blog

Category: Solo

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

 

Jan 28, 2015

Law Firm Succession – Succession Plan for the Solo Practitioner

Question:

I came across your firm while researching law partnerships. The short story is as follows: I am a sole practitioner and have been practicing for over 35 years. I have a high volume practice and I employ 7-8 people. Business is good and actually on the rise. I have a great office manager and outstanding loyal staff. The practice is on semi- autopilot for me. I have a young associate lawyer in my office that shares space and is  learning my practice but actually seems to be making his own way in a different practice area. He wants to buy into my practice. We have had some serious talks. He's capable and I think the right person to transition with. I have asked myself why sell/partner/transition when I don't have to? I am not ready to retire. With that said a 3-5 year plan may make sense. Let me know your thoughts.

Response:

The real value for most practitioners is the cash flow from working in the practice. Exit value is secondary and only makes sense when you are ready to quit or retire.

Eventually, however you will retire (retirement, death, etc.) as the clock runs. The biggest problem that I am finding is that practitioners that are ready to exit the practice is finding attorneys willing to buy the practice or buy out partnership shares in the event of a partnership. I am working with practices where is has taken a couple of years to find the right WHO and this often dictates the WHAT – merger, partnership, Of Counsel, sale, etc. The approach that works best is an internal transition via bringing an associate into partnership. So, I would take a serious look at the attorney that you are speaking about, maybe have him become a partner (member in a LLC) with minority interest initially, and incorporate into your agreements how compensation will be handled, him acquiring additional interests down the road, and the arrangement for your retirement payout upon your actual retirement.

Don't wait until you are ready to retire – take some baby steps now.

Good luck with it.

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

May 27, 2014

Law Firm Merger – Merger of a Solo with a Two Attorney Firm

Question:

I am a solo in Bloomington, Illinois. I have just completed my third year in solo practice. I have one full time secretary, a paralegal, and I office share with a group of attorneys. My overload is low and my margin is 61%. I have been approached by a two attorney (2 partners) firm regarding merging with their firm. One of the partners is relatively new (joined the firm 3 years ago) and the other is the firm founder and is planning on retiring in the next year. On average the other firm's revenue per attorney and partner earnings is on par or even less than mine. Their overhead is much higher. The two partners have been operating on a handshake with no succession/transition plan for the senior partner and no understanding of retirement financial arrangements (buy-out). While I have some concerns and fears about merging I believe that merger would provide me access to mentoring, additional resources and staff, and ability to improve my competencies and handle larger more complex cases. I would appreciate your thoughts.

Response:

I would be concerned that you have been approached to help with the buy-out of the senior partner. In essence this may be a large unfunded liability that you and the other partner will be saddled with for a number of years. It sounds like, based upon past performance of the other firm, that if there is a substantial buy-out of the senior partner you could end up making less for several years. Other than your rent there will be marginal cost savings as a result of the merger. Improvement in your earnings will be dependent whether you and the other partner can in fact generate larger cases, larger revenues, and increased leverage. 

If I were you I would ask the firm to work out the details concerning the senior partner's retirement as to timeline, the mechanics, the cost/funding of the buy-out, and put same in writing. Once this is accomplished factor this into the rest of your due diligence and analysis.

If the firm is unable to get their arms around the retirement of the senior partner issue I would stay clear.

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

 

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