The Top Three Options for Law Firm Succession Planning

The Top Three Options for Law Firm Succession Planning

At some point, you will no longer be running your firm. There are many reasons why you could leave your firm, including your health, a desire to enjoy a retired life, financial independence, and many others.

Although the reasons that will prompt you to exit your firm are unclear, one thing is certain: at some point, you will no longer be running your firm.

Given that reality, you have two choices: Prepare, or don’t prepare.

All too often, attorneys do not prepare for their eventual exit.  They hastily close the doors of their practice (or their family closes the doors for them). In doing so, they potentially lose a five or six figure payout and negatively impact their legacy.

Other attorneys plan their exit from their firm and reap the rewards: they get a nice chunk of income, bolster their legacy, and feel great about the outcome.

When it comes to law firm succession plans, there are three basic options, each with its own tradeoffs:

  • Close the doors
  • Internal buyout by your firm
  • Sell to another firm or lawyer

“Closing the Doors” as a Strategy

“Closing the Doors” can be an effective strategy, especially if you have already achieved financial independence and have built your legacy. When you close down your firm on your timeline, you have peace of mind. You have time to notify clients and wind down the operational aspects of your firm (on-going cases, personnel, leases, etc.).  Although you may not receive a significant financial benefit, you can take pride in the fact that you have gracefully exited the firm as a true professional. And because it’s planned, you are ready for the next phase of your life. Of the three options, this is usually the easiest, fastest way to execute your succession strategy.

Pros:

  • Easy to implement
  • Requires minimal advance planning (in most cases)

Cons:

  • Minimal financial gain, and often is actually an expense
  • Firm ends when you leave

“Internal Buyout by Your Firm” as a Strategy

“Internal Buyout by Your Firm” is the traditional planned strategy. Your ownership stake is bought by others in your firm. This can be accomplished at once, though most often the purchase is executed over time.  This option provides you with a financial benefit and reward for building your firm, and preserves your legacy. This option also gives you considerable flexibility in how you exit. Often times, attorneys cede control over the firm but continue to work in the firm on a part-time basis as Senior Counsel or Of Counsel. It does, however, require significant advance planning as you must groom future partners, structure the firm so it can run without you, have the valuation method (e.g. Certified Valuation, Rule of Thumb Multiplier, etc.) clearly documented in the Partnership Agreement, and negotiate your exit.

Pros:

  • Significant financial gain
  • Firm continues after you leave

Cons:

  • Requires years to implement (ideally 5+ years)
  • Exit negotiations can be difficult, particularly if the valuation method is not clear

“Sell to Another Firm” as a Strategy

“Sell to Another Firm” is a relatively new planned strategy. Your firm is bought by another firm or attorney. This option provides you with a financial benefit and reward for building your firm, and may even preserve your legacy. Typically, attorneys continue to work for a period of time to ensure a smooth transition. There are two challenges with this approach: (1) your firm has to have significant intrinsic value without you involved, and (2) you have to locate a buyer.

There are many ways to value the firm. Conventional wisdom is to multiply the firm’s annual gross revenue by a multiplier of 0.5 to 3.0. The more attractive the firm without you involved, the higher the multiplier. Others suggest thinking of the sale price as an origination bonus (15%-25%) based on the predictable continuing revenue of the firm.  At the end of the day, the value of the firm is what someone else is willing to pay. No more and no less. Therefore, if you want to sell your firm, you must demonstrate that the firm has value without you. Usually, this requires changes in the firm over time.

Locating a buyer can be done via several avenues. Two of the most popular are your network and business brokers. Your network can be a strong source of high quality buyers. However, you sacrifice a measure of confidentiality when you disclose your intent to “find another partner” to your network. A more traditional route is to utilize a business broker (preferably one with many years of experience working with law firms).  In either case, you should be prepared for an “earn out” arrangement, as your exit is more likely occur to over a few years rather than immediately.

Pros:

  • Significant financial gain
  • Well-defined exit from the firm

Cons:

  • Requires years to implement
  • Must be attractive to an external firm or attorney

How to Build Your Succession Strategy

The succession strategy for your firm is one of the most critical strategic decisions that you will make in your professional life. It should not be taken lightly. The good news is that there is a lot of information available in the public domain. The difficult part is crafting the right succession strategy for you. A trusted advisor can help you evaluate your options and create a succession strategy that is unique to you.

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