Law Practice Management Asked and Answered Blog

Category: Exit

Apr 08, 2020

Law Firm Succession and Exit Planning in the Era of Covid-19

Question: 

I am the owner of a general practice firm in the Southwest Suburbs of Chicago with four associates and four staff members. I am 66 and was planning on beginning to work on my retirement plan this year and approach two of my senior associates regarding acquiring my practice. I was hoping to retire and exit the practice two years from now. Now with the Covid-19 situation I am not sure what I should do. Is this a good time to even think about approaching my associates? While business is slow we are doing fairly well working remotely. I still want to retire and be done in two years. I would appreciate your thoughts.

Response: 

One thing is for certain, you will continue to age regardless of the virus and unless you needed higher income in your last year or two, your retirement goal and timeline has not changed. While I would not suggest approaching your associates for the next few months I believe you could begin some of the preparatory work. When I work with law firms on succession planning projects there is a sequence of work steps that take place that take time and often the process can take several months. For example:

  1. Initial call with owner or partners.
  2. Document request to law firm.
  3. Law firm collecting and gathering documents (financial and other) and sending to us.
  4. Financial and document reviews.
  5. Telephone with owner or partners.
  6. Telephone interviews with associate candidates that you are thinking of transitioning the practice.
  7. Preparation of opinion letter (valuation, approach, etc.)
  8. Telephone call with owner or partners re discussion of opinion letter and next steps.
  9. Preparation of proposal to be presented to associate candidates.
  10. Conferences calls.
  11. Presentation of proposal to associates.
  12. Execution of legal documents.

So as you can see there is a lot of pre-work that needs to be done before you even approach your associates. Slow times are a good time to work on non-billable administrative and management projects and unless you have changed your mind on your retirement and exit goals this might be a very good time to begin working on your succession and exit planning.

Since legal skill, client, and management transition takes times you don’t want to wait too long otherwise you may have to move your retirement timeout out further.

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

 

Jan 23, 2019

Law Practice Exit Strategy – Internal or External

Question: 

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?

Response: 

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.

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

Dec 06, 2018

Hiring an Associate Attorney as a Solo’s Exit Strategy

Question: 

I am a solo practitioner in Central Illinois. I have been in practice for 30+ years and I just turned sixty. I have two staff members and no other attorneys in the firm other than myself. I plan on working another five years and then I would like to gradually exit from my practice and then retire. I want to have a home for my clients and employees and I would prefer to be able to sell my interest to an associate attorney working for the firm. I think we have the work to justify hiring an associate and this is the route I would like to go. I have never had an associate so I am not sure what I should look for. Your thoughts would be most appreciated.

Response: 

I believe that an internal succession/exit strategy is your best option if you can find the right associate. Unlike years ago, there are many associates today that just want a job and work/life balance is more important than taking on an ownership role in a firm. They simply are not interested in the work, stress, and risk that it takes to own and manage a law firm. So it is important when searching for an associate that you really vet out this interest to insure that you are hiring someone that will be willing to buy out your interest when you retire and take over your practice.

I have worked with a lot of firms that think they have an exit plan via an associate only to be told no when approached with a proposal to acquire their practice.  When you interview candidates look into their history and their family history to see if you can find a hint of entrepreneurship. You may want to hire a more seasoned attorney that has a small practice that could expand his or her practice by becoming part of your practice. Hire someone that has an interest in the business of law as well as practicing law.

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

Oct 10, 2018

Law Firm Merger as an Exit Strategy for Sole Owners

Question: 

I am the owner of a small general practice firm in Novato, California. I have three associates working in the firm, three legal assistants, and one office manager/bookkeeper. I started my practice thirty-five years ago right out of law school. I am sixty years old and wanting to retire within the next five years. None of my associates have the ability or the desire to take over the firm. I believe that my best option is to sell my practice to another practitioner or join another firm through merger or other arrangement. I would appreciate your ideas regarding merging with another firm and how I would be compensated and receive payment for the goodwill value of my firm.

Response: 

Merger or an of counsel arrangement are approaches that many sole owner firms are taking when there is no one on board that is capable or willing to buyout your interest. Often merger or of counsel arrangements look very similar in how they are structured. Typically, the owner joining another firm:

Employees that the new firm has accepted would join the new firm and receive compensation and benefits spelled out in the merger or Of Counsel agreement.

How the arrangement will be structured and how compensation/buy-out will be structured will depend upon the size of the other firm. I assume that you will be looking at a firm similar to your size or a little larger (1-20 attorneys). If this is the case and if the arrangement is structured as a merger you would more than likely be classified as a non-equity partner and not an equity partner. While the other firm could pay you in the same manner that other non-equity partners are paid, often a special compensation arrangement is developed where you are paid a percentage of your collections and if you are lucky a referral fee arrangement for your client origination’s for two or three years after your retirement – typically twenty percent. In many cases if will be difficult to get a goodwill value payment and impossible in mergers or Of Counsel arrangements with large firms.

Another option would be an outright sale to another sole owner or small firm for a fixed price for the goodwill value of your firm and any assets the firm desires to acquire. More than likely this would be with an initial down payment and payments over a three to five-year period. Typically, practice sale agreements have provisions whereby the purchase price can be reduced if revenues fall below a certain level.

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

May 08, 2018

Of Counsel Arrangement as a Law Firm Exit Strategy

Question: 

I am the owner of a solo real estate practice in Merced, California. I have two staff members that work for me. I am the only attorney in the firm. I am sixty years old. While I am concerned about the long term exit from the practice I am also concerned about office coverage in case something would happen to me in the short term. I appreciate any recommendations that you may have.

Response: 

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

 

Apr 18, 2017

Law Firm Succession/Exit Plan – Merger, Selling, Laterals, or Promoting Associates to Equity

Question:

I am the owner of a small estate planning firm in Worcester, Massachusetts. I have three associates and three staff members. I am fifty five and am wanting to begin putting in place my succession/exit plan. I would like to retire and exit the practice in ten years. Would I be better off selling to another firm or attorney, merging the practice, bringing in laterals, or selling to one or both of my associates? I am interested in your thoughts.

Response: 

The biggest challenge for many firms, is finding the right WHO.

The who dictates the what – the actual succession/transition/exit strategy. In other words, many law firms find that they start down one path and end up on another. Not all non-equity partners and associates want to own a law firm. Not all lateral and merger candidates will be a good fit for your firm and culture. The key is the right relationship and sometimes that takes the form of making someone at the firm a partner, bringing in a seasoned lateral, merging with another firm, or selling the practice. Therefore, succession/transition plans have to be flexible and often the key is not get stuck in creating complex succession plans at the onset. Establish timelines, outline a general course of action, generate some momentum and see where that takes you. Then build the plan when you can see where the firm is headed.

Unless the retiring partner in a larger firm has a unique practice that requires the firm to conduct a search for lateral or merger candidates, larger firms will not have to embark on a search. However, solo practitioners and often sole owners will have to explore their options and conduct a search for the following:

This search and exploration often is the most time consuming and difficult part of the process and often the options identified through this process ends up dictating the succession/transition/exit strategy.

If a firm has associates, does the firm have the right associates on the bus for the long term? In other words, has the firm hired associates that want to be business owners and own a law firm? Many owners and senior partners in law firms are approaching retirement age and are beginning to think about succession strategies. As they examine their associate lawyer ranks, some partners are often surprised to learn that there may be few takers. While their associates may be great lawyers, they may not bring in business and may not be interested in ownership or partnership. Such firms have hired a bunch of folks that just wanted jobs and have no interest in owning a law firm. While this hiring approach may have satisfied the firm’s short-term needs – it may fall short in the long term.

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

 

 

 

Mar 21, 2017

Retaining Valued Associate Attorneys – Conducting Exit Interviews

Question: 

Our firm is a fourteen attorney law firm in San Diego, California. We handle business transactions and litigation for business firms in the area. I am a member of the firm’s three-member executive committee. We have been experiencing associate attorney turnover for the past two years and don’t know whether it is due to more opportunities in the job market as the economy has improved or whether we have internal issues. We would appreciate your thoughts on the matter.

Response:

I suggest that in the future you conduct structured face-to-face exit interviews when associates resign their positions. You may want to even interview associates by phone that recently resigned and left the firm. Exit interviews can provide an opportunity to find out how you can retain your valued associates. Departing lawyers that are willing to be open regarding their experience with your firm can provide valuable feedback and information as to how your firm is viewed by your associates, why your associates are leaving, and what the firm can do to resolve issues and improve retention.

I suggest that you conduct either face-to-face or telephone interviews or as a last resort written confidential voluntary questionnaire. Questions might include:

  1. What influenced your decision to join the firm?
  2. Has the firm met your expectations? Describe?
  3. Were your work assignments aligned with your personal and professional goals and interests?
  4. Did you find your work assignments interesting and challenging?
  5. Were there particular individuals who had a substantial impact on the quality of your experience here? How did they impact your experience?
  6. Did you receive timely and quality feedback regarding your performance?
  7. What experiences did you find the most positive?
  8. Least positive?
  9. Is there anything that the firm could have done to improve your experience here?
  10. Were you satisfied with your compensation and benefits?
  11. Why did you decide to leave the firm?
  12. What factors influenced your choice of the new firm that you joined?
  13. Other issues or recommendations that you feel would be helpful for the firm to know.

After you have solicited feedback via exit interviews it is critical that you look into any issues reported, determine whether there is merit, and take appropriate actions that can be taken to resolve issues and improve retention.

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

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.

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

Sep 15, 2015

Law Firm Succession/Exit Planning – Sole Owner Practice

Question: 

I am the owner of an estate planning practice in northwest suburbs of Chicago. I have two associates and for staff members. I am sixty seven and would like to retire when I am 70 (3 years). I have no idea as to where I should start and the approach I should take. I would appreciate suggestions.

Response: 

Sole owner firms and solo practitioners face a real challenge when deciding what to do with their practices. While many of the issues are similar to those faced by multi owner firms, sole owners and solo practitioners must also face the following additional challenges:

As with multi owner firms the key is to start early and not wait until the last minute. I suggest that you put in place your succession/exit plan as soon as possible – not just for retirement but for unexpected situations as well – so that your family, employees and clients are not left in the dark if something should happen to you.

Just because you have associates – don't assume they want to be owners and own a law firms. Look into this early as it may impact your hiring strategy as well as your overall strategy and whether it will be an internal vs. external succession strategy. 

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

May 13, 2014

Law Firm Succession/Exit Strategy for Owner of a Six Attorney Insurance Defense Firm

Question:

I am the solo owner of a six attorney insurance defense firm in Phoenix. The other five attorneys are associates – most of whom have been with me three years or less and had limited experience prior to joining my firm. I am 47 and am looking to start to wind down within five years and be totally out of the practice in ten years when I am 57. I want to start thinking about my succession strategy early so I have time to execute it properly. I would appreciate your suggestions.

Response:

If you are like most small insurance defense firms you have a handful of insurance companies that sends you virtually all of your cases. I assume that you bring in all the business, hold the key to the client relationships, and guard those relationships carefully. This may be a double edged sword for you in that while controlling those relationships and using your associates as "worker bees" may keep them from getting close and stealing your clients this approach may also prevent you from developing suitable "bench strength" in the eyes of your clients that could constrain an internal succession/exit strategy down the road. Ask yourself this question – if you made a couple of deserving associates partners today and you left the firm next year would any of the clients stay? Often in situations similar to yours I am told – none. If this is the case you need to begin to hire the right associates – ones that actually want to become partners someday (not all do) and bulk up the team that you have. Otherwise, you may have to bring in lateral talent at the right time or merge with another firm.

Unlike many law firms we are working with you are starting to think about this early – so you have time.

Good luck

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

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