Law Practice Management Asked and Answered Blog

Category: Options

Sep 25, 2019

Succession-Exit Options for Law Firm Solos

Question:

I am a solo real estate practitioner in Long Beach, California. I have one paralegal that works in the firm. I am 70 years old a would like to retire in the next couple of years. What are my options?

Response:

Solo practitioners have the greatest challenge since they have no associates or anyone in place to transition the practice. Therefore, the practitioner must both hire and groom an associate that could buy the firm or become a partner and buyout the owner’s 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

Hiring and grooming an associate can be problematic for the solo. If he does not have sufficient business and the associate does not originate business, the associate will be an expense and the owner’s net earnings will suffer. Other issues include:

The associate may have no interest in owning a law firm. He or she may simply want to be a lawyer, have a job, and not be a business owner.
The owner could invest several years in mentoring and training an associate only to lose the associate to another firm in two or three years. The owner’s succession/transition/exit plan is now out the window and he or she has to start all over again with less time remaining to do so.
The owner may not have the time or inclination to groom and train an associate.

Sell the Firm to another Lawyer or Law Firm

The owner can 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.

Solo practices are often very personal practices with little annual repeat business. Clients of law firms advise us that they hire the lawyer and not the law firm. This makes buyers very cautious due to their concern that the clients and referral sources will not stay and the revenues will not materialize after the owner sells the practice. Therefore, many buyers are not willing to pay cash for a law practice. Our experience has been that most of these practices are sold with payouts over time based upon a percentage of revenues collected over a certain number of years. Usually, the seller stays on in a consulting capacity for a year to help insure that clients and referral sources stay with the new owner.

Merger with another Firm

Merger with another lawyer or law firm is another option. This is often a better option for solos that want to gradually phasedown 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 pre-agreed to 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 phasedown to retirement.

Of Counsel with another Firm

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.

One option is not necessarily better than the other – much depends upon “fit” and individual circumstances as well as a little luck.

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

Apr 05, 2016

Law Firm Debt – Impact of Debt and Other Liabilities Upon Future Growth Options

Question:

I am a member of a three member management committee of a 16 lawyer firm located in Akron, Ohio. We have 10 partners and 6 associates. Several of our partners are in their 50s and 60s. Recently, we have had discussions with a couple of potential merger partners and laterals and in all cases they have backed out advising us that they were uncomfortable with our balance sheet. What can we do to better position ourselves. We desperately need to bring in new talent with books of business?

Response:

First there are the obvious balance sheet items – bank debt, large tapped out credit lines, equipment leases and other liabilities. Then there are the items that are not recorded on the balance sheet – namely unfunded partner retirement buyouts and long term real estate leases. These are often major deal breakers in mergers and scare away laterals. If you have bank and other debt on the balance sheet work at cleaning it up. More importantly if you have unfunded partner buyouts begin either rethinking the desirability of these programs or begin funding this liability now with a goal of the liability being totally funded over the next five to seven years. Then shift to a retirement program that is totally funded. Unfunded partner retirement programs are becoming a thing of the past.

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