Law Firm Succession and Exit Strategies – Firm Size

Firm Size and Impact Upon Strategies

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

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.

Solo Practitioners

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 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 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 phase down 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.

Sole Owners

Sole owners are practitioners that have no partners or shareholders but have associates and staff employees. While typically this might be a firm of an owner and a handful of associates and staff this is not always the case. Our firm has law firm clients that are much larger. For example:

A twenty-five attorney plaintiff firm with seventy-five staff employees in California with one owner;
A twenty-four attorney insurance defense firm in Massachusetts with one owner;
A fourteen attorney firm with fifty-five staff employees in Missouri with one owner.;
An eight-attorney collection/foreclosure firm with forty staff employees in Ohio with one owner; and
A six-attorney insurance defense firm in Florida with one owner.

Unlike solo practitioner firms, these firms have associate attorneys on board and often this is the best option for an owner’s succession/transition/exit strategy if the owner has hired the type of lawyers that want to own a law firm. Sometimes this is not the case. Often when the practice is larger, the value the owner is seeking is difficult for one associates to swing on their own. In these cases, it often makes sense to bring more than one associate in to the equity ownership circle. If internal succession by virtue of sale or admission to equity ownership is not a valid option the owner can pursue one of the options discussed earlier for the solo practitioner.

Larger Law Firm

In a larger firm, there are other partners in place to transition clients and management responsibilities. Unless the retiring partner has a unique practice niche, the firm usually does not have to go on the hunt for associates to groom or merger candidates. This eliminates many of the challenges and issues that solo practitioners and solo owners face. The initial challenge in a larger firm is to determine who the successor or successors will be to transition clients and management responsibilities. This may be no easy task especially if the firm is in first generation and the retiring partner is one of the founders.

Client Transition

In larger firms, clients are more likely to be large sophisticated clients, possibly Fortune 500 companies, which refer many matters to the firm during the course of a year. Often such clients may be both a blessing and a curse for the firm. A blessing in that their business provides the firm with huge legal fees during the course of a year. A curse in that their business represents a large percent of the firm’s annual fee collections and a significant business risk if the firm were to lose the client. An effective client transition is critical, takes time, and must be well planned.

Recently I was doing a telephone interview with the general counsel of a Fortune 500 company, which was a client of our law firm client. I asked him if there was an opportunity for the law firm to get additional work in a practice area in which the company had no experience with the law firm previously and if an opportunity existed what the firm needed to do to earn the business. Here is his response:

“Obviously, we currently have other law firms handling that work. However, we have been evaluating those relationships and may be making some changes. There is room for other law firms to earn our business in the practice areas that you have discussed with me.
I am aware that the law firm does other work other than what we have been using them for – but I am not sure exactly what those areas are.
In order to begin to forge a relationship into these other service areas:

I need to know specifically what they do;
I need to know who does it;
I need to know how well the person(s) do it;
I need to have a well-established relationship with the person – trust, respect, like the individual, etc.;
I suggest that we start by having the partner in the firm that I have a relationship with begin educating me on the firm’s other practice areas and begin introducing me to the other players in the law firm; and
We hire lawyers – not law firms.”

Successful client transition – moving clients from one generation to the next – is a major challenge for larger firms. Shifting clients is not an individual responsibility but a firm responsibility. To effectively transition clients the individual lawyer, with clients, must work together with the firm to insure the clients receive quality legal services throughout the transition process. Both the individual lawyer and the firm must be committed to keeping clients in the firm when the senior attorneys retire. Potential obstacles include:

The firm’s complacency regarding the relationship between the responsible attorney and the client;
Clients who are uncomfortable with other lawyers in the firm doing their legal work;
Other lawyers in the firm not being familiar with the client’s business;
Senior attorneys who do not include younger attorneys in meetings with clients; and
The point lawyer not identifying the appropriate lawyer successor to the client.

Management Transition

In larger firms, partners may have management responsibilities as well as client responsibilities. A retiring partner may be a managing partner, executive committee chair or member, or serve as a chair or member on other firm committees. Retiring partners will have to transition these responsibilities to other partners in the firm.

Transitioning client relationships and management responsibilities effectively can and where possible should take a number of years – preferably five years – typically not less than three years. For this reason, many firms use five-year phase down programs for retiring partners. These plans provide detailed timelines and action steps for transitioning client relationships and management responsibilities.

John W. Olmstead, MBA, Ph.D., CMC, is a Certified Management Consultant and the president of Olmstead & Associates, Legal Management Consultants, based in St. Louis, Missouri. The firm helps law and other professional service firms improve the operations and management of their practices and the lives of their practitioners. The firm, founded in 1984 serves clients across the Globe assisting them with implementing change and improving operational and financial performance, management, leadership, client development and marketing.

John’s assignments have covered the spectrum of management issues. However, in recent years most of his time has been focused on engagements helping firms in areas:

Succession/Exit Planning
Partner Compensation
Governance
Strategy & Competitive Business Models
Profit Improvement programs
Client Service Programs

John is the author of a recently published book, The Lawyers Guide of Succession Planning: A Project Management Approach for Successful Transitions and Exits, http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=235511823&term=the%20lawyers%20guide%20to%20succession%20planning, Published by the American Bar Association, John is also the Editor-in-Chief of “The Lawyers Competitive Edge: The Journal of Law Office Economics and Management,” published by Thomson Reuters. He is currently serving as Past Chair, Illinois State Bar Association Standing Committee on Law Office Management and Economics and as a member of the Legal Marketing Association (LMA) Research Committee. John may be contacted via e-mail at

jolmstead@olmsteadassoc.com. Additional articles and information is available at the firm’s web site:

Law Firm Succession and Exit Strategies – Firm Size

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

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