Law Firm Succession/Exit Strategies: Small Firm Merger Case Study

A Case Study of a Solo Attorney that After Two Unsuccessful Attempts Took a Phased Approach to a Merger with a Small Sole Owner Practice

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

Law Office of Mary Allison (Fictitious Names Used)

Upon graduation from law school Mary Allison, like many young lawyers, landed a job in a small law firm owned by Michael Brown. Michael’s practice was limited to estate planning, estate administration, and real estate. Michael was in his early fifties and it was his hope that Mary might be his eventual succession strategy. Mary was Michael’s first associate. Mary worked hard for the next five years working on Michael’s matters as well as her own. After seven years with the firm Mary was, bringing in enough business that she only had time available to work on her own matters. She was generating fifty percent more fee revenue than Michael and bringing in more business. On several occasions, Mary brought up the subject of partnership but Michael advised her that he was not interested in having a partner. Mary felt that she was not being adequately compensated, had no voice in the firm, and little control over her future. After ten years, Mary left the firm and started her own firm concentrating on estate planning, estate administration, and real estate. She took her clients and her paralegal that had worked for her at Michael’s firm for the past ten years with her.

Mary was a natural and her firm was successful from startup. She was a good attorney and had an excellent bedside manner. She truly cared for her clients and it was evident from the repeat business and referrals from her clients. Mary built up a strong referral source base of banks, financial planners, accountants, attorneys, insurance agents, church members, and community leaders. Other than her website and annual holiday cards, no other marketing investments were necessary. Mary enjoyed being a “solo” and had no desire to grow any larger than herself, her paralegal, and her staff assistant. She never had the need to hire another attorney, as she was able to handle the business by herself and her paralegal.

Fast-forward the calendar thirty-five years to 2013. Mary is now seventy. Her husband passed away a year ago, and her children are living out of town. Her paralegal is sixty but needs to work another ten years as her husband is deceased and she needs the income. Mary’s daughter works part-time as an administrative assistant. Mary is having some health problems but is still in relatively good health. She loves her clients, enjoys her work, and wants to continue working as long as she can. However, Mary realizes that she will not be able to continue working forever and needs to begin planning for the eventual succession and transition of her practice.

Mary retained our firm to assist her with succession planning and advised me that her long-range goals, in order of priority, were:

To take care of her clients
To provide continued employment for her paralegal
To receive fair compensation for her practice

We discussed various options including:

Hiring and mentoring a young associate that could eventually buy into the practice
Selling the practice
Merging with another firm
Forming an Of Counsel relationship with another lawyer or law firm

Mary quickly ruled out hiring an associate and mentoring. She believed that she did not either have the time or a sufficient volume of business to support an associate’s salary. Since Mary wanted to continue to practice as long as possible, she did not want to sell her practice prematurely due to the ethical requirements and restrictions that would have to be satisfied with a practice sale. She was open to an Of Counsel relationship or merger with another law firm.

Mary had been talking with another attorney, Sally, who recently left her in-house position with a bank trust department about a possible future relationship regarding providing backup coverage for Mary’s practice and eventually buy Mary’s practice at such time that should would decide to retire. I interviewed Sally and I had concerns. I did not believe that Sally had the desire or entrepreneurial ability to own and manage a law practice. However, Mary liked Sally and wanted to work out an arrangement. I suggested a “pilot test” and we structured an affiliate “Of Counsel” type relationship designed to explore whether the relationship could work. In essence, the “Affiliation Agreement” (Of Counsel) provided:

Sally would work at Mary’s office one day a week and she would work on Mary’s matters;
Over time Sally would be introduced to Mary’s clients and referral sources;
For services provided for Mary’s clients, Sally would be paid an hourly rate; and
For business that Mary referred to Sally that Mary did not handle or business that Sally referred to Mary Sally would be paid a referral fee of twenty percent.

Mary and Sally signed the agreement. Two weeks later Mary called me and advised that the arrangement did not work out and they had terminated the relationship. As I suspected Sally had no real interest in ever owning a law practice and this become obvious to Mary as they moved forward with the relationship. While Mary was disappointed, she was also gratified that she started with an exploratory relationship rather than jumping “feet first” into a partnership or other relationship.

We then placed online ads and commenced a search for other candidates. We were looking for other solo attorneys with an established estate planning/administration practice. After meeting with three potential candidates, Mary focused on one candidate, Kathy that had an established practice in another city approximately fifteen miles away. Kathy was in her early forties and her practice, in addition to handling estate planning and estate administration, handled elder law as well. Both practices generated approximately $300,000 in annual revenues. They visited each other’s offices, met each other’s staff, and had lunch on three different occasions. Mary and Kathy really liked each other and believed that they could make it work. Kathy’s practice was located in a less affluent community and her practice had reached a plateau. She believed that the acquisition of Mary’s practice could really jump-start her practice in five years. Mary believed that Kathy would be a good fit for her clients and would provide solid employment for her paralegal.

Mary was cautious after her recent experience with Sally. Mary and Kathy executed the same “pilot test” Affiliation Agreement that Mary and Sally executed. The relationship proceeded well and they began working together. In addition, since Mary did not handle elder law matters she began referring those matters to Kathy and received a twenty percent referral fee for those referrals. After six months, we met to discuss the next step. Mary wanted to merge but Kathy was not ready for a merger. Mary was still unclear about her actual retirement timeline but suggested that she wanted to work another five years. Therefore, she was uncomfortable with actually selling the practice at this time. Kathy and Mary agreed that Kathy would become “Of Counsel” with Mary’s firm and Mary would promote the relationship to her existing and prospective clients. Mary and Kathy also agreed to the terms for the purchase of Mary’s practice when Mary decided to sell her practice in the future. Mary retained a business attorney to draft a formal “Of Counsel” agreement. The “Of Counsel” agreement contained similar provisions as the Affiliation Agreement but with a lot more legalese. It also contained a right of first refusal for Kathy to purchase the practice when Mary decided to sell in accordance with terms outlined in an attached Practice Sale Agreement. The terms of the Practice Sale Agreement provided for a $50,000 payment at closing and twenty percent of practice revenue for five years with the $50,000 payment serving as a credit against future payments that would be due. Mary and Kathy signed the agreements.

The relationship continued to go well. Mary’s client’s liked Kathy and Mary’s paralegal and Kathy worked well together. Mary now had backup and coverage and was able to take more time off. Kathy received additional revenues in the form of payments for her time spent on Mary’s matters and elder law referrals. Mary received referral fees from the elder law matters referred to Kathy. However, after one year, the relationship fell apart and Mary and Kathy terminated their relationship. The problem resulted from Mary’s unwillingness to commit to a retirement timeline and micromanaging Kathy and treating her as an associate rather than a peer business owner.

After the relationship fell apart Mary contacted me and advised me of what had happened. I scolded her and advised her that if she did not commit to some sort of a specific timeline and recognize that since her goal was “succession and transition” and she should not try to enforce her approach on another attorney, she might not find anyone interested in working with her. She began searching again and met with a few candidates with no success. Finally, I introduced her to Brian the owner of an estate planning/administration/elder law firm in a community approximately twenty miles away. Unlike the other candidates that Mary had formed relationships, Brian had a larger practice that included four other attorneys and five staff members. Brian’s practice had hit a revenue plateau at $1,100,000 and he was looking to expand his practice into other communities. After several meetings, Mary and Brian advised me that they wanted to merge their practices. Based upon Mary’s past record of accomplishment I suggested a two-phased approach. A four-month “Of Counsel” relationship to explore feasibility and compatibility would constitute Phase I and a merger of the practices would constitute Phase II. The same “Of Counsel” agreement with the right of first refusal and related sale agreement that was used with Kathy was executed for the exploratory Phase I. A preliminary term sheet outlining the possible terms of the merger was prepared and discussed. Mary and Brian agreed that they would further develop the terms for the merger as they progressed through Phase I.

The relationship went well and after four months, Mary and Brian merged their practices. Since both firms were proprietorships, Brian formed a LLC, Mary merged her firm into the LLC, and they executed an Operating Agreement, which, among other things, established ownership interests, capital contributions, compensation, and for Mary’s retirement payout after three years. Mary and Brian continued to operate and manage their respective offices until Mary retired at which time Brian took over and staffed Mary’s office with an associate attorney. A few details of the merger included:

Mary retained the cash in bank and collected and retained cash from her accounts receivable, and work in process;
Mary’s fixed assets were sold to the LLC at appraised value and credited to her capital account;
Mary’s was admitted with a forty percent membership interest;
Compensation was based upon a “profit center” approach with each office being treated as a separate profit center;
Mary agreed to retire within three years after the date of the merger and her payout would be based upon twenty percent of gross practice revenue from her practice location for five years; and
Decision-making and voting was based upon ownership interest.

This time Mary got it right. The merger was successful and Mary is now retired, in her third year of her five-year payout, and enjoying her retirement.

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/Exit Strategies: Small Firm Merger Case Study

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

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