Retirement strategies for law firm owners
There are 8000 firms in England & Wales of between 1-4 Partners. A large majority of these will have Partners who are in the last few years of their careers. They all need to review their retirement strategies.
6 possible retirement routes?
For these Partners to retire there are only 6 possible solutions. These are:
- You already have tomorrow’s partners in place.
- You need to find your successors and attract them.
- Your firm is acquired.
- Bring in professional management.
- Close the firm.
- Just keep on going hoping things will work out.
It might be helpful for us to take each of these in turn and look a little deeper.
1. You already have succession in place.
Well done, you are obviously running an attractive firm. Your younger colleagues can see that it is strong and sustainable and so they are happy to invest. We advise all clients in their 50’s to start seriously concentrating on this process because it takes time to develop your people. The next generation seems to find taking on ownership easier if the firm incorporates. So that they can acquire shares in a business rather than equity in a partnership. This might seem a minor distinction but it does make the route to new ownership, and therefore your exit, smoother.
2. You need to find your successors.
You no doubt have good lawyers in the firm but no one who has the desire or commercial nous to take over. This is actually quite common. It may not be surprising considering the regulatory and financial environment that firms operate in now. However, other potential successors are out there. You need to find them and then make the firm as attractive as possible.
To find them we would suggest networking first. Ask your accountant and bank if they have heard good things about young locals. Talk to your other contacts and clients. However, if these efforts do not yield results, you need to retain a professional head-hunter who has the research capability to uncover the right person. Once you have a target, you then need to make the firm as attractive as possible. Obviously, if there are any issues you need to remedy these first or have a plan in place to do so. Then put together a sales prospectus containing all relevant information – fees and margin over 3 years, client types, staff demographics, liabilities, property details. Make it easy to see that this is a good long term business opportunity. And always, always, be positive.
3. Your firm is acquired.
People always talk about law firm mergers, but in reality, they are always acquisitions. Again, you need to tidy the firm up and prepare a prospectus to get your thoughts organised. Then make discreet enquiries as to which firms might be interested in an acquisition. These might be via your bank or accountant. Or via a broker who will ensure that your plans are kept secret and will help you cover all the potential options. Acquisition is an excellent way of solving the problem. There is no disgrace in losing the name or independence if by doing so you can exit whilst guaranteeing the continued wellbeing of clients and staff.
You don’t need to wait until retirement for this to work. Doing it in your 50’s gives you 5 to 10 more years in which to enjoy the benefits of the merged firm.
4. Professional management.
Bring in a non-lawyer to run the firm. For this to work, it is far better to incorporate. You can then hold shares in the business and maybe sit on the board whilst having a CEO run the firm day to day. That CEO should also probably own shares. This solves the ownership issue and also allows you a type of exit (whilst maintaining an income). However, you are very reliant on finding and keeping a good CEO and it is probably not a sound long term solution.
5. Closing the firm
Only firms with large liabilities or major issues should need to consider this as an option. There is always an inherent value in a firm. PII contagion is the largest issue and firms are rightly wary of becoming successor practice to firms with a poor history. However, if you decide to close, your current PII provider must offer run-off terms. You should then follow Chapter 10 of the SRA code and effect an orderly closure. This is a rather inelegant end to a career but at least it allows an exit. It would usually happen upon expiry of the office lease.
6. Do nothing
The final option, do nothing and hope something turns up. This last option is very common but is not sustainable in the long term however attractive it might seem immediately. As I have said earlier, every firm has a latent value so long as it is not burdened by PII or other toxic liabilities and the sooner you start the process the better.
So, do you have a plan?
In our experience, the best way to exit is to address the issue early and grow your own succession. If this is not possible (or doesn’t work out) then being acquired is likely to be the easiest option for you and the best option for your clients and staff. Whichever route you take you need to review potential retirement strategies well before the need to retire arises.
If we can help with any of the above please get in touch, firstname.lastname@example.org or call 0333 320 9979.