A note for today – Law Firm Succession

The White Paper below is written as a knowledge piece.  It is written with the medium to long-term issues facing the profession in mind.

In that context it does not – directly – take account of the issues raised by the current Covid-19 outbreak.  The outbreak is undoubtedly damaging business and law firms are no exception.  Certain areas of law will be hit harder than others, but undoubtedly, businesses will be dealing with the effect of this for potentially many years to come.

However, this only emphasises the issues raised within the White Paper and accelerates the need for Law Firms to address the issues below, such as ensuring that:

  • People are trained and mentored to manage the business, should senior management be unavailable staff can work anywhere.  They don’t have to be in the office, recruitment must take advantage of the desire from the workforce for more flexible working hours
  • IT is robust, backed up and able to support the business, even if not hosted on-site
  • Property needs are assessed.  Do we need that many desks on-site?
  • The firm is financially stable enough to withstand financial shocks and finally
  • There is a disaster recovery plan in place and that is tested frequently, so you know the business can continue, even in the most unusual of circumstances.

We hope you appreciate the ideas within the White Paper and look forward to helping you with those challenges, whether in the current emergency or once some version of normality has returned.


Introduction

Law firms have a problem.  There are too many owners that want to retire and too few people that are interested in taking over their business or share of their business and paying them out, so that they can do so.

If you are a partner or owner looking to retire soon, then you need a plan to ensure that you have a successor or two ready, willing and able to take over the reins.

That all sounds very simple but if you drill deeper into the problem, there are many issues to address in passing on your business.  Most owners focus upon the clients and the files.  They are important – critically important. But there are many other areas around the business that can create difficulties for the retiring owner and are often overlooked when retirement beckons.  This can lead to a failure to successfully pass the business on and a failure to realise the capital value in the firm – or their share of it.

There are many firms, with older partners, perhaps sole traders, with capital tied up in their business, who eventually decide it is time to retire, look up from their desk and then look around vainly for someone to pay them out: only to find that no one is prepared to do so.

We refer to a sole trader to illustrate the point but it can apply to any firm where there has not been any new blood into the business for several years.

For some firms, especially the larger ones, perhaps those in the top 200 by turnover, there are sufficient people coming through to provide a pool of talent, that can take on the challenges of equity: but those firms must still manage the process and get those people ready if there is to be a successful handover.

In recent years, the sole trader and partnership models have steadily declined and largely been replaced by the Limited Company structure, as illustrated in the table below.

Sole Trader Partnership Limited Company Limited Liability Partnership Other Total
December 2019 2,189 1,566 4,989 1,536 38 10,278
21% 15% 48% 15% 0% 100%
July 2010 4,030 3,620 1,898 1,262 75 10,885
37% 33% 17% 11% 1% 100%

Source: https://www.sra.org.uk/sra/how-we-work/reports/statistics/regulated-community-statistics/data/solicitor_firms/

What we are seeing is the retirement of an increasing number of “traditional” sole practitioners and their businesses being aggregated into new entities.  To some extent this has been accelerated by the complexities caused by increased regulation of the profession.  It has – put simply – become too much for a small ‘one-man-band’ to handle.  This process will accelerate due to the demographics of the profession, as illustrated shortly.

These retirements, with businesses being taken over by or converted to other legal vehicles, also have implications for the way in which succession will be managed.  Banks view these entities differently and there are taxation issues that will need to be considered in full when managing succession.

In this in-depth series, we deal with the likely stumbling blocks to a successful succession and hopefully signpost ways of addressing them.  Those issues are right across the board in law firms.  Some people will initially only consider this a people issue, i.e. who is able to take over?  While that is obviously a vital consideration, there are many factors at play here, including premises, IT security, PII and claims, finance, etc.

Each succession is a jigsaw and each one is different.  Planning for succession is very similar to planning for a merger.  You need to get the firm ready and make it attractive.  This takes time and requires the owners to put in that time.

The key message is to think through all of the potential issues and start planning early!

Protecting your core operating model

Both sellers and buyers need to be alive to vulnerabilities within the firm, and some are less obvious than others. While there might be plenty of awareness of the risks of, say, integrating IT systems in the event of a post-acquisition merger, what about the loss of highly skilled, hard to replace personnel? Take the example of cashiers.

We’re at a tipping point in the profession where demographics and technological change are driving a growing wave of retirements. It is such a pivotal role in a practice that unless well planned for, it can be hugely disruptive – not a situation that any new owner would welcome, especially when they thought they were done with succession planning!

So how do you mitigate the risk? Not everyone will have the luxury of a solid deputy able to step up. Then there’s the challenge of finding a quality replacement when there’s a dwindling pool of talent out there? You could be a long time looking. The reality is that firms are having to think differently about how they protect their core operating model. And where once people looked to outsourced services to drive efficiencies and economies, now increasingly they are being valued at an even more fundamental level – guaranteeing the supply of required expertise. And protections are there across the board, not just third-party suppliers to compensate for our disappearing cashiers, but equivalent services in secretarial and transcription, IT infrastructure and applications and HR and payroll.

The lesson here is that succession planning doesn’t just stop at retiring partners. Moving to outsource with the right providers can help modernise and protect the practice, affording a stronger stance for the seller and a more desirable proposition for the buyer.

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Next time…

In Part Two – People. This has to be the hardest part of the jigsaw in law firm succession planning.

Also, the thorny issue of understanding who your firm’s ‘best’ Clients are, do you know who owns those relationships, and how can you ensure that key relationships don’t leave with a departing partner.

Thanks to the Calico Expert panel for this special interest series:

Richard Wyatt, Baskerville Drummond

Patricia Kinahan, Hazlewoods

Alex Holt, The Cashroom

Brian Boehmer, Lockton

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