Succession – the hidden killer of Law Firms
The small-mid law firm world has changed without many of us noticing it and now succession is the biggest issue facing most small firms. It is like high blood pressure for law firms, often not really worried about until it is too late.
Many of the Partners who now wish to retire, bought into their firms in the 1960s, ’70s or ’80s when it seemed good business to buy equity for departing Partners and, more often than not, also agree to pay an annuity to them and their spouses.
In those days this seemed only reasonable. The retiring Partner had improved the business that the new Partner was now inheriting so his/her efforts should be recognised. Accountants in those days saw law firms like any other business and valued them accordingly at a multiple of profit. The old rule of thumb was that if the owner of a ‘Widjit factory’ had grown the business he/she was now passing on, this should be recognised so what was different about a law firm?
Track forward to today and this is no longer the case. The rug has been pulled out from under their feet. There are a number of reasons for this, but essentially firms are often less profitable due to loss of bank interest, online competition and increasing fee pressure. Compliance is a burden rather than something to be nodded at and staff know their rights. Add to this Property leases, IT supplier contracts, PII costs and all of a sudden being an owner is a lot less attractive.
Retiring Partners need to put themselves in the shoes of the next generation and ask, if you had your time again, would you buy in now? If the answer is yes, fantastic, you have clearly got a good firm and you should have no problem retiring, if it is no, then how can you expect anyone else to do so. To take each of these in turn:
If you would buy in again, then you have choices. You are clearly doing most things right so I would imagine you have thought about succession and have lined up salaried Partners who are happy and ready to take over.
This is great news, but the chances of them paying anything for the privilege are remote. Or, if they are not ready to take over but are good fee-earners then you have a good vehicle to be acquired by another firm. You should take time to find a good match, manage the integration process, become a senior consultant for as long as you wish and retire happy, safe in the knowledge that clients and staff are looked after and most importantly the new firm are successor practice.
If the answer was no I would not buy in, and be honest here, then your choices are more limited.
No doubt you have been an excellent lawyer for your clients but you have probably neglected your firm, staff who have left have not been replaced with better people, the offices are a bit tired, the IT system is held together with tape and you have drawn out all the income possible year after year. This is the more common situation and is not attractive to any junior Partner.
The ultimate option for you is closing down with run-off but this is expensive at around 3 x PII premium and really is the last resort. The most practical solution is to approach other local firms, or the national consolidators looking to open in your locality, and essentially hand them the keys to the firm, work for a few months to ensure the clients transfer over and leave. This is an undignified end to a professional career and entirely avoidable with a little planning but at least it saves the run-off cover cost.
We are often asked when partners should start looking at succession and the answer is broadly when their ages start with a 5. If your age starts with a 4 you are probably someone else’s succession and have plenty of time to plan how to improve the firm. If your age starts with a 6 however, your options are more limited and becoming worse every year so start work on this immediately and aggressively.
The ideal time is in your mid 50’s. At this point, if you decide the right route is to bring on junior partners you are still going to be around for 5-10 years to mentor them, hand over relationships and ensure the firm is in a good place. Alternatively, if you decide a merger makes the best sense, your firm is an attractive proposition and you will have 5 -10 years to enjoy the benefits of being in a larger firm and the enhanced profitability the merger has produced.
Partners in small firms need to have retirement strategy at the top of their agenda 10 years before they wish to retire. To make the firm as attractive as possible takes time, but if they do it right they can enjoy real benefits and leave their clients and staff in a better place than when they joined which, after all, is all any professional should really want.