For most solos and small firm attorneys, retiring or stepping away from the practice is like mortality. Most will avoid thinking about it until it is shoved into their faces. For some, the “shove” is a serious illness. For others, it’s a crisis in the practice—the loss of a long-time pillar of the practice or a major client, or perhaps an economic downturn (like the present one) that damages revenues. Something happens, and these lawyers suddenly realize they don’t have the drive, energy, or know-how to rebuild, change, or refocus. So they decide it’s time to step out.
Unfortunately, by this time it’s usually too late. The attorney is likely to lose hundreds of thousands of dollars in potential value from the sale of the practice, or even discover that no one can be attracted to buy it or take it over. And the lawyer simply has to close the doors and walk away.
So, when is a good time to start planning for a transition?
Now. Right now. It doesn’t matter if you are 60 or 30. Because a happy transition isn’t an accident and can’t be accomplished in a few months. The best transition starts as early as possible. An ideal time frame is five to seven years, a possible time frame is two to three years, and a fire-sale timeline is 12 to 18 months.
A well-planned and well-executed succession strategy yields the attorney literally hundreds of thousands of dollars that might otherwise be lost without a plan. This makes it important enough to be approached with the same seriousness that one would lavish on a high-stakes litigation matter: with extensive research, study, planning, strategizing, and impeccable execution.
Even more important, a succession plan is a type of risk management. The solo attorney struck down by illness or death can leave dozens of clients damaged and the attorney’s loved ones unprotected. A succession, where a second attorney is “understudying” the senior attorney, allows the senior attorney to honor obligations to clients even if he or she is no longer able to practice.
To ensure the best result from a succession plan, attorneys must undertake a carefully choreographed process. With careful planning, they can pass a viable and bountiful practice to a successor, cash out their full value, step back gradually over time, and remain in practice with the firm for an extended period, gaining additional income for years while still connected and involved with their profession.
Developing a Timeline
Failure to develop a clear picture, and a clear timeline, for all significant elements of the transition will result in failure to achieve a successful transition. And without a clear picture, a potential successor will be extremely difficult to attract. Remember, the best candidates will have more options than others, so the picture has to be attractive, and the incoming attorney has to trust that the outgoing attorney is fully committed to a clearly designed process. Potential successors must see that there is a very specific timeline for them to achieve full ownership. They need to be able to “fully understand the game,” so to speak.
The timeline has to have two parallel tracks: one for the transitioning-in, and one for the transitioning-out. The successor also has to see the long-term commitment of the transitioning attorney to support the firm during the entire transition, with revenue targets and marketing activity levels for both. What can sew up a sale is the purchasers’ clear understanding that they will receive full support from the transitioning-out attorney over the buyout period and won’t be left to fend for themselves and with a big debt partway through the process.
Parenthetically, the outgoing attorney should commit to ensuring that the incoming attorney continues successfully—and is able to finish paying any long-term payout. Too many owners have sold their businesses on a long-term payout only to watch the buyer crash and burn the business without paying their buyout price in full.
Inside this timeline is one of the hidden values of a well-planned transition. To facilitate obtaining a successor, the firm should seem to have not only an attractive practice, but even a bargain price.
One part of the plan is to increase the firm’s revenues significantly as the succeeding attorney enters the practice, not only to pay for both, but to actually increase the outgoing attorney’s personal income, just at a time when it would usually be declining. So the transitioning-out attorney earns more personal income even before the sale is completed. And this decreases the need to set a “sale” price so high that it scares away a potential successor.
So, beyond revenue goals, what does the timeline look like?
Step one is a first-year “audition” period for the potential successor, with specific performance and skill benchmarks the successor must meet in order to move to step two.
Step two is the initial buy-in—or rather, the awarding of, say, 10 percent ownership—without cost. This is an attractive part of the initial offer that has the potential successor say “yes” and step into the process. Again, in year two there are marks for the successor attorney to hit.
Step three comes at the end of year two, when the buying attorney is now sold another, say, 15 percent, at a very reasonable cost. Again, the successor must continue to meet specific performance marks to qualify.
Step four is at the end of year three, when the successor can purchase another 15 percent.
Step five comes at the end of year four, which is the make-or-break year. If the successor has measured up, this attorney now has the ability to buy another 15 percent and become majority owner with effective control of the firm. But the original buy-in/buyout agreement should contain a clear hook: If at this point the outgoing attorney does not trust the rest of the process and/or the long-term viability of the incoming attorney, he or she has the right to buy back all shares at the original purchase price and end the relationship.
Even with the most exacting planning, false starts with wrong candidates are possible, which argues strongly for clear and frequent performance evaluations. Five years is the safe minimum because it allows time to recover from false starts.
If the process has progressed successfully, in year five the outgoing attorney begins the transition into “advisor” and “of counsel” status, focusing more on the marketing and client relationships and less on the legal work, and the incoming attorney assumes the reins of operational control.
The remaining two to three years of the ideal transition continue the process of ownership transition until the outgoing attorney holds no ownership.
But within the original agreement should be two valuable elements. First, the outgoing attorney should be able to remain a part of the practice so long as he or she meets a minimum level of revenue—say, $50,000 to $60,000. This way, the outgoing attorney has a place to stay and play, keeping a hand in the game and the profession at a lower level and with none of the ownership responsibility.
Second, the outgoing attorney should also be able to earn origination for work he or she brings in that is passed to others in the firm—during the time this attorney stays in practice and even after he or she decides to stop working.
These two elements of the agreement are actually “stealth” components of the “selling price” of the practice, laid on top of that original, reasonable price that helped attract the successor in the first place.
Identifying a Successor
The traditional attorney succession plan usually begins and ends with the hiring of an associate and a hope that this person may wish to—and be qualified to—take over the firm. But this traditional process seldom creates the desired result. Few attorneys have the expertise to make the best hire under even the most normal of circumstances, and most hires are made because of work pressure, meaning the first candidate that seems to meet reasonable—but vague—criteria is hired.
The philosophy of “hire slow and fire fast” is particularly important here. The outgoing attorney must take time in the beginning to maximize the likelihood of making the right hire—and at the start of the transition process, bringing aboard a successor attorney truly is a “hire.”
The outgoing attorney should develop a detailed profile of the legal skills and personal characteristics of the ideal candidate and should use every screening tool available, such as personality profiles, test projects, background checks, and multiple cross-interviews by other attorneys and trusted professionals to maximize the likelihood of making the right choice.
Evolving the Successor into the Leader
Part of the written transition plan must include stepping the incoming attorney into management responsibility over time. It starts with defining the roles—operations management, staff management, financial management, and eventually marketing and client management. For succession to occur in an orderly fashion, these roles must be defined and a timeline developed for transferring key roles to the successor and providing mentoring.
Management and leadership are distinctly different, although irrevocably interlocked, issues. In sole practices or small firms, staff tend to view the attorney as the “spiritual” as well as functional head of the firm. The transition plan must address how to effectively transition this informal role over time, so that staff accept the succeeding attorney as the authority and do not maintain sub-rosa allegiance to the transitioning attorney. Too often, loyal staff may abandon the practice as the senior attorney steps back, damaging the practice and the successful completion of the succession.
Transitioning the Business Development Role
The transitioning partner typically holds most of the business origination through decades of relationship development with other professionals.
A specific part of the succession plan must be a strategy to transition these highly valuable referral relationships to the successor to protect the firm’s current and future health and revenue stream. Successful marketing—and a successful transition of the valuable referral relationships—is a subject for another article. But suffice it to say that the transitioning-out attorney must have strong marketing systems in place and be skilled in the marketing role in order to transition the marketing and mentor the successor.
Transitioning Client Relationships
Transfer of primary client responsibility and relationships is as essential as the transfer of referral relationships. Just as with the referral relationships, the transfer cannot happen quickly but must be accomplished through a planned and gradual shift from the transitioning partner to the incoming partner. Initially the senior attorney introduces the successor as a member of his or her team but then allows and encourages the successor to build relationships with the client (exactly what many jealous attorneys are unwilling to do).
Evolving The Compensation Structure
There must be a compensation structure that directly rewards originations and clearly defines compensation for all attorneys in the firm, for two important reasons:
First, such a compensation structure facilitates the transitioning-out partner’s long-term objective of reducing billable work and focusing on the origination role.
Second, for the firm to attract the highest quality of successor attorney, that attorney must be able to understand clearly how he or she will be compensated, what must be accomplished to gain the desired income, and the incentives to either work harder or smarter to achieve higher personal income. The successor attorney must also have reasonable assurance that the majority of the compensation will be objective, not the result of the subjective decision of the transitioning attorney.
The Fruits of a Successful Plan
Obviously, the best succession plan is a complex, multi-year process fraught with potential problems. It is unlikely to be fully executed without the initial planning support and long-term guidance of a professional succession planner and advisor.
But the payoff is immense. It can turn a transition “wish” into reality. It can produce many thousands of dollars more in personal income over the transition period and a tidy buyout in the process. It can ensure a successful, continuing firm for the buyer. And finally, it can provide a role in that continuing, successful firm that allows the attorney who is transitioning out to stay active in the profession and continue to earn money after the transition.