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From Business Plan to Succession Plan: Structure for Today with Tomorrow in Sight

Martin H Abo


  • A law firm’s strategic planning should be a multidisciplinary process that considers life changes, career transitions, financial obligations, and structural factors such as insurance coverages and attorney trust accounts.
  • Attorneys should recognize operational and practice development opportunities early enough to identify firm efficiencies, client development, and practice management tips that can help maximize a firm’s value later.
  • Effective firm management includes keeping financial statements, income tax returns, and other documents organized and readily available.
From Business Plan to Succession Plan: Structure for Today with Tomorrow in Sight
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A law firm’s strategic planning should be a multidisciplinary process to help the most important client you have—you. You must develop a comprehensive approach to guiding the transition of ownership for the practice when you say “enough” or perhaps outside forces so dictate for you, ensuring the enterprise can continue even when you don’t.

I’m an accountant, and accountants love checklists. We even think in bullet points. Sooooo, here are my bullet points that I believe you, as an owner/partner (along with your team) need to consider. You might:

  • go “in-house” with a client;
  • become a judge;
  • leave the practice of law to pursue other endeavors;
  • undergo irreconcilable differences with your partners and ask yourself “now what?”;
  • need/want to transfer your practice by merger or sale to a third party;
  • need/want to determine how best to preserve wealth and minimize taxes;
  • need to integrate business planning and lifetime exit objectives with an estate plan;
  • retire;
  • become disabled; or even
  • die.

Law firms, like any business or professional practice, should start with an end in sight (you’ll fill in the middle as you go along). Not even considering non-financial or emotional issues, let’s consider five bullet points of places your money can go:

  • your lifestyle;
  • your family;
  • someone else you select;
  • charity; or
  • someone else you don’t select, such as your creditors, the Internal Revenue Service, or the state.

Structural Considerations

Effectively, you must structure and build for the long term. You will want an effective business plan that flows into an effective succession plan. So, let’s see what such should contemplate.

  • Select the proper business entity to use. (I’ll discuss this further after these bullet points.) Options include sole proprietorship (I generally prefer alternatives); general partnership (I generally prefer alternatives); professional corporation (regular PC); professional corporation (Subchapter S PC); limited liability company (LLC); and limited liability partnership (LLP).
  • Confer with the bank before you actually need the money.
  • Consider various insurance coverages (not my particular expertise, but best to do early on), including malpractice; auto coverage for cars used by the practice (also for non-owned cars or those owned by employees); contents (office equipment, furniture, etc.—consider replacement value); special endorsement or policy for computers; special endorsement or policy for computers/equipment provided by employees; special endorsement or policy for valuable papers/lawyer file replacement; umbrella policy; workers’ compensation policy (consider opting in even if not required); employment practices coverage; special endorsements or policies for serving as fiduciary/arbitrator/mediator; employee bonding; cybersecurity; disability insurance/life insurance; long-term care coverage; office overhead and/or business interruption insurance; and premium financing.
  • Appreciate the critical importance of attorney trust accounts. The American Bar Association and your state bar offer publications that explain (in terms you can actually understand) the basics of trust and business accounting for attorneys. The property and recordkeeping requirements of an attorney’s trust account are of critical importance. The extra effort involved in properly monitoring this activity is dwarfed by the consequences of ignoring it: exposure to third-party scrutiny (e.g., the disciplinary review board, office of attorney ethics, or even state supreme court), client embarrassment, bank charges, poor internal controls, etc. Attorneys would be well advised to confer with their accountants to possibly assist in setting up a system of testing your firm’s compliance with sound and required procedures.
  • Establish effective operational, accounting, and financial systems that comply with ethical, professional, and legal best practices but that reasonably work for you.
  • Consider a logical (planned or even unplanned) transfer method (e.g., to a family member if a licensed attorney, partners, employees, outside third parties, etc.).
  • Consider a flexible timeline for implementation.
  • Communicate a game plan to stakeholders with stated roles and responsibilities, permitting resolution for issues in ensuring your wishes as the lawyer/owner/partner are adhered to.

Beginning to end, you can never start too early, and it’s never too late to appreciate that your tailored game plan, formal or informal, should:

  • be a dynamic process and changes constantly;
  • be a guide to manage the multiple levels and facets of transition;
  • allow you and other of the practice to anticipate and manage change;
  • be coordinated with your estate planning and overall financial planning;
  • be unique to each individual;
  • prepare you for when you will retire or just change responsibilities/jobs/activities;
  • contemplate all scenarios, such as going in-house, stopping the practice of law, becoming a judge, retiring, or becoming seriously ill or dying (who knows what tomorrow brings);
  • ensure survival of the practice through ownership transition (kept/sold);
  • focus on maximizing the return on investment (in accounting parlance, ROI) for you, the retiring owner, or your family; and
  • minimize the tax burden at transfer (but don’t let the tax tail wag the dog).

If the succession plan is not properly addressed, you, as practice owner, risk:

  • financial loss owing to increased but possibly avoidable income/estate/gift taxes;
  • possible gaps in wealth from lack of valuation/estate/financial planning;
  • jeopardizing the continuation of the practice;
  • inability to proactively identify and secure new lawyers/owners;
  • inability to consider the orderly departure of partners from a practice;
  • inability to strategize regarding the ownership transfer for unplanned events (e.g., disagreements with other partners, sickness, death, other catastrophes, etc.).

Choice of Entity

Oh, yes, back to the choice of entity. The selection of a law firm entity often occurs during the start-up phase of the practice and, alas, is often merely driven by a “ready-fire-aim” mentality focusing more on clients, office logistics, and other just-getting-started issues. However, one of the most significant early decisions a lawyer must make is which type of entity will best suit his/her current and, as best as possible, future needs.

The wrong legal structure can cost more in taxes, increase liability exposure, increase administrative costs and headaches, unnecessarily decrease flexibility, and expose the attorney(s) to costly business hassles. Still, it’s a dynamic process, and while the selection of a particular type of entity may have been appropriate yesterday, today’s factors might alter that logic as federal, state, and local laws—as well as practice dynamics—are continually changing.

Tax issues aside for the moment, limiting one’s personal liability is typically a key reason why attorneys should shy away from a sole proprietorship or general partnership. Sole proprietors and general partnerships just don’t have the limited liability protection afforded by the other, now-proven types of entities. No entity form will shield a lawyer from her or his own professional negligence or that of the attorneys and subordinates she or he directly supervises. However, an LLC, PC, and LLP will provide some protection from vicarious liability for the professional negligence of other lawyers in the practice and often the general business liabilities of the firm. You’ll want to check your own state for specifics on such “full shield” protection. Regardless, a bad decision, an inadvertent mishap, or inadequate insurance coverage where you thought you had ample, can cause the loss of savings, a home, cars, or other personal assets, let alone assets of the firm. Even when you think your risk of being sued is minimal or you believe your insurance is sufficient, your exposure increases markedly by adding vendors or employees to the mix, having clients and others actually visit your offices, or having an increased website presence with information and pictures you believe to be innocuous but that someone else may view differently.

No, I didn’t forget consideration of taxes when deciding which entity type to use, but, honestly, that’s a comprehensive, fact-sensitive discussion in and of itself. For example, what I might have suggested for even one particular law firm as recently as autumn 2017 might elicit a different conversation for that same practice as we sit here in 2018 (thank you, Tax Cuts and Jobs Act of 2017). The most important takeaway from this discussion is to use a seasoned business attorney (that might be you) and an accountant to properly set up your law firm. The choice of business form has too many significant and far-reaching financial, tax, and liability implications for you to approach the decision without informed advice. You must set up the practice the right way and prospectively monitor that it continues to be appropriate.

Succession Planning

For many attorneys, increased personal spending, spiraling costs of raising and educating a family, minimal outside interests, less-than-stellar investment returns, and even boredom translates into a later retirement than they ever planned. Is 75 the new 65? It’s hard to imagine when you just start a practice, but an often-overlooked asset you may maximize as a salable asset is your law firm itself (even beyond the income it provides while you practice). If you recognize operational and practice development opportunities early enough, there are firm efficiencies, client development, and practice management tips you can utilize now to help maximize your firm’s value later. Alas, the level of urgency will often limit one to take the less-than-opportune path. This is all the more reason to identify and shore up the value factors where you can—ahead of time.

At inception and then prospectively, the attorney practitioner is well advised to keep the following readily available for the current and preceding years (I generally like to see five), to share with his or her team/advisors:

  • firm head count and census data;
  • financial statements;
  • income tax returns;
  • attorney compensation data;
  • documents reflecting long-term commitments, such as pension obligations; loans payable; leases; employment agreements; firm/employee handbook regarding overtime, vacation, and sick pay, 401(k) plan, etc.; health insurance plan; IT operations manual; partner buyout obligations; and other commitments;
  • malpractice insurance policies and applications;
  • available management reports such as accounts receivable and agings; unbilled work in progress; contingency fee case inventory; pipeline report; attorney/paralegal productivity and time reporting; cash receipt fee allocation; area of practice productivity; cash requirements; payables and other liabilities;
  • details of any lawsuits where the lawyer has been the plaintiff or defendant;
  • if time records are not maintained, details to explain why and how the time of partners and staff is controlled;
  • documents explaining partner/associate compensation system, bonuses, production, etc.;
  • documents related to succession plans of the firm;
  • partnership agreement, buy-sell agreement, etc.;
  • strategic or business plans; and
  • marketing plan.

The better you have your information organized, the better prepared you’ll be to effectively manage your firm. Always look at it critically and try to imagine what a prospective partner, suitor, consultant, or appraiser would say, and how you would react if this were someone else’s information being presented to you.

Start with the End in Mind

The conclusion to this article was implied at the beginning, so let me state it explicitly now: Start your practice by focusing not only on your immediate needs but also with the end in mind—even though you don’t know when that end will actually be.