From Tradition to Innovation: Modern Era Succession Planning

Lawyers have more options now than ever before in both running a practice and in exiting that practice. In the ever-changing landscape of law firms, succession planning has emerged as a crucial factor for lawyers who want to keep profiting from the years and tears they poured into their practices, as well as those who want their legacy to continue well after they have retired. The legal profession is undergoing a paradigm shift, where only law firms that adapt and evolve will thrive in the face of changing regulations and market dynamics. This article examines an innovative concept that is changing the legal profession: succession through non-legal ownership.

Historical Context

This significant shift calls into question the long-held belief that lawyers should be the only ones with ownership interests in legal businesses—with good reason based on the history and tradition written into the professional code of ethics. Dennis A. Rendleman penned an outstanding article, “The Evolving Ethics of Selling a Law Practice” in November 2020, detailing the progression.

In brief, in 1945, the ABA Committee on Professional Ethics and Grievances issued Opinion 266 that held that goodwill of a practice could not be purchased upon the death of a lawyer, unless it was to the deceased lawyer’s partner. This opinion also set the stage for how the potential financial compensation to the buyer would go, which seemed to only include a payment of a certain percentage of fees, received from the deceased’s current or prior clients (their database). Thus, based on this opinion, only the partner of a deceased lawyer could buy the decedent’s share and compensate the estate by paying a percentage of revenue received from ongoing cases or returning clients.

Then, in 1953, Henry Drinker, in Legal Ethics, said, “A lawyer’s practice and goodwill may not be offered for sale.” Based on this, lawyers tried to circumvent the opinion by only selling hard assets like furniture, equipment and the like. This was quickly seen as a sham by the courts as an attempt to buy and sell goodwill of a law practice, which was considered contrary to public policy.

Current Landscape

In 1990, the ABA issued Model Rule 1.17, which permitted the sale of goodwill to other attorneys, not specifically just partners in the firm, and not specifically just upon death, but also recognized that attorneys may want to retire. This Rule was issued on the heels of an Illinois court case in 1989, in which a widow of an attorney sold her husband’s practice to an outside third party for a percentage of gross receipts for five years post death. When the firm decided to stop paying her, she brought a lawsuit against them and lost based on the Illinois Rules of Professional Conduct 3-102, which at the time was modeled off the ABA Model Code of Professional Conduct 3-102, now Model Rule 5.4(a)(1).

As with law firms in the past, it is not uncommon today for small law firms to employ their nonlawyer spouse as the office administrator who is responsible for managing the entire operations of the firm. When the lawyer dies, often so does the law firm. If nonlawyers were able to own law firms, the nonlawyer spouse would be able to continue to own and manage the firm when the lawyer spouse dies. That’s not innovative, that’s just common sense. And, still not universally permitted.

In 2007, the United Kingdom passed the Legal Services Act 2007, introducing alternative business structures (ABS) to encourage competition and increase wider access to justice. The act permits lawyers and nonlawyers to form businesses together. Moreover, it allows nonlawyers to be significantly involved in the management and ownership of businesses that provide legal services.

In 2021, Arizona was the first jurisdiction to permit nonlawyer owners of law firms. According to Lynda Shely, former chair of the ABA Standing Committee on Ethics and Professional Responsibility, and former Arizona Delegate in the ABA House of Delegates, as of January 2024, there were 67 ABS firms licensed and about 30 more applications pending.

Shely reported that as of January 2024, the licensing program was working well, and no significant issues had been reported.

Utah created the sandbox concept, a pilot program with an expiration date. Their sandbox allows nonlawyer firms to enter the space with a registration. Other states, including California, Florida, Illinois and New York, have been carefully observing Arizona and Utah and have formed committees to consider changes to their rules. As is tradition in the legal profession, change does not come easy, quickly or without opposition.

The ethics code that seems to be the sword of prohibition of nonlawyers is ABA Model Rule 5.4 which bars lawyers from sharing legal fees with nonlawyers and the concern over the lawyer maintaining independence of judgment. New York issued Ethics Opinion 1234, in December 2021, which held that a New York lawyer may not be a partner, associate or employee of a law firm in New York or in another jurisdiction that has direct or indirect ownership by nonlawyers in accordance with the rules applicable in that jurisdiction, unless the lawyer is lawfully practicing in the other jurisdiction and principally practices in such jurisdiction, and the predominant effect of the lawyer’s conduct is not clearly in New York.

The Evolution

It is easy to stand firm on what has always been rather than taking a deeper look into whether change is necessary and beneficial, much less naturally evolving. Tyler J. Replogle, a student at The University of Michigan Law School, beautifully enumerated how law firms have changed over time in a 2017 article. Essentially, the business of law has changed from sole practitioners to BigLaw with law firms of at least four lawyers, to the Cravath System breeding the exhaustive path to partnership, to in-house counsel, to outsourcing, to alternative legal service providers. Some of the causes that accelerated this evolution included what is called the “Golden Era” where having one, deep relationship with an attorney or firm was pinnacle, with the attorney or firm serving as a one-stop shop for the client. Eventually to save on expenses and increase profits, large corporate clients began bringing lawyers in-house. This was especially prevalent in the 1980s during the mergers and acquisitions boom. Then, law firms themselves began to engage in merging or acquiring other firms, creating mega firms that spanned continents. To maintain efficiency, process management among multiple offices, and reduce cost, alternative legal service providers were enlisted to perform all non-legal functions of the business.

Even a casual observer can see how law firms have changed over time, moving from traditional methods (sole practitioners) to ones that are more innovative with technology, more inclusive and diverse with staff and focused on business. In the contemporary landscape, law firms are actively moving away from homogeneous structures, fostering an inclusive environment that values differences in gender, ethnicity, background and perspectives. This inclusivity is not only a response to societal expectations but also a strategic recognition that diverse teams are more innovative, adaptable and better equipped to navigate the complexities of modern legal challenges.

Moreover, the shift toward a more business-oriented approach marks a fundamental change in the mindset of law firms and law firm owners. Beyond the core legal expertise, firms are now recognizing the need to operate as businesses, adopting strategies from the corporate world. This includes a focus on client satisfaction, efficient operational practices and a proactive approach to business development.

The business-oriented evolution involves implementing management practices, leveraging technology for operational efficiency and adopting client-centric approaches to legal services. Law firms are increasingly viewing themselves not only as legal service providers but also as enterprises that must be agile, client-focused and financially savvy to thrive in a competitive landscape. When this occurs, the successful succession of the law firm with the ability to sell it for value increases significantly.

This transformation is not merely cosmetic; it signifies a profound shift in how law firms perceive their role in society and the broader business ecosystem. Embracing inclusivity and adopting a business-centric mindset positions law firms to not only weather the changing tides of the legal industry but also to lead and innovate in an ever-evolving landscape.

Nonlawyer Ownership

The departure from the conventional model, where exclusive ownership stakes were reserved for attorneys, signifies a profound evolution in the operational dynamics of law firms. This transformative shift is characterized by the active involvement of non-legal professionals, such as entrepreneurs, investors and industry experts, who are assuming pivotal roles within law firms. Their participation injects a new dynamism into the legal industry, sparking innovative approaches and reshaping the traditional attorney-centric model.

The significance of this trend extends beyond the mere breaking down of age-old barriers; it lies in the diverse perspectives and skills these non-legal professionals bring to the legal landscape. Entrepreneurs, celebrated for their proclivity toward innovation and risk-taking, contribute to fostering a culture of creativity within law firms. Their presence not only challenges traditional norms but also introduces an entrepreneurial spirit that can lead to novel solutions and practices.

Investors play a crucial role by providing essential capital injections into law firms. This financial support empowers firms to modernize their operations and embrace cutting-edge technologies, enhancing overall efficiency and competitiveness. The infusion of capital facilitates the implementation of technological advancements, from advanced case management systems to state-of-the-art legal tech tools, positioning law firms at the forefront of technological innovation within the legal sector.

Furthermore, the incorporation of industry experts into law firms brings a wealth of knowledge and experience garnered from diverse sectors. This cross-disciplinary collaboration catalyzes a transformation from within, as professionals with varied backgrounds contribute unique insights and approaches. The melding of legal expertise with insights from finance, technology and other industries creates a synergistic effect, propelling law firms toward a more dynamic and adaptive future.

This collaborative approach, facilitated by the involvement of non-legal professionals, is not merely an alternative model; it is reshaping the traditional attorney-centric paradigm. The result is a more efficient and client-focused legal landscape. By embracing diverse skill sets and perspectives, law firms can enhance their service delivery, improve client satisfaction and foster innovation. Moreover, this collaborative model lays the foundation for the emergence of innovative business models specifically tailored for succession planning, ensuring a strategic and effective transition in the ever-evolving legal industry.

Succession Planning 

Historically, law firms could only pass to a partner. Sole practitioners were stuck with winding down the practice upon retirement, disability or death. ABA Model Rule 1.17 has done wonders to transcend succession from a mere contingency to an indispensable strategic aspect for attorneys. Its significance extends beyond the notion of preparing for an individual's exit; rather, it represents a meticulous and forward-thinking process aimed at securing the longevity and prosperity of legal practices, while funding the exiting lawyer’s life after law.

The recognition of the importance of planning well in advance becomes the cornerstone of effective succession planning. Attorneys contemplating this strategic process must embrace a proactive mindset, acknowledging that the future success of the firm hinges on thoughtful and preemptive actions. Bar associations across the United States have added succession planning to their continuing legal education offerings, have provided forms to complete naming successor lawyers, often colleagues in the same practice area, and implemented programs nothing short of mandating a succession plan.

Building a Succession-Ready Law Firm

One crucial aspect of proactive succession planning involves the identification of potential successors within the firm. This not only requires a keen understanding of the strengths, skills and leadership potential of existing team members, it also requires the owner to consider expanding beyond being a solo practitioner. By scaling and identifying individuals who embody the values and ethos of the firm, attorneys lay the groundwork for a seamless transition of leadership.

The grooming of potential successors emerges as a key proactive measure. This goes beyond the traditional scope of mentoring, encompassing a deliberate and structured approach to preparing individuals for leadership roles. This may involve targeted professional development, leadership training and exposure to decision-making processes within the firm. Through these intentional efforts, attorneys cultivate a cadre of capable individuals poised to step into leadership positions when the need arises.

Ensuring a seamless transition is a critical component of proactive succession planning. This entails not only the transfer of formal responsibilities but also the effective transfer of institutional knowledge, client relationships and the firm's unique culture. By implementing comprehensive transition plans, attorneys can mitigate potential disruptions, preserving the legacy of the firm and fostering continuity for both clients and staff.

Beyond preserving the legacy, proactive succession planning serves to maintain stability within the firm. Clients, accustomed to a certain level of service and familiarity, benefit from a smooth transition that minimizes disruptions. This continuity of service not only retains the trust of existing clients but also positions the firm favorably in the eyes of potential clients who value stability and reliability. One of the greatest concerns to a buyer is that the clients will leave. When the succession plan is created and executed with the business, team and clients in mind, rather than just the retirement goals, maintaining the stability of the clients can be reliable.

Equally significant is the stability maintained for the staff within the firm. Uncertainty during leadership transitions can lead to anxiety and decreased morale among team members. Proactive succession planning addresses these concerns by providing clarity and a sense of direction. Staff members feel secure in the knowledge that the firm is well-prepared for leadership changes, fostering a positive and stable working environment. This is especially critical when selling the law firm to an outside third party who may have their own vision, core values and ways to conduct business.

The proactive approach to succession planning transforms it from a reactive necessity into a strategic initiative. Attorneys who embrace this mindset not only secure the future of their practices but also cultivate a culture of preparedness, adaptability and resilience within the firm. Through meticulous preparation and foresight, they navigate the evolving landscape of law firms with confidence, ensuring a legacy that endures and prospers over time.

Navigating the intricacies of succession planning unveils a process that transcends a simple change in ownership; it is a strategic maneuver designed to guarantee the ongoing success of the firm, its adeptness in adapting to evolving landscapes and the preservation of its core values. Within this strategic framework, enhancing the value of your law firm emerges as a vital imperative, positioning your firm at a distinct advantage in the ever-changing legal landscape.

If COVID-19 taught us anything, it is that law firms no longer have to be tied to brick-and-mortar, staff no longer have to work in the office, technology can boost our productivity and profits and law firms that are managed like a business and not merely a practice are more sustainable. When they are sustainable, they are sellable. But strategies must be put in place to get the highest value. Just because you build it, does not mean they will come to buy it.

Increasing the Value of the Law Firm

Implementing strategic measures to increase the value of your law firm goes beyond immediate financial considerations; it is a deliberate effort to build and enhance valuable assets within the firm. This proactive approach is not only beneficial for the current operations but also strategically positions the firm to be an attractive prospect for a successor contemplating the acquisition.

Strategic Client Relationship Management

Cultivating strong client relationships is foundational to elevating the value of a law firm. Client satisfaction not only ensures repeat business but also contributes significantly to a positive reputation. Implementing client management strategies, such as personalized services tailored to individual client needs and effective communication channels, can substantially enhance a firm's perceived value. Firms that prioritize client satisfaction are more likely to retain clients, receive referrals and stand out in a competitive legal landscape.

Investing in Human Capital

The skills and expertise of a law firm's human resources are integral components of its overall value. Attorneys should actively encourage continuous professional development among their team members, fostering a culture of ongoing learning and growth. Creating a collaborative work environment that values teamwork and innovation contributes to building a robust and valuable team. Retaining top talent through competitive compensation, professional growth opportunities and a positive workplace culture enhances the intellectual capital of the firm, positively impacting its value. When considering succession planning, the owner should ask herself, “could this firm operate without me?” If the answer is no, then steps should be taken to replace the roles the owner is still holding onto that involve marketing, sales, legal advice and production. All functions in the law firm, aside from legal advice, can be performed by nonlawyers. A buyer likely does not want to buy a firm where he must put on all the same hats the current owner wears.

Embracing Technological Advancements

In the digital age, law firms must leverage technology to remain competitive and relevant. Adopting cutting-edge legal technology not only improves operational efficiency but also serves as a signal to potential buyers or successors that the firm is forward-thinking and adaptable. Integrating advanced legal tech solutions for case management, document automation and client communication not only streamlines processes but also enhances the overall technological profile of the firm, contributing to its perceived value. One sign of immature business practices that will devalue the law firm is not having a customer relationship management software.

Efficient Financial Management

Transparent financial records, effective budgeting, and strategic financial planning are fundamental to the value proposition of a law firm. A financially healthy firm not only attracts potential investors but also instills confidence in clients and stakeholders. Robust financial management practices contribute to stability, demonstrating the firm's fiscal responsibility and enhancing its overall market value. In contrast, still doing your own bookkeeping or not having profit loss statements will detract from the value of the firm.

Building a Strong Brand

A well-defined and positively perceived brand is a powerful asset that adds significant value to a law firm. Establishing a strong online presence through an informative and user-friendly website, participating in community outreach programs, and maintaining a reputable image within the legal community contribute to the overall brand value of the firm. A positive brand perception not only attracts clients but also enhances the firm's standing in the legal market. When possible, create a brand that is not tied to the owner or owner’s name. Bolster the team and the services, not the founder of the firm.

By systematically addressing these elements, law firms can elevate their overall value, positioning themselves as not just legal entities but as dynamic and forward-thinking businesses with a resilient foundation for sustained success. Success includes a successful succession. Lawyers contemplating their firm's future must recognize the importance of succession planning, viewing it not as an exit strategy but as a proactive, strategic process. The steps outlined, from grooming potential successors to embracing technology, contribute to a robust succession plan and increase the overall value of the firm, making it attractive to outside third parties, including nonlawyer buyers.