Many lawyers who spend years building up a law practice often leave significant money on the table when they retire and simply close their doors. But buying and selling a law practice is a legitimate option for the development, growth and conclusion of a lawyer’s professional efforts.
Determining your firm’s value is “really important to help you determine your retirement, your succession, your business continuation plan,” said Cynthia Thomas, president of PMLC and Associates, a management consulting firm for law firms.
She emphasized taking time to “go through a step-by-step timeline and, hopefully, come to a number where, on the options of perhaps selling your practice because you want to get a nice market value. You don’t want to sell your firm cheap.”
Thomas Raymond Lenfestey II, an attorney and CPA in Cary, North Carolina, said you must figure out the value of what’s “tied to you as an individual” and what’s tied to the law firm.
What you want to find out is the “transferable value” that you’ve built personally that can then be turned around and transferred to someone else, he said.
And, Lenfestey warned, “if you don’t help or assist in transitioning over the personal brands, what you’ve built up may have a loss of value or a loss of transferable value. Basically, what you had before you sold may not be what is achievable afterward.”
Transferable value can be maximized by implementing a transition plan, he said, in which you work with your successor (be it another firm, junior partners at your firm who will take over or an outside attorney who’s going to be an apprentice to the owners). The transition plan spells out how you will introduce them to everything “so that you can make sure that there’s not a loss of transferable value.”
Ellen Freedman, president of Freedman Consulting and law practice manager at the Pennsylvania Bar Association, shared common errors she’s seen with transitions:
- Partners holding on to clients until the last minute. Freedman has seen midsized firms with partners approaching retirement do this. “They’re afraid that if they do an effective job too soon (in aiding the transition) they may be forced out, they may be considered irrelevant and, most importantly, it will impact their compensation if they’re not in control of those relationships.” Freedman said a smart firm will figure out how to compensate the partner for the transference, bringing the successor onboard and opening the door to the client relationships.
- Waiting too long to transition the business management side of the practice. Freedman has also seen solo and small firms wait too long to hand off the marketing, finances and staff, so that the new owners are “not going to be able to maintain the revenues, keep up with the additional volume of work and all of a sudden teach themselves how to manage the firm and answer all those pesky business questions that nobody taught them in law school.”
“You have to start that transition at least three years ahead in terms of management,” she added.
- Senior partners wanting to maximize their earnings before the handoff and failing to keep the firm up to date. “They may stop aggressively marketing in a very competitive time, and it’s not hard to lose market share quickly,” Freedman said. Or “they may refuse to update the technology infrastructure because change is not normally a welcome thing, so they go, ‘That’s something you can do when you take over.’
“The problem is that they fall behind the competition, and by the time that they finally do exit, they’re leaving their successors with a lot less value and a much bigger climb to get the firm back where it needs to be at the very time that they’re trying to salvage the client relationships and so forth,” she said.
Lenfestey suggested integrating the successors by taking them to lunch to start talking about the firm and the operations and what it takes. “It doesn’t even have to be part of a formal succession, but you’re starting to bring them into the loop to educate them of what you’ve learned as a business manager, as a marketer or as a client manager,” he said.
“Work with the successors so you, the retiring attorney, could still stay engaged, involved and active, but let go of the ranks, pass them over,” Thomas said. “That’s really hard, but I know it has to be done if you really want the firm to continue.”