Exit strategy

The world of small to mid-sized law firms has changed without many of us noticing it. Many of the partners who now wish to retire bought into their firms in the 60s, 70s, and 80s, when it seemed to make good business sense 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 their efforts should be recognised. Accountants used to see law firms like any other business and so value them accordingly at a multiple of profit. The old rule of thumb was that if the owner of a widget factory had grown the business they were now passing on, this should be recognised, so what was different about a law firm?

Track forward to 2017 and this is no longer the case. The rug has been pulled out from under their feet. There are a number of reason for this, but basically firms are often less profitable because of a 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 themselves: 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?

Succession plans

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 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.

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 is a successor practice.

If you 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 not attractive to any junior partner.

The ultimate option for you is closing down with run-off, but this is expensive at around three times the 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.

Time to act

We are often asked when partners should start looking at succession, and the answer is broadly when their ages start with a five. If your age starts with a four, you are probably someone else’s succession plan and have plenty of time to consider how to improve the firm. If you age starts with a six, 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-50s. At this point, if you decide the right route is to bring on junior partners, you are still going to be around for five to ten years to mentor them, hand over relationships, and ensure the firm is in a good place. Alternatively, if you decide a merger makes best sense, your firm is an attractive proposition and you will have five to ten 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 a retirement strategy at the top of their agenda ten 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.

Andrew Roberts is managing director of Symphony Legal

@symphony_legal www.symphonylegal.com