'I'm a lawyer, get me out of here'
Martyn Caplan advises firms on how to plan succession and exit routes â€“ and their financial future
Never before has running a law firm been so challenging. The myriad of circumstances leading to firms encountering difficulties can seem relentless. Growing demand for evidence of future succession strategies from lenders and insurance companies is one such headache. The traditional questions about how a business is performing now usually come with a supplemental request to show a business plan for the future.
Meanwhile, an increasing number of firms are beholden to banks that may demand personal guarantees or pull the rug at any time. Professional indemnity insurance is increasingly expensive and an exorbitant amount of profitable, fee-earning time is eaten up in keeping pace with legislation and resolving other management headaches.
As well as external challenges, firms face many internal issues. New regulations for compliance officers for legal practice not only put a dent into fee-earning time but can also raise political issues within the firm. Key fee earners may decide to leave, and their clients may follow. Additionally, many senior associate lawyers, whom partners may have looked to for succession, are no longer interested in a future as an equity partner.
Running a successful and profitable practice, which has work in progress and debtors under control, meets its legal and financial obligations, provides a profit-making range of services, and has a future planned is a dream come true for many firms. Instead, those who have spent years devoting their energies to looking after clients are finding themselves ill prepared to take on the new ways of working that today’s increasingly competitive marketplace demands. Some are at crisis point.
Never has the phrase ‘I’m a lawyer, get me out of here’ been so apt.
So what are the options? If you are facing the future with uncertainty, feeling financially pressurised, or no longer feel your firm is delivering what you need it to, where can you turn?
One option may be downsizing the firm, although necessarily without deteriorating the quality of service delivered to clients. However, cutting staff will likely affect the morale of the remaining team, while redundancies and related administration carry a cost.
An alternative strategy might involve identifying a niche specialism, enabling the firm to market specific expertise to an identified target audience. For this, marketing support and know-how is required, which will require investment.
Few partners would choose to give up on the practice in which they have invested a lifetime’s energy and commitment, but bringing a traditional practice up to speed often necessitates major investment in areas that bring ever-changing challenges, including IT, cyber security, and training.
However, closure can be prohibitively expensive. Run-off cover – a requirement when there is no successor practice – can sometimes be a financial step too far, especially as, with no projected financial future, banks may be reluctant to lend the substantial lump sum payment required. Meanwhile, redundancy payments and an inability to collect outstanding WIP can create a financial black hole.
Many partners are finding themselves trapped and older partners are being forced to continue practising.
The option of a merger offers a glimpse of hope to many an ailing, or indeed ambitious, firm. A successful merger has much to offer. Identifying a firm with which there is synergy, where services can complement each other, and where partners can join forces in a common growth ambition can be an ideal solution.
Many partners envisage that joining forces will allow for economies of scale and some security for the legal team, and that bringing to the table clients’ goodwill will surely carry high value.
But there are some potential pitfalls. As one mergers and acquisitions specialist told us: ‘There’s no such thing as a merger, only a takeover.’ Merging with a stronger partner means making concessions, which some partners may find unpalatable.
Having taken pride in building a client base, a firm, a team, and a reputation, the prospect of equipping themselves with a different name, perhaps moving to new offices, needing to work with new partners (who may not fit well with their views or ambitions), and getting to know an alternative team can be daunting. Equity partners may be surprised to find their working hours are more strictly designated and are often unhappy to be told what to do.
True mergers – that is, where both firms bring equal value to the equation and share an agreed strategy and fit – are rare, but there are specialists who can bring interested parties together.
Succession is not always an option, as it depends on finding younger members of staff prepared to take on the challenges of buying into a firm and running it as a successful business in an uncertain legal marketplace.
Selling the business is another possibility, though it does come with the same health warning as the merger option, as acquiring firms are increasingly scrutinising insurance.
Also, any business has to be fit for sale, so most firms will need to spend some time and resources to make their operation desirable to a buyer. Professional advice – and some considerable investment – is likely to be needed to get a good return.
A new option which might provide a rescue solution for some is one of the new alternative business structures or ‘umbrella’ firms. Some enable firms to restructure into an organisation which will provide all the background administrative and legislative support, in return for a share of income. Some of these structures also allow firms to retain a trading name and former partners to retain a working independence.
The added bonus is that this option offers opportunities for firms to take a fresh look at the business and potentially increase their income from it. Former partners may find that, released from the burdens of administration, they can, for the first time in years, win more clients and create more profit, reigniting their passion for business.
Choosing the best option
There are a number of routes out there, so each needs careful consideration on its own merits. The challenge is deciding what’s important for your firm’s future – and then finding the right fit for you and your legal practice.
In the first instance, consider what you want for your firm of the future. Are your ambitions to share the burdens of responsibility and firm management? Are you looking for someone who will give your business what it needs in terms of technology, business know-how, and modern business practices? Do you need a business that gives you a better work-life balance? Are you looking for financial security for the future, with a route to putting in place succession plans and even income after retirement? Do you still see the potential for your practice to become bigger, better, and more profitable, with the right backing?
Then ask what’s important to you. Is it important to you to retain your company name in some way? Do you want to stay in your existing offices, or would you be happy to work in a team alongside new colleagues if you could access their expertise? Do you want to work with your fellow partners or would you benefit from a complete split? Is succession key? What about work-life balance? Can you adapt to a new structure that is likely to want you to operate and think differently – or would you work more comfortably as part of a model that allows you autonomy, while adopting some new ways of working? Are you moving as a team, and if so, what processes are in place to enable this?
Prepare for the future
If your options are to take the firm forward with either a merger, sale of the business, or an ABS, there is preparation work to be done.
First, it’s important to get your own house in order as much as you can – chasing up debtors, managing WIP, identifying where costs can be cut, devising a strategy or vision for your business, and identifying the firm’s strengths, weaknesses, and unique selling points will provide a sound basis for forward discussions.
Second, research, research, and then research some more the options that you are seriously considering. Prepare a list of questions with which to approach your prospective future partner. Meet the parties concerned several times, and where possible obtain feedback from others who have trodden a similar path.
Engage expertise where it is sensible to do so. This may mean consulting a specialist accountancy service to advise on the financial implications and benefits of joining an ABS operation or merger experts who can help you identify a party that may fit well with your firm and your ambitions.
Ultimately, for most firms, there is no option to stand still. If your firm is no longer delivering against your requirements or ambitions and you can’t see a way forward, it is time to start talking with those who may provide the solution. There are many possibilities to explore and a bright future ahead.
Martyn Caplan is director of Lawyers Inc