The necessary evil of succession planning

There are few issues that are more difficult to address than that of the succession of partners or shareholders in a law firm.

For an older and more senior lawyer, dealing with succession in a law firm context is not unlike drawing up a will. It’s an acknowledgment of mortality and an understanding that what has been commonplace for 30, 40 or 50 years is coming to an end.

For the firm itself, it’s a question of survivability. Can the entity go on after the progenitors of the firm have resigned/terminated their interest? The subject matter is so difficult and complicated that few firms have accomplished much in terms of planning for succession.

This column can only scratch the surface of some of the questions which must be asked.

What’s involved?

The existing partners/shareholders have provided a degree of capital, management and leadership to the firm. If they wish for the firm to continue (and not all of them have that desire), they must ensure that those elements will be provided for in the firm of the future.

Those who may succeed must not only be qualified (experienced, entrepreneurial and capable as leaders), but must also have the skills necessary ?to maintain the existing client base, bring in new work and attract and retain quality in lawyers and in staff.

There are many examples in law firms where the senior partners or shareholders wanted the firm to ?continue but the less senior partners/shareholders simply did not have the ability, experience or the intangibles necessary to perpetuate the entity. ?These are circumstances where the possibilities include the firm merging ?with another firm and/or one practice being subsumed to another.

There are also circumstances where the firm simply comes to an end; it is wound up and dissolved and existing lawyers who want to continue to practice must find another entity.

Finally, there are circumstances ?where a firm will bring in a leader or a group of lateral hires to whom the secession may be made. Any number ?of alternatives are possible.

Hard decisions

Of course, there is no substitute for planning. To plan for succession, however, means understanding the firm: its marketability, its finances and its potential for future success. Not everyone has the ability to objectively measure and understand what their firm is really about.

For many lawyers, grappling with the issues involved with succession can be the first time that they actually addressed the realities of their practice. This can be a very hard and difficult undertaking.

Many if not most law firms have issues that had been comfortably swept under the rug for decades. Everyone in the firm may know that certain senior partners have not carried their weight for years. Because of friendships and even close family ties, these lawyers have remained in the practice and their remuneration has probably increased. When the issue of succession is placed on the table, those kinds of very personal questions can make or break the ensuing discussion.

If the law firm is serious about wanting to plan for succession, it must also accede to the realisation that things will simply not be as they have been. The practice will change. The lawyers involved will change and the power structure which has existed (for what could have been decades) will be altered. Planning, therefore, includes this realisation. Many firms reach this ?point and never go any further.

Third-party advantage

It’s not a prerequisite but it is very helpful in the context of succession to ask for the help of an external third party. This could be a ‘friend’ of the firm; a lawyer or accountant, for example, with whom many of the people in the firm are familiar and whom they respect. Alternatively, it could be an outside consultancy that has a substantial body of experience in succession, mergers, acquisitions and so forth.

However, it must be a party that is thoroughly objective and owes no allegiance to anyone (anything) other than the entity itself. Ironically, the client here is the ongoing law firm, not the principals or associates of the existing entity.

Questions involving the evaluation and valuation of client business, the survivability of the entity, and the ?structural requirements of the new ?entity are all matters which have to ?be addressed and laid to rest.

Planning for the future

It’s difficult enough for the firm to arrive at the conclusion that it must address the question of succession. For most, handling these issues themselves internally means that they are never addressed in a manner consistent ?with a plan and positive outcome.

At the end of the day, succession will eventually and inevitably take care of itself. Handling it in terms more favourable to an ongoing entity, and allowing that entity the opportunity at least to continue, is what planning for succession is all about.

Tom Berman has been advising law ?firms on practice management and professional liability issues for over ?20 years (www.bermanassociates.net)