Best Practice: Law firm succession strategy when owner wants to keeping working
Asked and Answered
By John W. Olmstead, MBA, Ph.D, CMC
Q. I am the founder and solo owner of a small firm in Memphis. Besides myself there is one non-equity partner and four associates. We handle the transactional and litigation work for small and large business concerns in the Memphis area. I am 60 now and would like to begin slowing down over the next five years, but I I don't want to retire completely. Over the past few years I have focused more on client development as opposed to serving clients and have turned over much of the client service work over to other attorneys in the firm. While I would like to receive some compensation from my sweat equity - I also do not want to place an unreasonable financial burden (large cash buy-in/buy-out) on others in the firm. Legacy of the firm is important as is a place to continue to work and contribute - so I really would like to transition the firm internally to deserving attorneys employed by the firm. What are your suggestions concerning how I might accomplish this?
A. I often ask attorneys - are you more a lawyer that wants to lawyer or a business person that enjoys and wants to focus on the business of law. It sounds like you, as you approach retirement, would like to spend more of your time "finding" rather than "minding" or "grinding". You might want to consider the following:
1. Get a feel for the value of your firm. If you have been taking home say $400,000 per year - using that as a starting point for your rough value figure if you were to sell your practice to outsiders. Would you be willing to discount to transition the members of your current team? If so, maybe that figure might be $200,000 - $300,000.
2. Establish a date when you want to start to wind down.
3. Decide on your future role, institutionalize the role and write a job description for it. You might want to consider a role such as Business Development Director or Manager. Establish specific goals and expected outcomes for the role.
4. Then plan a gradual wind down with gradual draw reduction but at a level that in essence is greater than the ratio of time reduced providing you with say - $200,000 over a five year period of time.
5. Put in place a commission arrangement where you would receive a commission on fees (say 20%) from new clients that you bring into the firm after the date that a program is put in place. I would suggest a 5-year sunset provision whereby after five years the commission decreases to zero - requiring you to continue to develop new relationships and bring new clients into the firm.
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John W. Olmstead, MBA, Ph.D, CMC,(www.olmsteadassoc.com) is a past chair and member of the ISBA Standing Committee on Law Office Management and Economics. For more information on law office management please direct questions to the ISBA listserver, which John and other committee members review, or view archived copies of The Bottom Line Newsletters. Contact John at jolmstead@olmsteadassoc.com.