Best Practice Tips: Impact of Firm Size on Succession Planning

Asked and Answered

By John W. Olmstead, MBA, Ph.D, CMC

Q. I am a solo practitioner in upstate New York. I am 66-years-old, looking to retire, and trying to figure out what to do with my practice. My practice is a general practice and there is just me and one secretary. I welcome your suggestions.

A. The size of the firm will present different retirement succession, transition, and exit challenges. Firm size will affect the number of moving parts, specific steps that a firm will have to take, and the overall timeline. Solo practitioners and sole owners will have the most moving parts and face the greatest challenges.

You will have the greatest challenge since you have no associates in place to transition the practice. Therefore, you could both hire and groom an associate that could buy the firm or become a partner and buy out your interests, sell the firm to another firm, or merge with another firm. Other options would be to become of counsel with another firm or simply close down the practice. This takes time.

Hiring and grooming an associate can be problematic for the solo. If he or she does not have sufficient business and does not generate business, the associate will be an expense and your net earnings will suffer. Other issues include:

• The associate may have no interest in owning a law firm. He or she may simply want to be a lawyer, not a business owner.
• You could invest several years in mentoring and training an associate only to lose the associate to another firm. Your succession/transition/exit plan would then be out the window and you would have to start all over again with less time remaining to do so.
• You may not have the time or inclination to groom and train an associate.

You could sell the firm to another lawyer or law firm. This option works best when the practitioner is actually ready to retire and quit practicing. Often this is not the case and the restrictions on sale of law practice levied by a state’s rules of professional conduct, in particular Rule 1.17, may make this option undesirable. Locating desirable candidates will take time and a well-planned search process may have to be initiated. Our experience has been that this can take a year or longer.

Merger with another lawyer or law firm is another option. This is often a better option for solos that want to gradually phase-down, yet continue to practice for a few more years. In essence, they join another firm as an equity or non-equity partner, member, or shareholder, and subsequently retire from that firm under agreed terms for the payout. The odds are improved for clients and referral sources staying with the merged firm, and the merged firm is more committed than a buyer might be under a payout arrangement based upon collected revenues. The solo practitioner has more flexibility with regard to the ability to continue to practice longer, reduced stress, additional support and resources, and gradual phase-down to retirement.

Forming an of counsel relationship with another firm is an option that many solos are taking. Sometimes it is a final arrangement where a solo winds down his or her practice and then joins another firm as an employee or independent contractor. He or she is paid a percentage of collected revenue under a compensation agreement with different percentages depending upon whether the practitioner brings in the business, services work that he or she brings in, or services work that the firm refers to the practitioner. In other situations, an of counsel relationship is used as a practice continuation mechanism that provides the solo with additional resources and support if needed. An of counsel relationship can also be used to “pilot test” a relationship prior to merging with another firm. We have had several law firm clients that has taken a phased approach to merger with phase one being an of counsel “pilot test” exploratory arrangement, and phase two being the actual merger.

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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 and author of The Lawyers Guide to Succession Planning published by the ABA. 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.