Best Practice Tips: Law Firm Merger as an Exit Strategy for Sole Owners

Asked and Answered 

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

Q. I am the owner of a small general practice firm in Novato, Calif. I have three associates working in the firm, three legal assistants, and one office manager/bookkeeper. I started my practice 35 years ago right out of law school. I am 60 years old and wanting to retire within the next five years. None of my associates have the ability or the desire to take over the firm. I believe that my best option is to sell my practice to another practitioner or join another firm through a merger or other arrangement. I would appreciate your ideas regarding merging with another firm and how I would be compensated and receive payment for the goodwill value of my firm.

A. A merger or an of counsel arrangement are approaches that many sole owner firms are taking when there is no one on board capable of or willing to buy out your interest. Often merger or of counsel arrangements look very similar in how they are structured. Typically, the owner joining another firm:

• Winds down the firm and transitions clients to new firm;
• Retains the firm’s cash accounts;
• Collects accounts receivable and unbilled work in process on the books before the transition date through the old firm;
• Sells fixed assets to the other firm if the firm is interested in purchasing;
• Retains responsibility for any liabilities on the books before the transition date; and
• Transfers trust accounts to other firm for clients that agree to have their matters transferred to the new firm.

How the arrangement will be structured and how compensation/buyout will be structured will depend upon the size of the other firm. I assume that you will be looking at a firm similar to your size or a little larger (one to 20 attorneys). If this is the case and if the arrangement is structured as a merger, you would more than likely be classified as a non-equity partner and not an equity partner. While the other firm could pay you in the same manner that other non-equity partners are paid, often a special compensation arrangement is developed where you are paid a percentage of your collections, and if you are lucky, a referral fee arrangement for your client origination’s for two or three years after your retirement (typically 20 percent). In many cases it will be difficult to get a goodwill value payment and impossible in mergers or of counsel arrangements with large firms.

Another option would be an outright sale to another sole owner or small firm for a fixed price for the goodwill value of your firm and any assets the firm desires to acquire. More than likely, this would be with an initial down payment and payments over a three- to five-year period. Typically, practice sale agreements have provisions whereby the purchase price can be reduced if revenues fall below a certain level.

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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.