How Can You Prepare For Succession?
Planning for succession can be a problematic time for partners who have reached the time in their careers where they want to retire and take a more relaxed approach to life.
Succession is often a tricky area to navigate for a firm. Throw a worldwide pandemic into the mix, and a tricky job became much harder as negotiations were abruptly put on ice.
Many of the partners who are reaching the age they wish to retire bought into their firms in the 60s, 70s and 80s. In those days, buying equity from departing partners seemed the right thing to do as it recognized everyone’s efforts in helping the firm to succeed.
Fast forward three decades, and now the ‘old practices’ seemingly don’t fit with the modern day running of law firms.
Now there are a number of ‘issues’ which would discourage solicitors stepping into a retiring partner’s shoes. These include:
- Firms are less profitable now due to competitors and fee pressure
- Ensuring the firm is compliant is becoming more complex
- Strategic business workings, such as, property leases, IT supplier contracts and professional indemnity insurance renewals
Some retiring partners will be in a lucky situation, where a partner will happily ‘step up’ and fill in their shoes. This emphasizes the good work the firm has done over the years.
Andrew Roberts the Director of Ampersand Legal and the Chairman of the Association of Law Firm Merger Advisers (ALFMA), said:
“Partners in small firms need to have retirement strategy at the top of their agenda 10 years before they wish to retire. To make the firm as attractive as possible takes time, but if they do it right they can enjoy real benefits and leave their clients and staff in a better place than when they joined.
“Retiring partners who are lucky enough to have salaried partners lined up, have clearly already taken the time to think about succession. Alternatively, if you have partners who aren’t ready to take over, but they are good fee earners then you have a good vehicle which could be acquired by another firm.”
Philip Lewis, a Professional Services Specialist & Business Matchmaker, shared his personal experiences about the issues firms faced when it comes to succession:
“I spent 10 years at Barclays looking after solicitor firms as a specialty. Our most popular loan product was the Partner Capital Subscription Loan for new equity partners.
“Unfortunately, some law firms have failed in recent years and the banks have had to call these loans in. This has led to such partners (quite junior ones in some cases) becoming personally liable for these loans as they are all in their personal names.
“In most cases, the loans then need to be repaid over a period from that partners income at their new firms, which can be a disaster for young lawyers who may have big mortgages and are still repaying their student debts.
“I feel this has led to some would be equity partners being frightened off taking a personal stake in firms as they worry about the potential liability if the firm fails and have learned lessons from some of their peers at other firms where this has occurred. This is another factor which deters would be partners from buying into their firms and makes succession planning more difficult.”
What should I do if I have to look for someone to acquire my firm?
If you’re in a position where none of the partners want to take the plunge, then as a retiring partner you should:
- Take some time to find a firm that is a good match with yours
- Manage the integration process between the two firms
- If you wanted to you could become a senior consultant and help the two firms knit together before retiring safe in the knowledge you’ve left the firms in good hands.
Other’s unfortunately won’t be so lucky. The prospective offering to junior partners may not be so appealing, due to the retiring partner not providing enough attention to some of the daily strategic business dealings, instead choosing to provide the best service possible to clients.
Andrew Roberts explains that this scenario sadly is the most common he comes across. He explains:
“The ultimate option for retiring partners in this position is to close down with run-off, but this is expensive at around three times the professional indemnity insurance premium and really is the last resort.
“The most practical solution it to approach other local firms, or the national consolidators looking to open in your locality, and essentially hand them the keys to the firm, work for a few months to ensure the clients transfer over and leave. This is an undignified end to a professional career and entirely avoidable with a little planning but at least it saves run-off.”
When should I start looking at succession planning?
It is advised that when a partner reaches their 50th birthday, they should start to consider succession planning. This planning can begin any time whilst the partner is in their 50s, as it leaves plenty of time and options to help with a handover. Once a partner hits their 60s, their options begin to become limited.
For those partners who are in their 40s, you may be someone’s succession plan so there is no need to worry just yet.
What are the benefits of starting my succession planning in my 50s?
“If you decide the right route is to bring on junior partners you are still going to be around for five to ten years to mentor them, hand over relationships and ensure the firm is in a good place.
“Alternatively, if you decide a merger makes best sense, your firm is an attractive proposition and you will have five to ten years to enjoy the benefits of being in a larger firms and the enhanced profitability the merger has produced.”