The Flaws of the “Recruit Your Successor” Exit Strategy

One retirement exit strategy often considered by solo practitioners is the “recruit your successor” one. The idea behind this strategy is to find a young, inexperienced lawyer who is then groomed to take over the practice. During the initial stage of the transition (usually one or two years), the seller and buyer get to know one another. If the fit seems good, the parties then negotiate a “buy out” going forward (usually another one to three years).

On paper, everyone seems to win. The senior lawyer obtains some value for the practice. The younger lawyer obtains an established practice in far less time than it might take to build one. In addition, the successor receives a few years of valuable training/mentoring.

However, if sellers and buyers dig a bit deeper into the details, a variety of fundamental flaws with the “recruit your successor” strategy become apparent. In fact, this strategy is so full of holes that I believe older solos should rarely consider it.

Can You Find A Successor?

Problem number one involves finding the one special person to whom you feel comfortable handing down your legacy. This is easier said than done.

In practicing employment law more than 30 years, I have seen many workplace problems that were the direct result of a poor hiring decision. No matter how careful the screening, employers can only glean only so much from a resume, interview and references. In addition, as an attorney coach, I’ve heard many stories of even well-screened new hires not working out quite as planned.

The bottom line is that it is difficult to find a worthy successor. There may be plenty of qualified candidates in this terrible job market, but personalities and other intangibles still need to mesh. If I were to lay odds on the likelihood of a senior lawyer still being pleased with a hire at the end of the first year of working together, it would be no better than 50/50.

Finding a successor becomes even harder when you carefully scrutinize the likely pool of candidates. Chances are very good that a young lawyer is still paying off substantial student loans, and will be doing so for the foreseeable future. Will this successor have the financial wherewithal to ultimately do a deal to buy your practice? Probably not.

Where’s the Extra Cash Coming From?

Problem number two involves finding the cash to pay a potential successor during the “recruit your successor” process. This strategy is based on the premise that the successor has a very small book of business and needs to obtain one. Thus, adding the new lawyer adds no significant revenue to your practice. At the same time, you now have two lawyers working on the same pool of files during the early stage of the transition period.

The successor needs to be paid a living wage. Where does that wage come from? It comes from the take-home pay of the senior lawyer. In the short term, the senior lawyer takes a financial hit because net income is now being shared with the successor.

Going forward, it becomes less certain that the senior lawyer will see a significant pay-day when it comes time to transfer the book of business. When valuing the book, the retiring lawyer should try to add the sacrificed income to the overall value of the practice. But anticipate that the successor will be unwilling, or financially unable, to give back any salary he or she has earned.

Do You Have the Patience?

Problem number three involves training the new lawyer. Training or mentoring takes time, patience and a skill-set completely different from the practice of law. Most solos become successful because they know themselves and purposefully stay small. Many solos have intentionally rejected the idea of hiring associates because they don’t want to train and manage others. The process is not going to be any easier in a “recruit your successor” environment.

Will Your Clients Work with the Successor?

Problem number four involves transfer of client relationships. From the successor’s perspective, doing a “recruit your successor” deal only makes sense if the retiring lawyer’s client base is willing to carry over to the successor. Transferring relationships is fraught with potential issues.

Presumably, most of the retiring lawyer’s relationships are with individuals who are older than the successor. Will they feel comfortable with a younger lawyer? Will they be willing to work with a less-experienced and perhaps less-skilled lawyer, or will they take their business elsewhere?

Can You Trust the Successor?

Problem number five involves whether or not you can trust your potential successor. Could the successor leave your practice, taking some of your clients? Ethics rules prohibit you from imposing restraints on the successor. Are you willing to trust someone you barely know with your livelihood? Some, you can trust. Some you can’t.  Can you distinguish between the two?

What’s the Better Exit Strategy?

A better solution is to find an experienced fellow-solo with some capacity to grow, or another law firm with an experienced practitioner or practice group that would like to expand. Also, it helps to plan a shorter transition period. This solves a number of problems:

  • Less of a gamble when the field of candidates includes experienced practitioners;
  • The “successor” is already earning a salary, paid by someone else. No need to subsidize the successor lawyer or law firm;
  • With experienced practitioners, no significant training or mentoring needed;
  • With experienced practitioners, relationships should transfer more easily; and
  • There’s no book of business to steal, since under this structure the senior lawyer is out of the picture sooner rather than later.

Why Do Some Successor Deals Seem to Work?

Anecdotes you hear about successful successor deals rarely involve a new hire as an integral part of the senior lawyer’s exit strategy.  More often than not, these situations involve a successor who has already been working for a while with the senior lawyer.

Problems are less likely to arise in this situation because the successor is: 1) experienced; 2) already being paid out of current revenue; and 3) already knows many of the clients or is fully capable of serving them. Finally, the parties have worked together long enough to develop mutual trust. They will treat each other fairly.

Seller Beware

The “recruit your successor” retirement exit strategy may look appealing, but is often considerably more trouble than it’s worth. Instead, in order to obtain maximum value for your practice, transition your practice to more experienced lawyers.

(photo: White clock with words from Shutterstock)

  • Nick Kosmas

    Very interesting article and I believe you hit on very important points. I am a soon-to-be ‘second career’ attorney (graduating in May), and I have looked at becoming a “successor” as a viable option. How do you put a fair valuation on the practice? Obviously an upfront cash payment would be best, but do you see ‘retiring’ attorneys consider an ‘of counsel’ position and a ongoing income stream as part of the payment?

    • http://www.royginsburg.com Roy Ginsburg

      Yes, I do see retiring lawyers going “of counsel.” One payment method that avoids valuation issues is to have the successor pay the retiring lawyer a percentage of future revenues for a set time frame.