As attorneys, our job is to prepare for the worst. We’re always imagining the worst-case scenario—in deals, litigation, estate planning, you name it. Our job is to think of the most unfavorable outcome, prepare our clients for it, and make a plan to keep it from becoming reality.
Unfortunately, most attorneys don’t take the same attitude with themselves or their business. Worst-case scenarios are never fun to imagine, but you should be prepared. Why? Because you could walk outside and get hit by an anvil from the sky.
Or you could get sick.
Or you could decide it’s time to move to a far away beach and sell sunglasses, or just retire and have fun.
Whatever that next thing is, you should be prepared for it. Preparing takes time and thoughtfulness, so we’ll walk you through all the things you should consider.
That’s where law firm succession planning comes in.
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What Is Law Firm Succession Planning?
There are two sides to succession planning. On the one hand, it’s planning for the best—for what you intend to do with your business when you’re ready for the next adventure. On the other hand, it involves planning for the “bad”—for the what if’s in life that might leave you unable to practice law and run your firm.
As a law firm owner, you need to be prepared for both sides and everything in between, including:
- Sudden death
- Serious illness
- Family emergency
Law firm succession planning helps you develop a stable foundation for the future of your firm. Additionally, it simultaneously creates a roadmap for your team to use to serve your clients and move forward in the best way.
Plan for the Worst
Every solo or small firm needs a contingency plan in place. What would happen if you were suddenly incapacitated? Think about it:
Who would notify your clients?
How would people get access to your files and list of clients?
If the client list and contact information is in your case management software, would people have the right passwords?
Would they know upcoming case deadlines?
If the clients need to change attorneys, could someone access your trust account to pay your outstanding balance and transfer any remaining retainer?
Who would be responsible for closing down your office?
What would happen to your team members?
Although we don’t like to think about it, worst-case scenarios can happen. Planning your exit now will help you prepare your team and family should you pass away or need to leave your firm for any reason.
Plan Your Exit Strategy Today (Even if You’re Just Getting Started
You may be thinking, “Hey, I’m just getting started here!” If that’s the case, now’s the perfect time to plan your exit. You should know how you want to finish before you start. Planning for the end is an important part of your law firm strategy and business plan. They’re incomplete without it.
To get started, simply begin documenting your answers to these questions:
- What specifically am I trying to build and why?
- Do I want to build a business that I can one day sell?
- If so, do I envision adding partners and selling my interest to them or am I looking to sell the entire business to a third-party?
- Who much money will I need to retire?
- How much of my retirement fund will need to be funded through the sale of my business?
These are big questions, so take your time.
Selling Your Law Practice
As an attorney who built a successful firm, you deserve to walk away with something to show for it. Selling your practice allows you to increase your financial security in retirement. Plus, it gives you the power to choose the right successor for your firm, ensuring your clients are taken care of in the way they expect.
How to Value a Law Firm
We know it’s tough to place a number value on something you’ve spent blood, sweat, and tears building. Yet, you’ll need to do so to ensure you receive a fair payout when the time comes.
Valuing your law firm comes down to two questions: what are you selling and what would someone be willing to pay? Not only is a buyer purchasing your practice, but they’re also purchasing your book of business. Everything in your firm has value, from the processes you use to the clients you serve.
There are a few different methods used to value law firms, including:
- Asset-based valuation. Put simply, this method adds up all of your firm’s assets and subtracts the liabilities, leaving the net value of your assets.
- Comparable valuation. This method involves researching what other similar law firms are often sold for in your market.
- Multiplier. This valuation method involves multiplying one year’s gross revenue by a factor of 0.5 to 3.0, depending on the number of clients you have, how much repeat business the new owner can expect, etc.
We recommend finding a professional to help you value your firm correctly. The last thing you want to do is short-change yourself as you walk away.
Increasing the Value of Your Firm Now
Even if you’re not considering selling now, smart business people build a business now to increase its value in the future. Also, because these are all the best business practices, there will be no harm done by putting these things in place and deciding not to sell. Waiting, however, can make it very difficult to catch up and build value in a short period of time. Here are things you can do to better position your firm when the time comes:
- Don’t tie your firm to your last name. Sure, naming your law firm using your surname is an age-old tradition in the legal industry. Yet, it can decrease the value of your firm when you’re no longer around. A trade name, for example, will focus on your business other than you personally. Be sure to follow ABA guidelines and your state’s professional rules.
- Put critical systems and processes in place. The processes and systems you invest in for your firm such as billing and client intake are valuable. By creating and documenting these processes, you’re saving your successor time and effort which is often worth more than cash.
- Build a solid brand. A brand is more than the firm’s name and logo. It’s the reputation your firm has for the work it does and the client experience it creates. If you were going to buy a firm right now, wouldn’t you want one with an excellent reputation and a long list of satisfied clients? Focus on creating an excellent brand and your business will, in turn, be more valuable to potential buyers.
- Market your attorneys and your firm. If you’re a small law firm owner with other attorneys, remember they’re a part of your firm’s value. Make sure they’re gaining a reputation for themselves in the legal industry. Their reputation and success directly impact your firm.
- Keep a check on your expenses. Expenses and liabilities diminish your firm’s value. Make sure you’re keeping track of your expenses and making frequent changes to your strategy to eliminate liabilities as quickly as possible.
The best successor for your firm may already be a critical part of it. As a small firm owner, you may have the choice to sell to an associate or a current partner. Before you choose this route, there are some considerations to make.
For example, do you have someone inside your firm willing to buy? Before you select a successor, make sure they have the resources required to pay you. Additionally, consider whether that person is a good fit to run your firm. Being a great attorney is not the same as being a great business owner.
While this process sounds easy, there are a ton of operational hurdles you need to think through. Make sure you have solid operational documents. Don’t be afraid to enlist the help of an attorney that practices in this area. They have seen all the landmines that cause partnerships and sales to go south so they can help you think through and navigate them on the front end.
How to Look for a Buyer/Seller for Your Firm
If you’re a solo attorney or you have a small firm but not a viable successor, you’ll need to find a buyer on your own or seek out a broker’s assistance.
If you choose to find a buyer on your own, the best way to do so (without breaking ABA regulations) is through advertising and networking. For example, simply spreading the word by announcing your upcoming retirement to your colleagues can make some waves. You can also use online directories and websites to advertise the sale of your practice.
If you don’t want to go the DIY route, you have the option to find help from consultants or law firm brokers. Often, these individuals already know other attorneys who want to buy and have the skills necessary to properly value your firm.
Recruiting, Mentoring, and Training a Successor
Recruiting a successor and then mentoring and training that individual can help you ensure your firm is left in good hands.
Tips for Recruiting the Right Successor for Your Firm
You may already have an individual working for your firm that’s a candidate for succession. Or, you may need to start fresh and hire one. Here are several ways to make the recruitment process simpler:
- Stay true to your culture and core values. Your successor must fit your firm’s culture and showcase your core values. As you speak with potential candidates, talk about your values and ask questions. If you follow your gut, you’ll know whether a candidate is a good fit for your firm.
- Communicate your expectations. Make sure any candidate understands your goal of hiring a successor. Communicate your succession plan, including your expectations for the relationship moving forward.
- Ask the right questions. You don’t just want an attorney; you want a successor who will take over the position of law firm ownership in the future. During your search, don’t simply ask questions about the law. Ask questions about leadership, business acumen, marketing and communications knowledge, and much more.
- Keep diversity in mind. Diversity and inclusion open the door to a variety of perspectives that increase innovation within your firm. As you work to find a successor, broaden your pool of candidates by remembering other forms of diversity such as religious affiliation and disability. Create a system to evaluate all candidates in the same way to reduce bias.
How to Mentor and Train Your Successor
Finding a successor is only the beginning. To ensure you pass the baton with grace and ease, you must mentor and train.
- Document your processes and procedures. If you haven’t done so already, document your processes from client intake to billing to closing cases. If you’re the only one who knows how to run your firm, that critical knowledge leaves when you do. Your goal is to pass that knowledge to your successor and to give them documentation to refer to should they have questions later on.
- Create a successor development plan. It isn’t enough for your successor to shadow you each day. You’ll also want to define skills gaps and create a development plan to strengthen those weaknesses. For example, if your successor needs help with client communication, create a plan that outlines steps they can take to improve.
- Cross-train your successor. Your successor should understand the basics of each position within your firm. This enables them to understand the unique dynamics of your team while improving their skill set.
- Hand over the reins gradually. Over time, give your successor more responsibility. Expose them to your responsibilities such as management and strategy gradually. Not only will this help them understand your role, but it will also prepare them for it.
- Learn from your successor. One of the benefits of mentorship is discovering new ideas and perspectives from your successor you may not have thought of on your own.
Common-Law Firm Succession Planning Issues
We’ve already covered in detail two issues that arise during law firm succession planning: how to find the right successor and how to properly value your firm. Beyond that, there are several ethical items that you’ll want to address upfront to avoid issues later on down the road, including:
- Confidentiality. Selling or transitioning your clients and firm to another attorney requires the disclosure of at least basic information. It’ll be your job to not violate client confidentiality rules while seeking your successor.
- Fee sharing and future compensation. ABA Model Rules of Professional Conduct discuss fee sharing, referral fees and more. If you pursue the sale of your firm, you’ll want to pay close attention to how you’re arranging fees and payment.
- Client communications. You’re required to provide certain notices to your clients throughout the succession process. This can include the potential need to get client permission to share details about their situation with a prospective buyer. It can also include the need to provide notice of a pending sale and communications post-sale of how you will be transitioning out of your practice.
Additionally, you’ll want to keep a close eye on your expenses and contracts that you enter into on behalf of your firm. Keep overhead low and pay attention to contractual dates regarding everything from leases to software licenses.
Winding Down a Law Practice
Selling your practice requires a wind-down to prepare for your exit. Winding down will ensure you tie up any loose ends and pass your practice to your successor with confidence. To do so smoothly, start with these steps:
- Stop accepting new client cases. Put your effort into tying up client cases to ensure your current clients don’t fall through the cracks.
- Share your exit plan with your staff. As soon as you decide to take active steps to exit, tell your staff. The more notice you give, the easier they’ll be able to prepare. Now is also a good time to explain your plan for their future with your firm (more on this a bit later).
- Inform your clients. ABA guidelines state that you must inform your clients of your exit if you’re selling your practice or closing. This means sending them written notice before your exit.
- Transfer case files to new attorneys. If applicable, transfer all documentation relating to open cases to other attorneys within your firm.
- Deliver pertinent information to your successor and staff. If you haven’t done so already, deliver a master list of all information such as bank loans, contracts, financial obligations, and more to your successor and applicable staff.
If you’re closing your practice without a successor, there are several additional steps you must take. Be sure to follow the recommendations and guidelines put forth by your state’s bar association.
How to Secure Your Employees’ Futures
The best way to protect your employees after your retirement is to plan ahead. This requires creating a documented compensation plan that includes the wages, salaries, bonuses, and more you expect your employees to receive after you exit. This plan can be negotiated when you pass your practice to a successor or buyer.
If you’re planning to close your firm, give your employees as much notice as possible so they can find another place of employment. In good faith, offer your employees their unused vacation or sick days, if applicable, to ease the financial burden of job loss. Do your best to offer letters of recommendation or perhaps help your employees find new positions with colleagues who are looking to hire.
Don’t Get Too Caught Up in the Details
We know planning for your future is overwhelming, especially when trying to build and run a successful law firm. Take a moment to breathe. Now’s not the time to get too caught up in the details. Instead, start small by simply deciding what you want your exit to look like. Then, create a simple plan that outlines the steps to take to get there.
Learn More About Planning for Your Future. Download Chapter One of The Small Firm Roadmap Today.
Whether you’re just getting started or considering retirement, you need to plan for the future of your firm. Our new book “The Small Firm Roadmap” can help. Download the first chapter for free today.