As thousands of baby-boomer attorneys (hereafter referred to as senior attorneys) consider retiring over the next 5-20 years, they often ask (a) What is my law practice worth? and (b) What succession planning options do I have for my law practice?
POST-2020 LAW PRACTICE VALUATION
Since 2020, law firm valuation consists of the cumulative value derived from the following five components. Each component is referred to individually as a value chip; collectively, they’re known as the five components of value.
1) The firm’s client list;
2) Sources who refer clients to the firm;
3) Goodwill that the firm’s senior attorneys have earned over the course of decades of practice locally, regionally, and even nationally or internationally;
4) Subject matter knowledge that the firm’s senior attorneys have gained in their given practice areas; and
5) The firm’s digital value.
PRIMARY SUCCESSION PLANNING OPTIONS FOR LAW FIRMS
Senior attorneys and the firms they lead have the three primary options when considering succession planning for their law practices: joining a growing law firm; structuring an internal succession plan; or maintaining the status quo.
Preferred option: join a growing law firm
Joining a growing law firm is the preferred succession planning option for senior attorneys because growing firms want and need what senior attorneys have:
Instant growth that a senior attorney’s client list can deliver;
Associated lawyers and support staff who are typically well-trained and reliable;
The cumulative experience of senior attorneys and their lawyer and non-lawyer staff in shared practice areas; and
A wealth of potential value stemming from opportunities to repurpose the senior attorney’s knowledge into print, video, and audio content (e.g., podcasts, blogs, e-newsletters, LinkedIn posts, YouTube videos, and more) and expanding marketing to the senior attorney’s client list.
Potential option: structure an internal succession plan
Many senior attorneys would prefer structuring an internal succession plan with a long-time associate or partner or recruiting someone to take over their practice. However, most internal candidates do not want to assume the role for the following reasons:
They joined the senior attorney’s firm as a key employee and prefer working for someone else rather than becoming a small business owner;
They have no interest (and often minimal know-how) to operate a business that needs to make payroll twice per month and pay rent every month;
They cannot afford to purchase the practice due to personal expenses (e.g., mortgages, car payments, college tuition) and planning for their own retirement; and
Most internal successors assume that their boss will never retire.
Risky option: maintaining the status quo
Senior attorneys maintaining a status quo approach to managing their firms risk long-term loss of value for two reasons. First, senior attorneys who do not make meaningful investments in digital marketing for their firms are unlikely to add new clients at a pace similar to yesteryear; today’s consumers increasingly ask Google to recommend the best attorney for their legal needs. By contrast, today’s senior attorneys developed their books of business in the word-of-mouth era when potential clients learned about lawyers from friends, family members, co-workers, and other professionals.
Also, by maintaining the status quo for too long, senior attorneys risk a random event that can instantly and negatively impact the value of their practices — an unexpected physical or mental health occurrence, the untimely departure of a key lawyer or support staff employee, or a senior attorney’s premature death.
Other succession options
Senior attorneys may consider selling their law firms in accordance with Michigan Rules of Professional Conduct 1.17. MRPC 1.17(a) states that “[a] lawyer or a law firm may sell or purchase a private law practice, including good will, pursuant to this rule.”
MRPC 1.17 includes several challenges, most notably the client notice requirement set forth in MRPC 1.17(c) requiring would-be sellers to provide actual notice to “each of the seller’s clients” at least 91 days before the date of a sale about the following:
The fact of a proposed sale;
The identity of the proposed purchaser;
The terms of any proposed change to fee agreement terms with the applicable client, if permissible, per MRPC 1.17;
Notice of the client’s right to retain alternate counsel or take possession of the client’s file; and
Notice of a presumption that client files will transfer to the purchaser if the applicable client does not retain alternate counsel or “otherwise object within 90 days of receipt of the notice.”1
In addition, MRPC 1.17(d) states, in part, that “[i]f a client cannot be given actual notice as required in paragraph (c), the representation of that client may be transferred to the purchaser only upon entry of an order so authorizing by a judge of the judicial circuit in which the seller maintains the practice.”2
In the author’s experience, senior attorneys often opt not to pursue a sale per rules such as MRPC 1.17 because of the potential “lose-lose-lose” consequences presented by sending a pre-sale notice — namely, the potential loss of clients after they receive the notice; the potential loss of the purchaser should too many clients depart after receiving the notice; and the potential loss in value to the purchaser due to the firm having fewer clients.
Additional succession planning options for senior attorneys include winding up the affairs of a practice per MRPC 1.163 or transferring files to one or more colleagues, including doing so on a case-by-case basis per MRPC 1.5(e). In the event of an unexpected death or a physical or mental health incapacity of a lawyer, a sale or transfer of the practice can be facilitated by the lawyer’s fiduciary with the involvement of an interim administrator.4
In the October issue, we’ll continue the discussion of sale or transfer of law practice ownership by looking at typical payment terms, logistics, succession planning and rules of professional conduct, and current trends in succession planning.