Our discussion of valuing a law practice and succession planning options for lawyers continues this month by looking at typical payment terms, logistics, succession planning and rules of professional conduct, and current trends in succession planning.
TYPICAL PAYMENT TERMS
First, for the purposes of this article, the payment terms described here do not contemplate a law firm sale per MRPC 1.17 and instead presume payment terms negotiated per either a senior attorney joining a growing law firm or structuring a plan with an internal successor(s).
In this version of succession planning, the parties negotiate earnout terms based upon two value chips: the client list and the referral source list. Together, they represent the senior attorney’s book of business. Negotiating earnout terms typically relates to assigning a fee-sharing percentage to collections derived from the senior attorney’s book of business and determining the number of years in which the fee sharing applies.
Earnout terms represent fair market value to the successor by minimizing the risk of overpayment if clients attributable to the senior attorney’s book of business depart. For senior attorneys, earnout terms provide appropriate compensation based upon the portion of their book of business that continues to engage and refer new clients to the successor during a negotiated timeframe in which the terms apply.
Fixed Payment + Earnout Terms
As the 2020s progress, successors to senior attorney-led firms will begin paying fixed prices tied to the firm’s brand value in addition to earnout terms, ushering in a new version of succession planning.
Introducing fixed pricing for brand value is a result of today’s digital-era firms collecting data analytics from multi-channel digital marketing efforts and client origination data maintained by customer relationship management (CRM) software, including distinguishing between clients originated digitally and those drawn in via word of mouth-type referrals.
In his book “Digital Marketing for Law Firms: The Secrets to Getting More Clients and Better Cases,” Chip LaFleur wrote that the “single greatest advantage of digital marketing tools compared to traditional advertising methods is that the digital tools generate data that you can use so that you can improve your campaigns so you can keep getting better and better results.”1
As a hypothetical example, let’s say a firm focusing on estate planning for young families in southeast Michigan adopts the following trade name for its practice: Lighthouse Estate Planning Group.2 Recognizing that potential clients search for attorneys online, the firm:
- develops a website with tactical search engine optimization that includes a “contact” button for visitors to schedule an initial Zoom consultation or submit an online inquiry;
- regularly posts digital content via multiple social media outlets;
- invests in pay-per-click search terms;
- subscribes to listings within online legal directories like Justia, Avvo, and Super Lawyers; and
- hosts monthly livestream webinars about trends in estate planning with a focus on young families.
As a result of its digital marketing efforts, the firm achieves first-page Google status as a go-to firm in southeastern Michigan; maintains multiple years of data analytics showing click performances, visitor time on page, new client inquires by month and year, online reviews, and more; and collects data from its CRM software determining the sources of all new clients as well as revenues received per client origination category (e.g. digital originations vs. word of mouth).
Under this version of succession planning, data will support firms seeking fixed payments attributable to the firm’s brand value while being mindful that if a firm’s goodwill includes its brand value, any fixed payment may need to comply with MRPC 1.17.3
SUCCESSION PLANNING LOGISTICS
When planning for succession, the following logistical considerations apply:
- How the five components of value apply to the senior attorney’s practice;
- Whether to pursue succession planning with a growing law firm, an internal successor, or maintain the status quo;
- Whether succession planning using solely earnout terms or fixed payment and earnout terms applies;
- The ongoing roles of senior attorneys upon implementing the succession plan for the firms they led;
- Addressing closed client files;
- Malpractice insurance, including the applicability of purchasing a tail policy; and
- Whether to involve an intermediary to assist with succession planning efforts.
When growing law firms consider succeeding senior attorney-led firm, these logistical considerations apply:
- Due diligence to determine that the practice areas and firm culture present the right fit;
- Negotiating financial terms that include incentivizing senior attorneys to transition their books of business;
- Establishing 30-, 60-, 90-, and 180-day plans to integrate the practice; and
- Co-developing a marketing strategy to transfer the trust of the senior attorney’s clients and referral sources to lawyers at the growing law firm and creating digital marketing content in written, video, and/or audio formats based upon the senior attorney’s knowledge and experience.
RULES OF PROFESSIONAL CONDUCT AND SUCCESSION PLANNING
When considering succession planning in Michigan, lawyers should review the Michigan Rules of Professional Conduct including Rule 1.17 (sale of law practice); Rule 1.6 (confidentiality); Rules 1.7-1.10 (conflicts of interest); Rule 5.4(a)(1)-(2) (exceptions to fee sharing with non-lawyers per an agreement by a firm to pay a lawyer’s estate or other representative after the death of a lawyer); and Rules 7.1 and 7.5 (firm names).
Also, effective Sept. 1, 2023, when submitting an annual licensing statement, Michigan attorneys in private practice must comply with two additional requirements by order of the Michigan Supreme Court:
- Designating an active Michigan attorney in good standing or a firm with at least one other active Michigan attorney in good standing to serve as the attorney’s interim administrator or indicate that he or she wishes to designate an attorney from the list maintained by the State Bar of Michigan.
- Identifying a person with knowledge of the location of the attorney’s professional files and records and location of passwords and other security protocols necessary to access the attorney’s professional electronic records and files. This person can be the same person designated as interim administrator.4
The State Bar of Michigan explained the mandatory interim administrator planning, stating that it:
“protects clients, attorneys’ interest in their law practices, and the judicial system in the event that a private practice attorney becomes unable to represent their clients because of death, disability, discipline, disappearance, or incarceration[.] Designating an interim administrator is the first step to ensure that your practice has a succession plan in place. You wouldn’t leave your family without a will; don’t leave your practice without a succession plan.”5
SUCCESSION PLANNING TRENDS
Among the trends in succession planning that we expect to continue into 2024 include would-be internal successors not wanting (or having the financial ability) to purchase equity partners’ interests in firms where they practice; growing firms recognizing the instant client growth presented by welcoming senior attorneys to their firms; senior attorneys relying on trust transfer to maximize earnout terms by transferring clients and referral sources to successors; and growing law firms supplementing earnout terms by paying a fixed price for the firm’s brand value.
Law firms have value, and senior attorneys have three primary options when contemplating succession planning for their practices: join a growing law firm, structure an internal succession plan, or maintain the status quo. Senior attorneys who maintain the status quo risk seeing their firms decrease in value — their books of business will not grow at the same rate during today’s digital era when compared to the era of word-of-mouth growth.
Senior attorneys who have developed a book of business during their careers will find that growing law firms want and need that information. They also covet the goodwill, subject matter knowledge, experienced workforce, and marketing value well-established practices offer. As of now, senior attorneys benefit from earnout terms offered by succession planning. Soon, succession plans will supplement earnout terms by adding fixed payments that take into consideration the firm’s brand value.