Confronting Those Tough Questions About Retirement
As someone who has helped many attorneys with succession and transition planning, I've come to understand that this process can seem paralyzing, because lawyers often don't have the answers to some of the tough questions that arise when they begin to think about retirement. Granted, addressing a few of these questions often leads to more, and every person has different circumstances. But understanding the answers to a few of the basic questions can provide a useful starting point for thinking about and planning for the next stage in life.
The following three scenarios provide real-life examples of approaches to succession that have taken place here in New Hampshire.
The sole practitioner
A sole practitioner, age 64, wanted to groom a successor to assist her with her current caseload, allowing her to wind down over the next 10 years and for the successor to eventually buy her out. She recruited a 45-year-old lawyer who had a partial book of business and who was trying to build a business in the same community. She employed the younger lawyer as an associate and provided clear information about the track to partnership, should the arrangement work out for both of them. She created structuring documents that provided for the transfer of ownership interests and her retirement at such future time as she chose to implement those provisions.
The combination of the additional business and the younger lawyer's contribution to her cases resulted in a strong financial performance for the firm in the first year.
The small firm
A firm with three partners, ages 58, 60 and 62 hired a 27 year-old associate, but the partners recognized that for them to orchestrate retirements in the next 10-12 years, they would need to grow the firm with one or more mid-level lawyers. They recruited two lawyers with books of business and were able to make arrangements with both of them to become non-equity partners in the firm with the opportunity in the future to become equity partners. To clearly identify the opportunity, they developed criteria for equity partnership and shared detailed information about the succession plan, as described in the firm's structuring documents. The firm now has three generations of lawyers and the structure necessary for succession transitions to take place in the future.
The 68-year-old lawyer
A 68-year-old practitioner felt that he did not have the time or the inclination to recruit and groom a successor. For him, the options were more limited and, after exploring all possibilities, he elected to negotiate with a firm of five lawyers to become Of Counsel. The arrangement included a two-year contract that provided him compensation for work he performed, compensation for work performed by others for his clients, and a negotiated value for the benefit the firm would receive for continuing to work for his clients after his retirement.
How can I afford to deal with succession at a time when I struggle to cover my office overhead and my compensation?Do not let your financial situation delay an evaluation of your succession and/or retirement options. While there would be an advantage to having capital to invest in a succession plan, it is not a hard and fast requirement. Considerations will include recruiting a lawyer with a partial book of business, a potential merger (or acquisition), or offering your services and reputation to another firm in an Of Counsel position in return for a mutually advantageous exit plan.
Can I sell my practice? How much value does it have?Whether a law firm has value and the amount of value will depend on a number of factors, including the practice area, the nature of the clients, the profitability of the practice, and the branding of the firm. Have in mind that a lawyer can increase the value of his or her law practice based on decisions made and actions taken over time. While Rule 1.7 of the New Hampshire Rules of Professional Conduct now allows for the sale of a law practice subject to certain conditions, a straight sale is rare. Usually, the transaction involves a transition period of at least two years and the retiring lawyer receives some type of financial reward over a period of time. Be sure to review the conditions set out in Rule 1.7 and in any discussions or negotiations be attentive to conflict issues and preserving client confidentiality.
Will I lose control? I had a partner years ago and we didn't get along. I learned that I never again wanted to share control with anyone.Do not let the idea of having to share control delay consideration of recruiting a lawyer in a younger generation to be your successor. There will be several options for transferring an interest to your successor over a period of time. If you are concerned about the issue of control, you may decide to retain a 51 percent interest in the firm until such time as you have in place a committed exit plan. You will want to have the details of your exit plan in the partnership agreement when you begin to transfer an interest in the firm to your successor.
What will my clients think? I am concerned that I will lose clients if word gets out that I am thinking about retirement.The concern about one's reputation in the community is a valid consideration. While you may not be advertising the fact that you're planning for retirement, it is nevertheless important to consider the client's perspective. Clients worry about their ongoing needs if their lawyer is at an advanced age and there is no apparent successor in place. What a relief for the client when their lawyer does have a plan in place and sees a successor being groomed for the future. Similarly, lawyers who have partners tend to be concerned that the minute they begin to talk about retirement, they may lose leverage in any partnership discussions.
The answer to that dilemma is to start the discussion of retirement and exit plans well in advance of an impending retirement. You will have more negotiating power if you are a full-time, busy lawyer than if you wait until you are aged, and perhaps in poor health, to initiate that discussion.
Am I too old to begin working on a succession plan? I am concerned that age 70 is too late to put a succession plan in place. What if I hire a younger lawyer and it doesn't work out?It is never too late to evaluate your options as you approach retirement. At age 70, however, the options may be more limited. Depending on the number of years you want to continue working, it may be too late to bring in a successor and groom him or her for a transition of clients over a period of time. Options that are still realistic include merger, acquisition or an Of Counsel arrangement with another firm. The key here is to recognize that there are a number of options available and that the appropriate course of action will depend on a number of factors.
The three scenarios on the previous page illustrate the varied alternatives available to lawyers who are approaching retirement age. Most lawyers, for whatever reason, work beyond age 65. There is a point in time when they will (or should) be thinking of winding down their practices and enjoying time with their families. For some, there will be financial rewards for the value of the practice they have created. To evaluate options and make good decisions, lawyers need to take the time and expend the energy necessary to assess their own circumstances and focus on their own exit plan, because ignoring the endgame will not benefit your clients, your family or your well-being.
Any lawyer in a small firm or solo setting should begin to consider developing an exit plan at a point where he or she intends to practice for 10 or 15 more years, to provide the lawyer with the greatest number of options as well as sufficient time to create value in their practices and an opportunity to structure the firm so as to ensure significant rewards upon retirement.
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Arthur Greene has experience as managing partner for a large New Hampshire law firm and as founder of a small firm. In his consulting practice, he assists lawyers in all management areas.