Trial Magazine

In June 2015, our firm had two equal equity partners. It had been that way for more than a decade. Then, without warning, one partner handed the other—my father—his resignation letter. Within 60 days, he was gone. My father, the sole remaining partner, was left with more than a few questions: Who would take over the former partner’s cases? How much did the firm owe him for his shares? And how could a partnership have only one partner?

It had never been my father’s intention to be the sole partner at the firm—after all, the partner who had so unexpectedly retired was several years his junior. As the firm worked through these issues, my father sold me a 1 percent share of the company so the firm would remain a partnership that I would be able to manage should anything happen to him. Over the next few months, we began discussing the firm’s future and gathering information about how to plan for succession. For example, how would management be handled moving forward? Who would be allowed to buy into the partnership and at what percentages? How long would my dad take to wind down his current cases, stop taking new cases, and retire?

Then, my father suffered a ­sudden and almost catastrophic­ medical emergency, which resulted in an extended hospital stay. Thankfully, he survived—but I found myself suddenly managing our 12-attorney firm. While we didn’t have a succession plan in place, we did have a few things going for us—most important, we had started discussing succession, and I was already familiar with firm management. Those little things made a world of difference to me and our firm, as I went from 1 percent shareholder to managing partner overnight.

Despite our discomfort with the thought, we all will reach a day when we are no longer practicing attorneys, and unfortunately, that day may not be of our choosing. As my own story illustrates, questions about succession need to be asked and answered now because you never know when a partner will no longer be part of a practice. So how do we prepare ourselves, our firms, and our clients for the day when we stop practicing law?

Step 1: Identify the Kind of Planner You Are—or Aren’t

Are you a risk-taker, a procrastinator, or a pragmatist? If you’re a risk-taker, you—so far—have simply opted not to plan for retirement. If you are a procrastinator, you recognize the importance of planning but believe that there’s no reason to start planning today. Inaction, however, will almost certainly increase the likelihood that you, your loved ones, your colleagues, and your clients will needlessly suffer adverse consequences in the future.

If you are a pragmatist, you recognize that although you cannot fully predict or control the future, you can at least prepare for the issues that you know are coming, with the primary objective of minimizing harm to yourself, your family, your partners, and your clients when challenges arise. 

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If we can strive to be pragmatic about the future by creating and executing a plan to ensure a smooth transition, everyone around us benefits.

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Obviously, we should all be pragmatists, but most of us are probably procrastinators when it comes to succession planning. Many of us may be too focused on the practice of law to consider the consequences of when that practice ends. But if we can strive to be pragmatic about the future by creating and executing a plan to ensure a smooth transition, everyone around us benefits.

Step 2: Identify Your Goals for the Firm

Next, you need to decide what you want to happen to the firm when you leave. What is your top priority? Perhaps it’s that your firm continues growing well after you’ve stepped away and that it continues to take on new clients. Identify what is most important and why you are thinking about succession planning in the first place.

Remember, too, that you must ensure that your clients’ legal matters and needs are protected. This is not only an altruistic goal but one required by the Model Rules of Professional Conduct. For example, Rule 1.16 requires us to take steps to protect a client’s interests, such as giving reasonable notice of retirement, allowing time for finding other counsel, and returning papers and property to the client. Rule 1.17 discusses the sale of a law practice. Check your state ethics rules as well to make sure you are in compliance.¹

You also want to maximize the value you receive for the law practice that you’ve built through years of labor while providing yourself with the flexibility necessary to enjoy a rewarding ­retirement. If you want your firm to continue to grow and thrive after you leave, include hiring strategies in your succession plan. At our firm, we considered the ages of the partners and associates against the needs of our various departments to make sure that any gaps created by a retirement will be filled by younger attorneys. Think about what you want for your clients, yourself, and your firm so that you can tailor a plan that is right for all three.

Individual succession plans differ depending on the size of the firm, the age of the partners, and myriad other factors. Generally, however, establish

• a time line for transitioning attorneys both out of and into new positions
• who will fill voided roles in the firm
• compensation for the retiring attorneys and the advancing attorneys
• whether a new management structure will be necessary
• how new partners will pay for their new ownership interest in the firm while, at the same time, paying out retiring partners for their interest. 

Step 3: Start Your Succession Planning Early

While most of us know that we will retire someday, very few attorneys know when that day will arrive. Even if we set a retirement age and date and remain steadfast on that deadline, we never know when sickness, disability, or other life-changing events may strike. Accordingly, at the very least, any partners who are within five years of retirement must begin planning their exit strategy with the firm’s other leaders. 

Assess the current situation among the senior lawyers in your firm. Who is likely to slow their practice or retire in the next five to 10 years? Talk to those lawyers about whether they have a plan for retirement and what support they will need from the firm as they wind down or retire. 

If the retiring attorney has a specific practice that the firm wants to continue, ask the attorney what attributes, experience, skills, and knowledge his or her successor needs to continue the practice smoothly and successfully. If you already plan to have someone take over, ask the retiring attorney whether—and in what areas—the successor attorney needs additional development, training, or mentoring. And if you do not have anyone specific in mind to replace the senior attorney, determine a strategy and time line to both find and develop the successor.

Step 4: Know Your Options

Succession planning also can depend on the size of your practice. For example, if you are a sole practitioner, you could simply retire and close your office. While you may not capture any value for your hard work in creating the firm, as you would if you sold your practice, this option may be the easiest.

Shuttering your office. There are two ways to do this. You could close your office abruptly by simply ceasing to take new matters and telling existing clients your retirement date well in advance, leaving plenty of time for them to find new counsel. You also could do so gradually by not taking on new matters and winding down as each existing case is completed. This gradual approach could take two to four years or even longer.

Finding a successor. Recruiting a successor is an option for both sole practitioners (attorneys who practice alone) and sole proprietors (attorneys who own 100 percent of their firm but may have many associates). Handpicking a successor to whom you will transition your firm’s ­leadership and your cases enables you to choose and train the person who will be taking over. This strategy, however, could leave you vulnerable if your successor leaves before your retirement. Having an open and mutual understanding of the transition process, time line, and each other’s goals will help solidify the process, as will selecting a successor with similar values and priorities.

Merging. Firms of all sizes, from sole practitioners to large partnerships, can also choose a merger as their future. But for a merger to work, the financial models of the joining firms must be similar. Firm cultures must be compatible as well. Being on the same page about finances does not mean that the employees of each office will be able to work together if there are contrasting cultures or management styles.

Hire a financial adviser. Transferring ownership of a firm comes with a host of financial and tax considerations. Make sure that you work with a certified public accountant with expertise in the area who can help you strategize the sale and navigate the tax and financial consequences.

Many associates don’t understand the tax consequences of purchasing an ownership stake in a law firm—I didn’t. Where will the associate come up with the money? A loan from the firm? A loan against salary? How will he or she repay it if there is a lean year? Conversely, if the firm gives an ownership stake to an associate, the associate will be taxed on income equivalent to the value of that stake.

It also can be difficult to value a firm as revenue changes from year to year. Our firm, for instance, looked at profits over the most recent five years, took out the best and worst years, and calculated an average. We then used that number to figure out how much we had to pay the partner who retired based on his ownership interest and also how much an associate who wanted to become partner would have to pay.

Step 5: Consider the Attributes of Your Successor

The most popular route for attorneys who want their firm to continue is to find and develop a successor. How do you determine whether that person is competent and in a position to succeed? While you will have to look at the specific needs of your firm and your practice, there are several attributes that all law practice leaders generally must possess: ­self-management, people management, case management, and practice-building skills.

Managing a law firm adds a new set of stressors to those of being a trial lawyer, as well as introducing new demands on your time. Successful self-managers have the time management, stress management, organizational, problem-solving, and decision-making skills necessary to keep your firm moving forward. They also appreciate and exercise ­self-protection: the ability to take care of yourself, which allows you to take care of others.

Good people managers know what they need from the team as well as each member’s strengths and weaknesses to position each member for the greatest likelihood of success. They delegate assignments not only to free up their own time as a manager but also to allow their team members to learn and grow. They give actionable feedback, model positive leadership behaviors, and improve the work environment.

Successful case managers delegate not only assignments but also the resources that will allow their team to meet their deadlines and do well. While all attorneys have some level of case management experience based on their own workload, managing an entire firm’s caseload is different. You need a succes­sor who can keep track of everyone’s ­workload—from attorneys to assistants—to make sure that the firm is handling its cases as efficiently as possible.

Finally, make sure that your successor will be able to do what you did to grow a successful law practice. You want to hand the keys to someone who shares your future vision for the firm but who also has new ideas and strategies for specific business development goals. Whether you built your firm through a strong network of referring attorneys or an in-depth understanding of law firm marketing, make sure your successor has the same abilities and understands the firm’s needs for building a case portfolio.

You’ll find that succession planning is not one-size-fits-all. There is no ­step-by-step blueprint to successfully manage your firm’s leadership transition: Even among two nearly identically structured firms, there will be significant differences that will dramatically change their succession plans.

One firm, for example, may be transitioning from parent to child, another from mentor to mentee, and yet another from senior partner to slightly less-senior partner. These differences demand that you consider the unique situation, characters, and practice of your firm.

I learned from my experience that the key is to start planning now. Remember that the goal is to make everything smoother, happier, and less fraught with uncertainty for your clients, your associates and partners, your family, and yourself. 

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Matthew P. Rosenberg is a partner at Handler, Henning & Rosenberg in Harrisburg, Pa. He can be reached at mrosenberg@hhrlaw.com.

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Note

1. See, e.g., Pa. R. Prof’l Conduct R. 1.16 (2017); Cal. R. Prof’l Conduct R. 3-700 (2017).