Insight #1: Estate Planning for Your Law Practice - What's your end Game?

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Imagine The NEXT chapteR…

Enjoy the journey…

Insight objective: Inspire you to imagine and preserve the intrinsic value in your law business, throughout the journey of practicing law, and as a student, entrepreneur, leader and mentor…


We thought this is a good place to start the insight blogs. Just imagine, you’re thinking about starting your own law firm.  Or you’ve started your own law practice.  Maybe you’ve been working at it a while and have developed a financially sustainable law firm. You’re working hard to maintain and improve the law practice. That’s incredible!  You can do it!  That’s just another step to realize your why.  Why you went to Law School.  Why you’ve decided to start your own firm.  Whatever the WHY is that motivates and inspires you. 

Now that you’ve dared to imagine, the next step is the creation of your own firm, to make it a reality. You love what you’re doing- the practice of law. Your clients seem happy, too. You're providing superior service and representation to your clients. You’re getting good results. You’re getting referrals and new business. Business ownership gives you control to accomplish the goals that matter most to you.

But to what end. Sure, it supports or supplements today’s lifestyle. Is that the only reason you’re putting in 40, 60 ,80 hours a week to make the law practice work. You’re the Attorney, secretary, bookkeeper, IT person, janitor, and file clerk (at least at the beginning). Why go through all that? Have you planned for the transition to the exit phase of your law business?  What is your long game? What end do you have in mind? What's your end game? Really, what’s your END game.


“Imagination is everything.

It is the preview of life's coming attractions.” - Albert Einstein


Your law practice has Value.  Potentially a lot of Value

At times we can all fall into the delusion of permanence that extends into our professional life.   Although dealing in the here and now is important, we often overlook long term planning.  Unfortunately, the majority of solo and small firms don’t have an Estate Plan (Exit Strategy) of their own for their Law Practice.  In fact, over 60% of Solo law practices close without recognizing any value that was created over decades.  A properly planned and executed exit strategy will significantly add value to your retirement “nest egg”. 

Traditionally, a solo attorney would work through a rewarding legal career.  When that attorney retires or leaves this earth, the perception has been that the law practice disappears with the attorney.  That’s because we assume that “goodwill”, the intangible value of the law practice is not really “transferable”.  Goodwill usually consists of factors such as the business reputation, brand recognition, customer and supplier relations, employee knowledge, internal processes, etc., of the exiting attorney.   However, a well-structured office can take on the persona of the lead attorney giving the office the value of an ongoing business concern.  Such a law practice actually carries intrinsic value.  


INTANGIBLE ASSETS REFLECT THE TRUE VALUE OF YOUR LAW BUSINESS  

Intangible asset An intangible asset is an asset that lacks physical substance; in contrast to physical assets, such as machinery.

Examples of intangible assets in a law firm:

  • Client list - relationships

  • Reputation-

  • Website and domain

  • Brand name recognition

  • Skilled employees

  • Know-how

  • Processes and training

  • Affiliate relationships

  • Systems and procedures 

  • Developed technologies

  • Location 

next chapter

Have you thought about your next chapter, your  aspirations for the next mountain journey  that motivates you, or simply more time with loved ones and leisurely life in retirement.  Any idea when that might happen?  What are your obstacles?  What do you need to accomplish to make it possible?   

Hopefully, this article can help you to start the process of developing a roadmap for your next chapter.

SUCCESSIOn Planning AND EXIT STRATEGIES  

Solo practitioners have the greatest challenge since they have no associates or anyone in place to transition the practice. Therefore, the practitioner must both recruit and groom an associate that could buy the firm or become a partner and buyout the owner’s interests, sell the firm to another firm, or merge with another firm. Other options would be to become Of Counsel with another firm or simply close down the practice. This takes time. 

A smaller-firm structure avoids these obstacles only to the extent that there is talent already embedded in the firm with a Partner or Associate.  The commonality with a sole practitioner is the investment of time through mentorship. 

recruiting talent - Mentor & Apprentice

Traditionally, this would be an Apprenticeship;  a system that stems back to early industry, with the master working in his own premises alongside his assistants. This created something of an artificial family relationship, in that the articles of apprenticeship took the place of kinship.   Sometimes we also refer to this arrangement as mentorship.  The key difference in the terms is really only perspective.  An Apprentice is someone who is learning a trade or profession from a skilled Mentor, having agreed to work for a fixed period at lower wages.  The Mentor agrees to invest his time and expertise in the Apprentice.  When Apprentice and Mentor agree to this arrangement, their incentives are aligned in that they both invest into the relationship for later gain. 

Focus on recruiting talent, training and preparing them through mentorship. Create a common goal by aligning incentives, meaning that you both share a gain through give and take.   It may take several “iterations” of this process in finding and recruiting talent. 


Sell the Firm to another Lawyer or Law Firm 

The owner can sell the firm to another lawyer or law firm. This option works best when the practitioner is actually ready to retire and cease practicing law.  It’s important to prepare your law practice business for when you’re personally ready to retire.   It takes a minimum of 3-5 years to prepare, enhance, and memorialize the value of the law business.   That affords the opportunity to close any gaps and “package” the law business to go to market. 

Additionally, the sale of a law practice has restrictions levied by a State’s Rules of Professional Conduct.  Locating desirable candidates will take time and a well-planned search process may have to be initiated.  This process can take a year or longer. 

Solo practices are often very personal practices.  Repeat clients can be quite variable from one law business to the next.  Clients often perceive that they hire the lawyer and not the law firm. This makes buyers very cautious due to their concern that the clients and referral sources will not stay and the revenues will not materialize after the owner sells the practice. This obstacle is easily overcome by the selling attorney staying on in a consulting capacity for a period of time to help insure that clients and referral sources stay with the new owner. 

Merger with another Firm 

Merger with another lawyer or law firm is another option. This is often a better option for solos that want to gradually phase out  yet continue to practice for a few more years. In essence, they join another firm and subsequently retire from that firm. The odds are improved for clients and referral sources staying with the merged firm. The solo practitioner has more flexibility with regard to the ability to continue to practice longer, reduced stress, additional support and resources, and gradual phase out to retirement. 

Of Counsel with another Firm 

Forming an Of Counsel relationship with another firm is another phase out  option. Sometimes it is a final arrangement where a solo winds down his or her practice and then joins another firm as an employee or independent contractor (contract attorney).  An Of Counsel relationship can also be used as a practice continuation mechanism that provides the solo with additional resources and support if needed.  An of counsel arrangement can also be used to “pilot test” a relationship prior to merging with another firm. 

HOW AND WHEN TO EXIT FOR MAXIMUM VALUE

The question of how and when is a mindset to have throughout your journey to prepare for, planned and unplanned situations and allocate appropriate resources. The starting point for an attorney is to create value, develop a loyal client base, establish branding and community recognition, leverage the right technology and tools, hire talented team, and create an organized workflow.  Sound familiar?  These (and more) are few of the intangible assets mentioned above.   

The next step is to measure and track your results by asking the right questions. Developing capable measuring systems for the accurate analysis and reporting of the health of your law business.  We go into much more detail on how to measure the health of your law business in our next blog/posting.   

Determine the law practice value base on the last five years financials. Develop a projection of profitability for the next five years. 

Conclusion - GUIDING principles

Create a data driven culture in your law business to guide, continuous improvement and value creation. Embed and memorialize the business know-how within the people, systems and process. Invest one of your most precious commodities in others, your time. Learn, mentor and lead by example. Your daily investment habit in the future will make people better that are around you and reap exponential rewards, in the transition value of your law business.

The earlier you start drafting your business estate plan roadmap, the greater opportunity for a orderly succession and to realize your career-long investment in building the Law Practice Business. Value is determined by the buyer and your responsibility is to demonstrate the value of the business going forward. Start learning the process of business valuation by including it in discussions with your network and subject matter experts. If you’re within 3-5 years of business exit, start interviewing business brokers. A baseline valuation will help identify and prioritize where you need to focus on to create or enhance value for the transition into the next chapter. Timing is the essential ingredient in success.

Enjoy your journey of practicing law, and as a entrepreneur, student, mentor and leader. When it’s time to pass your successful business model on to the next generation it will be a win, win for all involved.


Insight Call to action

Start on your roadmap to create, enhance, recognize and preserve the intrinsic value in your law business, throughout the journey of practicing law, and as a entrepreneur, student, mentor and leader.

-Enjoy the journey…

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