Over the next ten or so years, we will see a marketplace-shifting change in law firm ownership as baby boomers retire and decide what to do with their practice. This is a time of high angst for those about to leave the law, and potentially a remarkable opportunity for the more entrepreneurial and thick- stomached juniors coming up behind them. But both sides need to proceed with care and with eyes wide open.
In the US alone it is conservatively estimated that over 400,000 lawyers will retire within the next ten years. That’s roughly 30% of the profession. Canadian stats are not readily available but let’s assume we’ll follow a similar path: again conservatively, that’s 37,500 senior lawyers gone by 2029. Regardless of how many baby lawyers move into their places, we stand to lose an enormous amount of legal wisdom and skill in the coming years.
Even more importantly, many of those soon to retire are also business partners/owners. As the vast majority of lawyers in Canada do not practice with the biggest law firms, this means that firms will be closing or changing hands. Each of these retiring lawyers from smaller firms will be facing their retirement with three critical questions:
- What will I do with my time?
- Who will look after my clients and the practice I worked so hard to establish over the past 30+ years?
- Can I realize any money from my practice or do I just shut my doors?
Retirement coaching can help with the first question (and feel free to give me a call on that). For the other two, keep reading.
On the flip side, the next two generations of lawyers are not quite cut from the same cloth. If you’ve ever met a founding partner, you know that they seem to be incredibly skilled in a wide range of areas: legal, business, HR, marketing. They could start and run a law firm, bring in and hand work to others with relative ease, resolve issues within the firm as they arose, and still maintain a strong personal practice.
While older lawyers learned through necessity to build profiles and client bases, too many of the next two rungs were fed large chunks of their practice. They may be capable of some marketing but most are not in the same league as their seniors. To this day, very few law schools teach marketing and when they do, it’s a micro course and often an elective. In my experience, most new partners are certainly not ready to help run a law firm, let alone take the thing on by themselves.
I’ve also found that the younger generation of lawyers has little patience for the time required in building a reputation or network. They want to practice the law, not do lunch. They gravitate – if they can – toward larger firms assuming someone else will keep them busy until clients walk through their door based on reputation. It’s a rude awakening to discover that older lawyers are holding onto files to meet their own targets and not rushing to fill the plate of their juniors.
In smaller firms, such lawyers rely on older lawyers or the firm’s marketing to fill their time. When that’s unsuccessfully, they attempt marketing but can tend to be only adequate at it, putting marketing aside the moment legal work is once again on their desk.
And finally, while the generation behind those about to retire has developed some experience in law firm management, it’s spotty at best. Perhaps they’ve sat on a compensation committee, chaired the student committee, or sat on an executive team. Most have very little HR experience, almost no marketing experience, and they’ve never been responsible for the profits and loss of the firm as a whole.
All of this makes it challenging for older lawyers to contemplate retirement as they aren’t convinced that the next rung down will be able to practice law AND keep the doors open. But handled well, these realities can also provide opportunities for both the retiring lawyers and those who take over their practices.
Here are some things to consider when selling a law practice:
- Determine what you have of value to sell: unless the firm owns its premises (in which case this is a real estate deal and may not involve selling the property to another law firm), the only tangible asset a firm has is its corporate records. There are various formulas for determining the value and either up front or delayed payments can be negotiated. If you want a quick out, sell your corporate records and shut down the firm.
- Alternatively, you may decide to sell your practice as a whole (not just your minute books). This requires a careful and realistic assessment of the potentially transferred value of your practice which depends on a number of factors. Understand that this valuation will need to be conservative, as there is no guarantee that all of your practice will flow to the buyer.
- Your practice could be sold to a buyer who wishes to bring it into the fold of their existing infrastructure. That means that they don’t want your premises, and possibly not your staff either (although some might be integrated). Your systems are also of little value to them as they will convert your records over to their own systems. This type of purchase can have implications for your client base in terms of new location (accessibility/comfort) and pricing (the purchaser may need to align pricing with their existing operations), meaning that fewer of your clients may actually go to or remain with the buyer. All of these considerations can in turn can have impact on the purchase price.
- Or you could decide that you want to sell to a buyer who will maintain your legacy: stay in your location, take over your entire practice and continue to service your clients just the way they’ve been serviced over the past many years. In this instance, purchase price can be assisted by the length of the lease, the loyalty of the staff to remain, the office infrastructure you’ve created, and the increased chance that more clients will stay after the sale.
- If you are selling practice as a whole (not just your minute books), consider agreeing to stay on for a period of time to keep the billings up and assist with the transfer of client relationships. This can be part of the purchase price or negotiated on a monthly or half-yearly salary basis. Again, agreeing to be there for the transfer may increase the changes of more clients staying and thus, the purchase price.
Here are some things to consider when buying a law practice:
- Before you start window shopping, take the time to really think about your current firm’s strategic plan. What do you want to look like in five years? What are your current strengths and weaknesses? How will your marketplace shift? What’s the best way to get where you need to go? Too many lawyers acquire new lawyers or practices without proper consideration and then regret their purchase for years to come as they try to fit a square peg into a round hole. Think about what you need first, then go shopping.
- Know what questions to ask. I’ve spoken with far too many lawyers who, ironically enough, failed to do appropriate due diligence before getting into a deal. It doesn’t matter that the person on the other side is a lawyer. They need to prove everything: their revenue and expenses; their lease arrangements and future; the ongoing commitment (and capability) of their staff; the soundness of their infrastructure, etc.
- If you are buying more than minute books, include a transition strategy in the deal. It really helps to have the principal stay on for a period of time to help with implementation of this plan.
- Understand that you probably won’t find the perfect fit: you’re looking for the closest fit you can find. There will be some negatives to whatever you consider. Determine whether you can mitigate or live with them.
- Ensure the purchase price is one that both you and the seller feel is fair. It’s likely you’ll need the buyer for a while during the integration and client transfer period. You want to be in a good working relationship with this person.
This anticipated massive transfer of law firm ownership expected over the coming 10+ years provides remarkable opportunity for younger lawyers who don’t want to wait many years to get the chance to be an owner, earn what they know they are capable of earning, have more autonomy and shape the practice the way that they want to. Buying a ready-made practice shortens the time span on all of these areas. Having the principal continue for a period of time to transfer client relationships and potentially serve as a mentor is of high value in this process.
Lawyers wishing to become owners will be well-served by surrounding themselves with great help and advice. Engage the services of experts: an accountant, an HR expert, a marketer, a coach. Encourage the departing principal to stay on for as long as they can to help transfer clients and provide business mentoring to the new owner. Give yourself the support needed (especially in the early days) to start off right and avoid pitfalls that will be hard to recover from.
Running a law firm – even with help – does require a particular type of a lawyer. They must be ready to work hard, long hours; learn about business and management; become outstanding networkers and marketers; prepare and follow strong business and marketing plans; become great employers for their staff; and have the strength of stomach to ride the usual ups and downs of building a business. Many lawyers tend to be too risk-adverse for this type of activity but I’m finding that the younger ones, in particular, are open to being more entrepreneurial.
I’m going to end with a warning that I will now move into a pitch. Very few people in Canada have the appropriate experience with law firms to truly understand their potential value, and to be able to connect a buyer with a seller. In my practice, I go even further through careful review of and interviews with interested parties in order to find the best available fit and help to shape a deal that all parties can live with. Once the deal is done, I can continue to work with the purchaser on strategic and marketing plans to maximize the potential as quickly as possible. This helps the new owners to make fewer missteps and ideally, maintain or even increase the firm’s productivity to pay off the purchase price as quickly as possible.
If you are thinking about selling your practice, if you feel you’re ready to branch out on your own or with a partner and take on your own practice, if your firm needs help doing strategic planning and might be in the market for acquisitions, feel free to contact me.
Heather Gray-Grant is a business strategist, marketing expert and executive coach for law firms and lawyers. She can be reached at firstname.lastname@example.org