Succession planning in law firms: Some points to ponder

July 1st, 2018
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By Thomas Harban

Succession planning is important for every legal practitioner and in this article the Attorneys Indemnity Insurance Fund NPC (AIIF) will look at succession planning in the context of law firms. The phrase ‘succession planning’, is used in reference to the plan of what will happen to the legal practice after the practitioner ceases practising. It is advisable that, in the development of a succession plan – as far as is practically possible – to consider that there are some risks associated with unplanned, unexpected events. To some, this may be seen as a rather morbid topic, which should be avoided or postponed, but consideration of this issue is necessary. It is best to consider and plan for the departure – especially of senior practitioners – rather than hope that ‘things will somehow work themselves out’ in the absence of proper prior consideration and the development of an appropriate plan. As is succinctly put in a Thomson Reuters article: ‘If you fail to plan, you plan to fail’ (‘Law firm succession planning: Does your firm have a plan’ (http://insight.thomsonreuters.com.au, accessed 15-6-2018)).

Over the years of activity in the profession, the practitioner would have built up a substantial practice and a good client base. What will happen to the practice after the practitioner leaves? What, if anything, should the practitioner consider ahead of leaving practice to ensure the successful continued existence of the firm? This consideration is the subject matter of this article and it is hoped that the questions raised will assist in focusing the attention of legal practitioners to this important matter.

A legal practice is a business enterprise and it is thus important that consideration be given to what happens to the enterprise after the practitioner leaves. This is an important question, irrespective of whether the sole practitioner wishes to dispose of or close the practice on their departure from practice. The practice may, in many instances, be one of the highest valued assets in the estate of the practitioner, which has been built up after many years in practice, the practitioner would have made many sacrifices to ensure success.

The practitioner may have planned, over the years in practice, to build what they perceive to be value in the firm, which could be sold in the future and thus reap the financial (and reputational) rewards for sustained efforts over many years (many decades in most cases). This is referred to as the branding of a practice. Taking a view along the lines that ‘I am the practice and the practice is me’ is rather myopic. If you regard yourself as the sole or most important asset within your practice, then you should ask yourself whether you have been successful in creating any real value in the practice as a business with a value in and of itself. If so, how do you protect that value and pass it on to the next generation of lawyers while being appropriately remunerated for your years of work? Is there a mandatory retirement age in the firm or do you plan to work ‘and die at your desk’ (as it is often colloquially put)?

For firms made up of sole practitioners or even partnerships of two or three partners, the departure of a key practitioner may have a significant impact on the firm, if not properly planned and managed. Failing to do so could result in the eventual downsizing or unplanned closure of the firm. If succession planning is not properly addressed, it may result in a loss of significant clients and staff, which can also lead to the firm closing down. Consider how the financial well-being of the firm will be affected in such cases and how the interests of the various stakeholders (including yours) could be prejudiced without a succession plan. The departure of a key individual must be properly planned, structured and implemented. Some practitioners may have decided that they do not plan to retire from practice and thus plan to work for the rest of their lives. If that is the case in a particular firm, all the implications and risks of this must be fully appreciated.

Legal practitioners, like many others in the professional service industry, sell a service and expertise to clients and this is in essence the service offering of a legal practice. The service provided by the legal practitioner is based on the skill, expertise and a specific area of practice of the practitioner. As with all other aspects of life, the service and the skill sold to clients come to end when the practitioner leaves practice for any reason or, sadly, passes away. Death is unplanned, but a properly planned exit from practice in the event of the retirement, relocation or other structured manner of exit can be appropriately prepared for. There may be unfortunate circumstances that lead, for example, to a striking-off of a practitioner, a sudden illness or other change in life circumstances that may lead to a practitioner being unavailable to continue with practice. One wonders how many attorneys have considered this in the context of their own practices. For sole practitioners or small partnerships, the departure (or death) of the practitioner may lead to the firm closing down, particularly where that person was the sole or a significant fee earner. In larger firms, the practitioner may work as part of a team where there are other professionals available to step into the breach and thus fill the vacancy. The relationships that key clients have with the firm may be due to a personal relationship between the client and the firm and those relationships may thus not survive the departure of the practitioner concerned.

Over the duration of the practice, the practitioner would have built up client relationships. What will happen to these clients when the practitioner leaves the practice?

Why succession planning is important

The practice and the goodwill created over the time in practice may have significant value for the practitioner. Planning gives the advantage of enabling the practitioner to determine what happens to the practice. The questions to be considered include:

  • Do I want my practice to continue after I leave and, if so, how can I ensure that?
  • Will the practice be sold?
  • In the event that the practice is sold, how will the appropriate value be determined?
  • Will the files be transferred to another practitioner (within the same firm or in another firm)?
  • Have I identified, recruited and trained a possible successor?
  • How can I close the firm and wind it down in a structured manner taking the interests of all stakeholders into account?
  • Is succession planning addressed in the partnership agreement of the firm?
  • Has the buy-out of the interests of partners been addressed in the partnership agreement?
  • How will the value of partnership interests be determined?
  • How will the value be paid to the departing person?

Succession planning will ensure that the departure of the practitioner is properly structured and documented, thus mitigating or avoiding disruption to the firm. The succession plan developed by the firm should be properly documented and updated as and when the circumstances of the firm and the individual senior practitioners in the firm change. The remaining practitioners may decide to downsize the firm after the retirement of a senior practitioner.

Alan R Olson in the article ‘Law firm succession planning: Do one simple thing’ (www.de-lap.org, accessed 7-6-2018) suggests that the reasons legal practitioners in law firms are reluctant to have the succession planning discussion, include –

  • inertia or aversion to planning;
  • concerns over lawyer retention;
  • concerns over client retention;
  • a lack of viable successors; and/or
  • over-reliance on compensation systems.

The phenomenon by some who feel irreplaceable can be added to that list.

When should succession planning be addressed?

Succession planning should be addressed as early as possible and not only with the imminent departure of the practitioner concerned. It may not be necessary to develop a succession plan for younger practitioners who are part of broader teams, however, succession planning becomes more important where there are senior and/or long established practitioners in a firm. An added advantage of the early development of a succession is that the practitioner then has the luxury of time to recruit and even develop a possible successor or to consider other available options. The planned departure of the practitioner concerned can then also be communicated to internal and external stakeholders in a structured manner and the narrative of the departure can be determined by the firm and the departing practitioner together thus mitigating rumours and reputational damage.

The area of work carried out by the practitioner should also be considered. Litigious matters, for example, may take many years to be finalised and may need to be attended too (and fees earned thereon) long after the practitioner who initially dealt with the matter has departed.

Succession plan options

The appropriate succession plan will depend on the individual size, structure, location and area of practice of the firm. Arthur G Greene, in ‘Succession Planning for Solo and Small Firms and Rewards for Retiring Lawyers’ (www.mebaroverseers.org, accessed 7-6-2018) suggests the following available choices –

  • winding-down and closing the firm;
  • recruiting a successor;
  • merger with another firm;
  • acquisition by a large firm; and
  • the sale of the firm.

Greene also suggests that the considerations firm should consider include the following –

  • creating value in the professional business;
  • a partnership structure that takes succession planning into account;
  • having a generational spread of partners;
  • developing a firm with leadership requirements and management responsibilities;
  • encouraging an entrepreneurial spirit;
  • transitioning clients;
  • implementing two-tiered partnership structure issue that addresses control issues; and
  • compensation issues.

John Niehoff in ‘Succession planning for law firms’ (http://bakertilly.com, accessed 7-6-2018) suggests that senior lawyers should be eager to:

  • ‘Train and develop the leadership skills of the next generation;
  • Delegate client relationships to additional partners;
  • Share and introduce their professional network with others;
  • Assist new partners with practice development activities and reputational building; and
  • Transition from indispensable to supportive as they near retirement.’

Do risks follow a practitioner after ceasing practice?

It must also be remembered that even after a practitioner has left practice, professional indemnity (PI) claims may arise out of matters dealt with by that practitioner while in practice. In that event, the AIIF policy will respond as long as the practitioner concerned was in possession of a Fidelity Fund Certificate (or obliged to apply for one) at the time that the cause of action arose. It will not matter that when the claim is made, the practitioner is no longer practicing. In the event of liability, the claim will be paid out of the limit of indemnity (amount of cover) available to the firm of which the practitioner was part. The applicable deductible (excess) payable will also be determined in this manner. Unlike most other PI policies, legal practitioners thus do not need to purchase run-off insurance cover in respect of the cover afforded under the AIIF policy.

Section 34(7)(c) of the Legal Practice Act 28 of 2014 provides that present and past shareholders and members of a practice conducted through a commercial juristic entity (in other words, an incorporated practice) will be jointly and several liable with the juristic entity for:

‘(i) the debts and liabilities of the commercial juristic entity as are or were contracted during their period of office; and

(ii) in respect of any theft committed during their period of office.’

Practitioners must thus plan accordingly for their lives after practice and what will happen to their practices after their departure.

Thomas Harban BA LLB (Wits) is the General Manager of the Attorneys Insurance Indemnity Fund NPC in Centurion.

This article was first published in De Rebus in 2018 (July) DR 23.

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