Part One: When and What to Plan
Earlier this year, I had a call with a new prospective client, a business owner who needed to finalize a buy-sell agreement with his business partner. They had started the agreement more than a year before, but it was never finished. When I asked what lead to the delay, he told me their former attorney had died but no one told them until many months after he had passed. They were in the dark for almost a year.
Unfortunately, this is not the first time I had heard about a client being left in the lurch because their attorney was suddenly unavailable. A few years ago, I worked on the sale of a solo practitioner’s firm after he had passed away, aiding his family and a court-appointed conservator in transferring the firm and the client files to another attorney. Many local bar associations have become increasingly concerned with the aging of solo attorneys and their failure to prepare for leaving practice. I’ve taught a few seminars on this exact topic. Now that we are in the midst of the COVID-19 pandemic, it is increasingly crucial that solo and small firms address their own succession planning.
When Should You Start Planning?
It is never too soon to establish a succession plan for your firm. Ideally, you should have started planning for your successor when you first set up your practice – and not with retirement in mind. Solo attorneys and small firms need to prepare for life’s unexpected emergencies. A medical emergency could leave you out of the office for an extended period of time. Think about how bad your email inbox is when you are on vacation for a week; now, imagine that for a month while you are recovering from surgery. Not fun. As a solo practitioner, you should build into your engagement letters provisions for coverage when you are unable to work due to an emergency. This should include identifying another attorney who can cover for you if you are out of the office. Having an arrangement in place in advance gives your clients a direction in the event that something prevents you from fulfilling the representation relationship. Much like in childhood, the buddy system works!
Solo and small firm attorneys should set up disability insurance as well. Not working means no income, and your personal savings will only go so far. If you have staff, you will need to continue to pay them even if you are not earning.
As with personal estate planning, business succession planning should be done in advance of retirement, disability, or death. Solo attorneys should identify potential successors. A mentoring relationship could lead to your mentee succeeding you in your firm ownership. Small firms should look for the next generation of firm leadership when making their hiring decisions. Integrate associates into the firm: teach them about the business side of the practice, encourage their engagement with running the practice. Many small firms fail to provide incentives to young attorneys to keep them involved – you do not want to invest your efforts in grooming a successor, only to have them leave before you retire.
The Structure of the Sale
The actual sale of your practice could take many different forms. A few key questions will help you determine what structure works best for you and your practice. Do your clients pay you hourly, a flat fee, or on a contingency? Are you selling the company or just the assets of the firm? Are you slowly integrating a successor through vesting interests, or do you expect to do a total transfer to a new owner? Do you expect to receive residuals long after you stop practicing law?
Once you have a sense as to how you go about selling your practice, you should have a business valuation performed by a third party. The adage of “the sales price is 2.5 times last year’s sales” does not hold true for professional practices. A professional valuation expert can give you a fair market value for the sale of the company or its assets. Assets are divided into two categories: tangible (your office equipment, furniture, software, records, etc.) and intangible (your goodwill and intellectual property, including the firm’s name and marketing presence). The tax treatment of the two is very different.
You will also need to consider the transfer or assignment of your firm’s business contracts, including real property leases, office equipment leases, and your employee contracts. Some contracts may require you to pay out the full amount of the contract rather than let you assign the responsibilities to another party. Keep this in mind as you renew agreements with terms that outlive your intended ownership of the practice.
Even if your employees are “at-will,” you will need to take into consideration whether they will be employed under your successor, and how that will impact their wages/salary, any employee benefit plans, or bonuses. These can be especially tricky to determine if you are transferring your business mid-way through the year.
You will need to consider whether your software programs (including client management software, billing systems, or legal research programs) are needed or wanted by a successor. How will you transfer data to a new owner? Your IT person may be able to assist; if you are your own IT person, then you will need to determine your options. As with other contracts, if you are planning to sell your firm soon, address assignment provisions when negotiating for new or renewed contracts.
Your firm’s billing practices must be addressed in the transfer of the firm. Will you sell your accounts receivable to a successor, or keep the rights yourself? Many personal injury firms provide referral fees to colleagues who do not have the same focus in their own practice (i.e. a medical malpractice client is referred to appropriate counsel by a colleague who focuses on car accidents and gets a percentage of the ultimate award).
The transfer of client files is subject to the Maryland Rules of Professional Conduct. Clients have to be notified of the intended sale, and given the option to have their files moved elsewhere. How will you transfer files? Are your files on paper or digital? What risk is there to the buyer that your clients will not continue with the new firm?
Each practice is unique, and no purchase is identical. With good planning in advance, you can anticipate the challenges you may face in transferring your firm and identify your goals for retirement. Stay tuned for Part Two for information about the challenges that arise when a Maryland attorney without good succession planning is no longer able to practice law.
ABOUT KELCIE LONGAKER
Ms. Longaker’s primary areas of concentration include general corporate advising, administrative hearings, and state and federal appellate litigation. She advises start-ups and small businesses during all stages of the business’s life-cycle. She regularly drafts organizational documents, reviews commercial leases, negotiates franchising agreements, and assists with the sale of corporate entities. Ms. Longaker represents many businesses that require liquor licenses, including restaurants, package goods stores, agricultural producers, and manufacturers. She represents clients before county agencies in their applications for new licenses, transfers of existing licenses, or defense of challenged licenses. She also handles land use and zoning matters, real property transactions, and homeowners’ association matters.
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