Are small, midsize firms facing succession planning crisis?

Listen to this article

In Brief

• Many small and midsize law firms lack formal succession planning.
• Ethical duties require continuity of client representation.
• Poor planning can reduce firm value or derail potential sales.
• Early communication and written plans are critical for smooth transitions.

BOSTON — Partners at small and midsize firms, along with solos, need to do a better job at devising and implementing succession plans in order to maximize the rewards they reap for years of effort spent building their practices, law firm management consultants say.

Effective succession planning requires clear, objective terms for the rights and obligations of both departing partners and newly elevated junior attorneys, experts say. Moreover, successful outcomes hinge on years of clear communication between partners and those junior attorneys identified as potential equity partners. Those open lines of communications, experts say, are essential for avoiding unpleasant surprises when the time for transition rolls around.

According to J. Nathan Cole, co-founding partner of a nine-attorney firm with offices in Boston and Providence, Rhode Island, law firm leaders aren’t doing nearly enough in terms of succession planning.

“The succession problem at small and midsize firms is real, and it’s getting worse,” Cole says. “A lot of these firms were built around one or two rainmakers, and succession planning forces a conversation that can feel like planning for your own irrelevance. Nobody wants to have that conversation. So it just doesn’t happen until something forces it — a health scare, a sudden departure, a dispute among partners. By then, it’s almost always too late to do it well.”

Boston attorney and law firm consultant Jared D. Correia agrees. From what Correia sees, few lawyers at small firms give serious consideration to succession planning until they’re forced to.

“Ideally, you want to think about firm succession when you start the business,” Correia says. “No business is going to last forever. You need to be considering once it ends, how it ends, and can we put some guardrails around it so it’s not a debacle.”

According to Marblehead, Massachusetts, law firm consultant Margaret Burke, there’s often an absence of “realistic” succession planning on the part of firm leaders.

“You may have a senior attorney who has worked very hard to build a firm and has some expectations of what will happen when they decide to transition [out of the practice],” Burke says. “But their expectations aren’t always aligned with the people they view [as their likely successors]. It’s incredibly common.”

‘Random Tuesday events’

Watertown, Massachusetts, attorney Jeremy E. Poock runs a management consulting firm that specializes in designing and brokering law firm sales. Poock says there are a number of essential elements to effective succession planning, first and foremost being an ethical obligation to ensure the interests of the clients are always addressed.

“From a Rules of Professional Conduct standpoint, lawyers have an obligation to competently and zealously represent their clients,” he says. “Inherently in the Rules of Professional Conduct, there is a requirement for lawyers to make sure their clients aren’t going to be left in the proverbial lurch, that they will have successor counsel either within a law firm or by making arrangements with a successor law firm in the event of retirement, disability or death.”

Then there are the financial considerations.

“Lawyers are professionals, but we also run businesses,” Poock says. “For a lawyer or law firm that has developed value and good will in the marketplace, what does succession planning mean in terms of receiving consideration for what your law firm is worth? Succession planning can also mean how do we find either an internal successor or a third-party law firm that is prepared to pay consideration for the value of a lawyer’s law firm.”

Small firms often face a common problem when it comes time to sell, according to Correia.

“As service businesses, they’re really tied to one person’s reputation,” he says. “They’re not very valuable businesses to sell unless you do other stuff. And if you acquire a law firm, you run the risk of literally every client leaving. And then you have no asset.”

On the other hand, Correia says, some lawyers are too hasty in rejecting the idea of selling their firm.

“A lot of attorneys will just close it down and won’t extract any value from the business,” he says. “For a lot of people, just knowing there’s an option [to sell] gets them thinking about how they can increase the value of the business when they do transition out of it. And that can be helpful for their retirement, whether they’re selling the firm to a third party or whether they’re transferring it to somebody in-house.”

In terms of maximizing the marketability of a firm, Correia says keeping good records is a must.

While there may be a tendency to view succession planning as simply ensuring an orderly retirement or sale of a law firm, Poock says any good plan should account for the unexpected, which he labels those “Random Tuesday events.”

“What if an equity partner of the firm could on a random Tuesday no longer be able to practice?” Poock asks. “Who would take over the practice? What is the emergency planning? Who would have access to the IOLTA account? Who would have access to confidential and secure information in the cloud, on their server, in their emails?”

The lawyer’s ethical duty to act competently and zealously would include a duty to have an emergency plan in place to address the ongoing needs of clients whenever a crisis occurs, he says.

Talk to your people

Cole says succession planning should begin with a strategy for retaining valuable team members rather than reacting to impending departures.

“If you can’t build a place where good people want to come and — more importantly — choose to stay when they have other options, there is nothing to succeed,” he says. “You’re just managing a slow decline.”

It’s important to look beyond those members who fit the traditional definition of “rainmaker,” he adds.

“At my firm, we’ve thought carefully about how to define origination more broadly — to recognize not just who brought the work in, but who is building and sustaining the relationships that keep clients coming back,” he says. “When you do that, you create a real path to ownership for lawyers who might not be natural rainmakers but who are exceptional at the work and exceptional with clients. That changes the culture of the firm entirely.”

Poock recommends firms engage in what he calls “reality check” succession planning, which addresses the expectations of the “key employee” attorneys who do the actual work that the rainmakers bring in.

“These very sophisticated key employee lawyers over the years matured into senior associates [and] junior partners, whether with or without equity,” Poock says. “But at the end of the day, from the reality check, what we consistently see across the United States is most key employee lawyers do not aspire to purchase their boss’s law firm. They do not want to run a small business law firm — and they can’t afford to either.”

In his work as a broker of law firm sales, Poock says he’s seen succession planning crises occur when partners unexpectedly learn that those key employee lawyers who may have been viewed as internal successors actually have no interest in buying the firm.

Along those same lines, Burke says it’s important for small and midsize firms to have a clear succession plan in place that is documented and communicated to all parties.

“It can get very personal when someone decides to reduce their schedule or retire, and that’s what firms want to avoid,” Burke says.

Those conflicts can be avoided with a succession plan that clearly lays out the financial impact on the individual who is retiring as well as how their retirement might affect the attorneys taking over their work, she says.

Case study for success

Payal Salsburg says the eight-lawyer firm in Boston where she’s a partner recently completed a transition plan that was first implemented three years ago in response to the firm’s former co-founding partner, Marc C. Laredo, deciding to run for mayor of Newton.

“This was a multiyear plan that we looked at as a transition of the leadership, a transition of the business, and a transition of the client relationships,” Salsburg says. “We wanted to make sure that our clients knew that this firm was going to continue with new leadership but with the same values and the same or similar structure in terms of the services we would provide.”

Reassuring clients that the firm’s “way of lawyering” would continue was a key element of the transition plan, she notes.

“That was particularly important for our small business clients,” Payal says. “Mark Laredo’s book of business included a lot of small businesses.”

As part of the plan, upcoming junior partners such as herself and senior associates were involved in the firm’s cases so that they were all known to clients by name.

“When the transition occurred three years later, toward the end of the planning period, it was very seamless,” she says. “The more senior [attorneys] went to do other things, like Marc Laredo went on to be Newton’s mayor.”

Meanwhile, co-founding partner Mark D. Smith stepped back from an active administrative role with the firm and Matthew A. Kane succeeded Laredo as managing partner.

Salsburg says she takes several lessons from her firm’s successful transition, including “starting early and not keeping your head in the sand.”

“The wave of folks who have been running small and midsized firms in the Boston area are boomers,” she says. “They’re reaching retirement age. It’s not a crisis right now, but as folks retire over the next 10 years, the planning needs to start as to how you are going to keep the firm and the work going, so start early.”

It’s important to have a written transition plan as to how goals such as replacing retiring partners will be accomplished, she adds.

“If it’s going to be done with junior partners who are coming up through the firm, you may need to start hiring,” Salsburg says.

And it’s critical to start having conversations with junior partners and senior associates, “folding” them into the plan so that they can be prepared to take on what is needed, Payal advises.

“Attorneys of a younger generation may not be interested in taking on the business of law in a small-firm setting,” she says. “So then you may need to think about whether you’re going to bring in junior partners as laterals from other firms, or maybe start merging with other small firms so that the practice and the business can continue.”