Succession plans are designed as either a planned exit strategy or a business strategy to ensure that a business survives and prospers when the current leader(s) is/are no longer in charge due to retirement, untimely death, sudden incapacity, or another unforeseen circumstance.

To develop a successful plan, it is essential to understand the succession process, avoid the potential pitfalls, and explore all transition options in order to meet the primary objectives of the firm owner(s).

Understanding the process

The best transitions happen when new leaders are well-mentored and work alongside their predecessors, not when founding and senior partners are looking toward retirement. As such, understanding the planning process is essential in developing a successful plan.

• Understand and acknowledge that a formal plan is necessary
• Identify the key players in the business, especially those being trained for the future
• Explore transition options and appropriate ownership transfer techniques
• Understand and address ownership and management succession issues
• Implement and communicate the plan to all parties

Exploring transition options

It is essential to develop a plan that meets the unique needs of the firm. Having a clear understanding of the following options and how they may work for your business will enhance the possibility of a successful transition. Transition options include:

• Internal transition
• Practice continuation through a lateral
• Selling or merging the firm or practice

Internal transition

Typically, law firms that have succession/exit plans in place have executed partnership agreements that govern how the retirement or withdrawal of a partner is handled.

The updating of a firm’s partnership, compensation, and retirement agreements is another important step in preparing for succession. It is invaluable to incentivize partners to give longer notice of their plan to retire to allow more time to prepare an effective succession plan. By providing financial incentives, firms will benefit from a timely and planned succession.

A firm first mentality is key to effective transitioning and succession planning. The development or creation of a management committee is vital to succession planning for a firm:

• Formation of a committee forces a more open discussion about the succession plans for the firm and the development and grooming of future firm leaders.
• Select younger partners for the committee who demonstrate a high level of interest in the governance of the firm.
• Participation provides younger partners with the time they need to learn leadership skills and understand the business of the law firm.

Once a management committee is fully developed, their first order of business should be:

• Imposing the message that all clients are law firm clients, not clients of individual partners
• Reinforcing the overall culture of the firm
• Encouraging senior partners to transition portions of work to younger partners

It is crucial to a firm’s financial health to make clients aware that despite the retirement of their partners, business will remain as usual. The practice of having retiring partners begin to pass off portions of their clients work to younger partners will help build continued trust with clients and maintain a positive relationship following the transition.

Laterals

Laterals are becoming an increasingly more common route when it comes to law firm succession plans. If considering a lateral for firm succession, it is imperative to consider:

• The overall needs of your firm
• The financials of the targeted lateral
• Who you are hiring
• What your talent’s contractual obligations are
• The cost of technology and services
• How the firm will integrate into your culture
• A memorandum of understanding

Mergers

According to Reuters, there were 46 completed law firm mergers in 2022 and it is believed that this trend will continue through 2023. When planning for a merger the firm must:

• Identify merger candidates
• Perform due diligence
• Coordinate intake
• Be aware of the complex tax implications that come with a merger/acquisition

If you have questions or would like to learn more about law firm profitability, please contact Citrin Cooperman’s Professional Services Industry Practice or John Fitzgerald at jfitzgerald@citrincooperman.