The law is an aging profession. Karen Mathis, when chair of the American Bar Association several years ago, focused her leadership year on developing a new awareness for the legal profession regarding the implications of the aging population. She often emphasized that 400,000 lawyers of the baby boom generation and older will likely retire by the year 2020, a number that would equal the entire membership of the ABA, the largest volunteer organization in the world.
Legal practices, of course, are not the only business sectors so affected—estimates are that more than seven million baby boom business owners will retire during the forthcoming 10 to 15 years. Studies by MassMutual, Marquette University, PricewaterhouseCoopers, and others show that 75 percent of these business owners have no idea how to financially plan for and handle this transition. This figure surely applies to lawyers in solo or small firm practices who typically are not known for their financial foresightedness.
Unlike other business owners, however, lawyers face significant, and actual, ethical consequences for failing to plan for their practice’s future. Failure to plan for how clients will be taken care of as a lawyer approaches retirement age can, according to various authorities, be construed as reckless disregard for client welfare—a true ethical violation. In a number of jurisdictions, if a practice must be wound up due to the death or incapacity of the lawyer, application must be made by a personal representative, guardian, or conservator. If there are cases or other matters not completely closed, the appropriate bar association can intervene, assume responsibility for action, and seek both reimbursement and compensation from the lawyer’s estate or assets. And in one Maine case, which I read several years ago, the court held that a deceased lawyer was liable for negligence because he had not made plans, before his death, to address statutory time constraints his clients would face after his death. Though his estate had been closed, his heirs were responsible for the damages.
Some people believe older lawyers are more careless, too prone to distractions that cause them to make errors leading to disciplinary action. A good example of this concern is Rule 1.16(a)(2) of the Minnesota Rules of Professional Conduct. The rule states that a lawyer shall not represent a client, or shall withdraw if representation has already commenced, if the lawyer’s physical or mental condition materially impairs the lawyer’s ability to represent the client. While not overtly based on age, such a provision aims to “protect” society from aging lawyers presumed to be unable to practice on their own. Other states have similar concerns, shown by the recent State Bar of California proposal requiring lawyers to have an “estate plan for the law practice” providing for succession in the event of a lawyer’s death or disability.
It is true that, especially in a solo practice, aging lawyers or lawyers focused on the dream of retirement may emotionally leave their clients long before they close their doors. This can result in less effective representation well before the lawyer retires, and it is a danger to guard against. Even lawyers not intent on retiring may be burdened by trying to continue a practice at “full speed” past the time that this is no longer physically possible. For the small firm, and especially the sole practitioner, selling a law practice to another qualified lawyer can alleviate a host of problems associated with aging. Not only do the buying and selling lawyers both benefit, but the clients also benefit when they are smoothly transitioned to receive competent representation from a qualified buyer. With proper planning, sale of a practice is a win-win proposition for all concerned.
Certainly not every law practice is saleable. Some practices are so small and so personal in nature that, without a continuing involvement of the first attorney, a second attorney might not succeed in keeping the clients. This, however, is a rarity. Even the smallest and most personal practices might be saleable for the right price and under the right terms. If the buying attorney were assured that he or she would receive that which was negotiated—a law practice of a certain volume of revenue or a certain client base that remains with the buying attorney for a designated period of time—a sale would be highly likely even for the smallest firm.
Some lawyers still believe they have little or nothing of value to sell, irrespective of the size or profitability of their practice. However, experience shows that even such lawyers would find selling their practices far preferable to just closing their doors. After investing years of hard work and financial resources in growing the practice and building goodwill, why forego the opportunity to reap the benefits of that investment? Even in the event of a lawyer’s death or disability, the lawyer’s family can benefit from the sale of the law practice.
In 1990, the ABA Model Rule of Professional Conduct 1.17, which affirms that an entire practice can be bought or sold, and modified the rule in 2002 to permit the sale of part of a practice. Since 1990, 47 states and the District of Columbia have followed with their own rules or opinions affirming the ethical viability of buying or selling a practice. Minnesota’s version requires explicitly that “a lawyer shall not sell or buy a law practice unless the seller sells the practice as an entirety.” Those states that follow the ABA rules are adapting their rule to follow the revised 1.17 and allow even an area of practice to be sold. Alabama, Louisiana, and Texas have no counterpart to either the 1990 (entire practice) or the 2002 (area of practice) version of Model Rule 1.17.
Obviously, the sale of a practice is not purely a business transaction. The Rules of Professional Conduct set forth very precise ethical requirements for transferring one’s interest in a law firm. Here are a few examples:
Fees charged to clients cannot be increased solely because a practice is sold—even if the purchaser is a larger firm that may charge higher rates than solo or small firm practitioners.
The selling attorney must give written notice to clients no less than 90 days before the transfer and advise them that they have the right to remove their files.
The selling attorney must also inform clients of their right to retain other counsel.
The selling attorney must close out all client trust accounts, and some jurisdictions require keeping trust account records for years.
One of the biggest ethical considerations concerns a partial practice sale. The 2002 revision to Rule 1.17 allows lawyers to sell a practice area and still remain in practice, although not in the area sold. For example, a probate and estate planning lawyer may sell the estate planning segment, but retain the probate segment. As noted, partial practice sale has been adopted by the states that follow the ABA model rules and is slowly being adopted by others as well.
But the change has not been adopted uniformly. For example, interpretations of at least one major Midwestern state’s version of this rule hold that the sale of the entire practice is required without allowing for a transition to occur. In other words, when an escrow for the sale closes after notice is given to clients in accord with the rule, the lawyer must stop practicing, period. That permits no transition whereby the selling lawyer can continue to practice under the aegis of the buying lawyer to facilitate the likelihood the existing clients will stay with the buying lawyer, assuring the value of the practice purchased. This seems contrary to what the ABA Commission on Ethics, as affirmed by the House of Delegates, intended.
There apparently has been little or no discussion in this state concerning the length of escrow; the focus on time involves the minimum notice of sale to be given to the clients. This would suggest the feasibility of an extended escrow—for example, one year or some other time constraint desired by the buyer and agreeable to the seller. If this is not possible, however, the parties may turn to form versus substance. Before the rule was changed to allow the sale of a law practice, lawyers would merge practices with a buy-sell agreement.
Such a situation creates partners who can enforce an agreement of separation (sale of a partner interest). And, with Rule 1.17 now allowing the sale of a practice area, it will be possible to sell part of the practice at an inflated price (to address the real worth of the full practice), the balance of the practice being transferred at a later time when the lawyer wants to terminate his or her work regimen entirely, but at a lower price. The combination of the two would represent the actual full purchase price for the firm.
There are numerous other issues to consider when selling a practice. One of the thorniest issues in selling a practice involves goodwill and how to value it. “Goodwill” in this sense is the reputation, client base, and client loyalty that the selling lawyer has created over the life of the practice.
Typically smaller firms understand the value of their client relationships and reputations and, when negotiating for the sale of a practice, discuss compensation for goodwill. However, buyers may argue that there is no goodwill and walk away from a transaction if the “seller” wants to be compensated for goodwill. The parties may not talk about goodwill; they may say there will be no deal if the seller insists on goodwill. Often, however, there is a “credit” for a factor that might be analogous to goodwill in terms of the cost of the capital buy-in. There will need to be some adjustment for this factor, irrespective of what it may be formally called.
Price is normally based on expected future earnings, but may also be affected by revenues that will be earned based on the buyer’s talents. The law practice may expand the depth of the buyer’s existing practice or increase the areas of practice of the buyer. These are reasons the buyer may be willing to pay more than otherwise would be the case.
Many buyers want to pay a percentage of revenues collected rather than a fixed sum for the practice. This enables the buyer to pay money only for revenue received. However, there may be ethical concerns about selling files.
It is generally preferable to sell (and buy) on a fixed, set sum. There can be bonuses and payment terms that take into account the buyer’s legitimate concerns. Purchasing attorneys may well prefer to take advantage of their own efforts to increase the revenue and reap the rewards, usually with an appropriate involvement of the selling attorney during a transition period.
An increasingly important issue is technology. Many small firm lawyers, facing financial pressure, resist buying or updating technology because they are overwhelmed by the high up-front expense. They may have software and hardware that is going on 10 years old, or may not be using case management software or document assembly software at all, or may not be backing up and storing client electronic files at all. Lawyers who do not use adequate technology may be committing malpractice per se, by failing to provide competent representation when measured as the standard of care in the local community. And such malpractice directly and negatively impacts goodwill.
Some lawyers may say that a practice sale is more bother than it is worth, and vow to stay in practice until they “die with their boots on.” That is extremely short-sighted. In effect they are throwing away the value of their practices, cheating their heirs, and making an unrecognized gift to strangers (the lawyers who pick up the deceased lawyer’s clients). Why would lawyers ignore perhaps the largest asset in their estate—their practice? Why throw away so much value that would otherwise go to family and heirs? The value is there. After investing years of hard work and financial resources in growing the practice, effective succession planning allows any lawyer to reap the benefits of that value and the years-long investment of time and effort that created it.
If the practice is not sold, the best succession alternative is grooming a successor brought on board as an associate or a lateral partner. Ideally this succession plan can be structured to transition over a period of up to five years as client responsibilities gradually transition to the new lawyer. During this period there can be ongoing conversations with key clients about the upcoming transition, an opportunity to forge new ties between the successor and both current clients and new prospects, and sufficient planning to ensure that the new lawyer is completely up to speed on what the client needs and expects. Preparing for this kind of smooth transition can ease problems over the issue of goodwill when the time comes to turn the practice over to a successor. Grooming and transitioning a successor from inside the firm can eliminate discord over the goodwill issue. However, because the successor lawyer usually believes he or she contributed to the value of the firm, the price the seller can expect will be less.
A final issue remains. This article has shown that both a practice sale and succession can be done. The ultimate question is, should they be done, and when? Certainly older lawyers who continue to apply the client service lessons presumably learned throughout their careers, and who keep up with evolving professional rules and trends through continuing legal education, should not automatically feel that reaching a particular age requires them to retire. However, lawyers are not immortal. At some point every lawyer must confront the issue of transitioning into life beyond the law. A planned sale or transition of a practice allows lawyers to enter a “second season,” spending the final years of their lives enjoying the fruits of their labor as they choose.
The focus here is on personal satisfaction, self-worth, and well-being. All successful people are focused and passionate about what they do. If they want to pursue different interests, it is not that they wish to have a life of leisure—it reflects a desire to pursue a different passion.
When developing a plan for your second season, ask yourself some questions. What do you want to do with your life once you leave practice? Do you want to quit working and retire, or start a new adventure? Can you achieve the same objective without leaving the practice of law?
Leaving your current practice by retiring is an emotional process. You must want to do so, and a successful transition will require all the traits that defined your success as a lawyer: motivation, acceptance of risk, resiliency, and commitment. Each person’s approach will be unique, and can change over time. But any such transition is above all an issue of planning. And there is only one time to start. Now.