Lawyers and Retirement Planning

Author: Simon Taylor - Lexpert (July / August 2006 at p. 107)

We live in interesting times. An entire generation of lawyers is moving inexorably towards retirement, but with few, if any, business models available to them to plan their succession. This is a particular issue for this generation of soon-to-be-retired lawyers. Previous generations had the comfort of younger lawyers, snapping at their heels, eager to take up the challenges of owning and running a practice. These younger lawyers were also available to pay out the retiring generation. As more and more statistics show, however, this cosy scenario is becoming less and less common, particularly for smaller firms, many of which were founded by the generation of partners who are now coming up for retirement.

And it is in the smaller firms that the financial consequences of failing to plan for succession will be felt most acutely. Large firms tend to have more formal business structures, whether for recruitment, accession to partnership or retirement. The business imperative drives larger firms to be more methodical and systematic in their operating procedures. Smaller firms, however, tend not to be so methodical; it is rare indeed to come across a formal retirement process in such firms.

Lawyers tend to be no different from the rest of the population when it comes to retirement. For many, the 60 – 65 age mark is seen to be the age to go. However, a number of issues arise from this. First, not all 60-ish lawyers want a complete cut off from what has been their professional life for the past 35 or so years. Secondly, the amount of money tied up in the firm varies widely from partnership to partnership. For some, the firm from which they are seeking to retire simply cannot afford to pay them out in full and in a timely manner. This is particularly serious when a number of partners wish to retire within a few years of each other. Thirdly, even if timing and finances can be worked out, few firms obtain the fullest leverage from the retiring generation.

So how can a soon-to-be-retired partner exit gracefully, with a full payout from the firm to which he or she has devoted their professional life? The first point is to start the preparations in time. Accept that it will take between three to five years to exit properly from a firm, and plan accordingly. If there are a number of partners who may wish to retire within a few years of each other, the succession plan may need to run for more than three to five years.

It is also necessary for the remaining partners and the retiring partners to agree on the financials. Structured payouts are pretty difficult to arrange when the parties cannot agree on the amounts. Once the amounts are agreed to (and the services of a financial professional may be required at this stage), timing of payouts comes next.

Timing will depend on a number of factors. Are the sums to be paid out profit shares, or capital? Does goodwill form part of the package? Again, a financial professional may be required to ensure the payouts are made in the most tax efficient manner.

There is, however, one particular feature of the retiring partner’s financial situation that the remaining partners often do not properly value. This comprises the experience, contacts and skill sets that will walk out of the door with the retiring partner unless properly captured by the partners who remain.

A useful starting point for the remaining partners is to analyse and record the skill sets and expertise of the retiring partner. He or she may well have 30 or more years as a real estate lawyer, or litigator, but there is much more to their skills sets than technical knowledge, no matter how impressive that may be. How good are they at negotiating? If they have been in the job for more than 30 years, they clearly will have had some practice at this. How good are they at mentoring and guiding young lawyers? If they have successfully taught a series of articling students and young lawyers, that skill has value to the remaining partners. What about their client getting skills? Have these been captured and passed on to future generations?

There is a deal to be done here. The retiring partner wants his or her money out of the practice, but also does not want a sudden and complete cut off from the firm. The remaining partners need someone to help train and guide the junior lawyers in the practice; something they clearly do not have the time to do properly. To pay the retiring partner for the value of his or her experience is a sensible investment for many firms; an investment that, if properly leveraged, will repay the remaining partners many times over.

Also to be factored into the equation is the retiring partner’s book of business. Clients and contacts should be passed on; value is attached not so much to the retiring partner’s address book, but instead to the successful transitioning of that book of business to the remaining partners.

None of this can be achieved overnight. A successful handing over of a busy practice will inevitable take many months, not weeks. With careful planning, however, a three-year exit plan is feasible. It is also important for the remaining partners to control the pace and delivery of the exit strategy. The assumption has been that both parties want the retiring partner to keep some involvement in the firm, albeit not as an owner. If this is not the case, then clearly the remaining partners will need to control this as well.