How Limited are you?

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Posted by Viv Williams, chief executive of Legal Futures Associate the 360 Legal Group

Williams: using the limited company structure attracts younger lawyers to take positions as directors, gaining their “equity” by receiving shares based on their performance

Dealing successfully with succession is proving a difficult challenge for many traditional legal practices. The average age of (predominantly male) equity partners is now 59, yet most have failed to plan for their exit and succession. As a result, many firms now face an uncertain future with little or no value being placed on the sale prices of their practices and no younger partners prepared to invest in equity to enable partners’ retirement.

Currently many practices have an ageing number of partners in their 50s, 60s and even 70s for whom retirement or a reduction in hours and the pursuit of other interests have become virtually impossible.

Therefore law firms must focus on strategies that preserve the business those lawyers are responsible for and capture and transfer their skills, experience and market presence. The key to holding client business is, and will continue, to be found in individual relationships. How a firm maintains those client relationships as key senior lawyers retire will be critical.

The need for alternative exit strategies

Traditionally, young aspiring lawyers would jump at the chance to purchase equity in a practice, therefore providing the exit strategy for senior partners. But the growing number of women entering law, which has recently been as high as 70%, and their understandable unwillingness to put their families’ financial security at risk is contributing to the overall trend of younger people being reluctant to raise finance to purchase equity in such uncertain times. This is not particularly surprising when many law firms are financially insecure, with large unsecured borrowings being serviced by reducing turnover.

Seeking an alternative exit route, numerous partnerships – especially those with one to three partners – are now looking at selling or merging. The question now is what value are those partners expecting to receive?

The predictions that some 3,000 firms could well disappear from our high streets with the arrival of the Legal Services Act seems more a reality than a myth. Thus we can expect considerably more sellers than buyers and a downward trend in values.

In fact, many traditional law firms have maintained little or no goodwill in their practices, with the key services based on transactional relationships with their clients and customers.

Innovative solutions

Forward-thinking law firms are finding innovative solutions to these problems.

Over 20% of the legal sector has formed limited companies, so the practice can be purchased from the original equity partners. This attracts younger lawyers to take positions as directors, gaining their “equity” by receiving shares based on their performance. This solution could allow for some practices to place a value on goodwill and enables partners to effectively buy their own firm.

There are currently significant tax advantages in becoming a limited company and you should explore these savings with your accountant (they should have advised you in any case – but have they?).

Denis Stevenson, managing director of Rowlinsons Solicitors, faced a dilemma a few years ago following the death of his partner. With no succession planning in place and his partner’s wife subsequently holding 50% of the equity, there seemed no obvious solution.

With help and support, Denis has completely changed his outlook. By creating a strategic plan for the next two to five years, he realised there was a way to rebuild his practice. A new limited company was formed and the former partnership was purchased over the next five years, subject to profitability.

As a result, younger “potential partners” were encouraged to become directors in the new business and therefore effectively purchased the old practice. This approach, plus the purchase of new offices, re-branding and a new marketing strategy, have given Denis and Rowlinsons a new lease of life.

Ensuring smooth handover

This model will work for partners in traditional practices who are prepared to raise their profile and develop new products and services. Obviously careful planning and structuring is essential, but it is a solution for some firms wishing to ensure their succession is secured.

Whichever model you choose, it will be imperative to encourage senior partners to become mentors, introducing other team members to their clients and creating opportunities for new relationships to be established. They should do so because they understand that it is in the firm’s best interests and necessary for the practice to grow.

Be prepared to deal with less generous partners who refuse to take the necessary lead to ensure smooth handover. Or others who are determined to hold the client relationship close, allowing only the most superficial contact with others in the firm.

It is never too late to plan for succession and the adoption of more innovative ideas can go some way to securing your future. The Legal Services Act will not produce the “big bang” that some pundits are predicting. Life after 6 October will be much the same as it was on 5 October and the legal profession will adopt change relatively slowly. However, there will be increasing pressure on those firms who do not have a strategy to ensure their exit and succession.

Your options are Limited.

Viv Williams is chief executive of 360 Legal Group, which provides a dedicated business consultancy service to UK lawyers and which has some 700 law firms as members. Viv is also a leading consultant to law firms on the topics of management, practice development, marketing and business strategy.