News & Views

Law firm succession - Faithfuls or Traitors

I’ve never been one for celebrity gameshows – Pointless Celebrities about sums them up for me - but I must confess to being slightly hooked on The Celebrity Traitors. I think the round-table finger-pointing has become a form of regression therapy for me, triggering memories of partners’ meetings from my distant past. Thankfully, in my working life, the Faithfuls have always far outnumbered the Traitors.

Unfortunately, some law firms resort to round-table finger-pointing when they talk about succession planning as it seems to stir up emotions stronger even than profit sharing and bonuses. For this reason, when working on client projects, we prefer the term ‘success planning’, as the process should really be about achieving a successful outcome for those wanting to step back, for those building for their future, for the stability of the firm, and for the clients whose trust has been lent to the firm.

A common mistake in succession planning is failing to appreciate the distinction between leadership succession planning, management succession planning, and ownership succession planning. 

These three issues too often get conflated, and this seems to be where many of the problems arise and why succession planning so often fails.

I once wrote a piece on why people vote for law firm leaders. Seven years on and a pandemic, Brexit, and cost-of-living crisis later, I think I would write the same things today. In leadership succession planning, nothing has changed. Good law firm leaders are like belts that hold up your legwear - remove them at your peril.

Management succession planning is a different ball-game. Management is a learned skill, and many law firms don’t spend enough time training up aspiring professionals to take on the vital regulatory and business roles that every firm needs. Not only is this sensible risk mitigation, but it will also help to identify who is up for, and indeed up to, the challenge and, perhaps more importantly, show the upcoming generation just how much professional satisfaction and personal enjoyment can be gained from management roles.

Ownership succession planning is different ball-game again, and so specific to the circumstances of each firm that it is hard to generalise. There are more models for ownership succession now than there have ever been. To achieve the right outcome, the best thing your ownership group can do is sit down with professional advisers with sector experience and who will listen for as long as it takes to understand what you really, really, really want. Once you know that, the rest is comparatively easy.

Ownership succession planning draws from a wide range of traditional options, including such classics as:

• The orderly wind-down – take on less and less work, slowly make people redundant and target a solvent liquidation with professional indemnity insurance run-off cover. Hardly succession planning but the only viable option for some law firm owners.
• The disorderly wind-down – similar to the orderly wind-down but without the proper preparation and more common than you might think.
• The gardener’s delight – a fireside chat, a Moonpig card, prosecco in the boardroom, and an RHS subscription.
• The trade sale or merger – reserved for those with something valuable - in the eyes of a competitor firm or market consolidator that is.
• The management buyout (MBO) – like a trade sale but with the Faithfuls – one hopes.
• The private equity investment – a means of de-risking a little and but mainly about strapping yourself in for the ride of your life.
• The employee ownership trust – selling all or part of the firm to a trust for the benefit of the firm’s employees and a way of rewarding team effort – at least when things are going well.
• The dividend plan – converting to an alternative business structure (ABS) allowing non-lawyer ownership, handing over the management, surrendering your practising certificate, and holding your breath that the dividends cover the cruise tips.

The best option for you will depend on factors such as market sentiment, your timescale, your personal financial needs, and the value of your firm. Getting the right accounting, tax, legal and wealth management advice around you and investing time away from the day job to think clearly will go a long way towards narrowing the field.

Nigel Wallis