With an aging population of attorneys it seems that there are more and more articles on selling a law practice that are beginning to emerge. The first inquiry is whether you can sell your practice and what will you need to do to satisfy your obligations on the Rules of Professional Responsibility in your jurisdiction and opinions interpreting those rules. The ABA Model Rule 1.17 is a good place to go to get started quoted in part below;
A lawyer or a law firm may sell or purchase a law practice, or an area of law practice, including good will, if the following conditions are satisfied:
. . . ((c) The seller gives written notice to each of the seller’s clients regarding:(1) the proposed sale;(2) the client’s right to retain other counsel or to take possession of the file; and(3) the fact that the client’s consent to the transfer of the client’s files will be presumed if the client does not take any action or does not otherwise object within ninety (90) days of receipt of the notice.If a client cannot be given notice, the representation of that client may be transferred to the purchaser only upon entry of an order so authorizing by a court having jurisdiction. The seller may disclose to the court in camera information relating to the representation only to the extent necessary to obtain an order authorizing the transfer of a file.
(d) The fees charged clients shall not be increased by reason of the sale.
For a purchaser, you will need to consider what the good will is worth. For any given practice putting a dollar value to the value of any going concern often depends on ongoing participation in the business for some time after the sale. Under the Model Rule you are required to send notice to your clients that you are selling your practice, does that mean that a partial equity sale will require the same notice? What about giving an equity position to a new associate while the senior partner continues to work in the firm or leave his or her name on the moniker and continues to take fewer and fewer clients to the point that you are no longer active in the firm?
What I see as a growing trend is not so much a “clean sale” as much as transitioning out of the work environment slowly and gradually for solo practitioners. Giving notice to your clients that you will be selling out to someone else is a prescription for diminishing any goodwill that has been been built into a solo practice. In the practice of law the relationship defines the value of representation, not the firm name in most cases. This is particularly true when you are talking about a solo practice or small firm environment.
As my students interview established solos, I can tell you that the vast majority of them say that they rely upon “word of mouth” as their marketing strategy. What happens when the principal is changed to a totally different person with the original owner no longer in the picture?
For that reason, you need to consider a plan that will preserve the good will that you created by staying involved as a partner with shifting equity positions which are less than 50% ownership and when that relationship changes, as it will over time, you will need to review the rules in place for your jurisdiction to determine the type of notice required for your clients and how that shift in ownership is completed so that you can retire from practice entirely.
As a workable strategy, for the sale of a solo practice, I would highly recommend giving consideration to a long range plan of 5 years or more to make that transition complete while you stay on. That means that you need to start your planning early to make your selection of a person appropriate to take on an equity position. That also means a “working interview” in my opinion. Bring someone in who you have tested and mentored over time to determine if they will thrive and continue to grow the business rather than run it into the ground. That also means that you will need to invest in him or her and compensate them so that they will not want to leave your firm until you are ready to give them control over time.
Don’t judge each day by the harvest you reap, but by the seeds you plant. – Robert Louis Stevenson
We all know that many business fail. The same can be true of a law practice. You need to vet your new associate, not just for how many billable hours they can generate, but even more important, you need to determine if they have the Six Characteristics identified in my recently published blog on that topic. For sustainable and predictable success, you need more than a student who showed prowess in academics. They need to be well rounded and capable of generating revenue over the long haul. They need to have good business sense as well as being productive and ethical.
Follow my blog for tips and tricks on exit strategies that you might employ and techniques to get the most value from your transition plan to retirement.