After years of success (by any number of measures), more than a few firm founders (or later generation leaders) confront succession. Some of them are simply ready to step back and enjoy life-turning their worries over to the next generation has great appeal. Others are driven by unanticipated developments-illness or family circumstances compel them to move away from the practice sooner than intended. Whatever the motivation, succession is a watershed event that requires careful planning, attention to detail, and comfort in the persons or firm that succeeds to what has been built.
When talk turns to law firm succession, there are some commonly identified considerations. Are the founders really willing to let go? Are their successors up to the task? Do the founders have confidence in their successors? Do the younger partners have the drive and passion to carry on the firm’s good work. Can the younger partners develop business like their mentors? Will the firm, in one form or another, survive?
Despite the variety of factors that arise in the succession analysis, eventually all of them funnel down to one issue: money. Simply put, for succession to work financial considerations must be understood, addressed and resolved. Without sound economics in place, execution of any succession plan will be difficult. But by focusing on the following five financial issues, a succession plan with good fundamentals is possible:
Understand and Address the Founders’ Financial Expectations. Unless a firm’s founders are uncommonly altruistic, their visions of succession will include the receipt of some form of financial benefit. Founders’ expectations can include the return of all contributed capital, payment for the value of their equity, and a little something for the firm’s goodwill. Some founders may also be thinking about continuing to work on a modified basis in return for “reasonable” compensation. Until their financial expectations are understood, met or modified, little progress is possible.
Understand and Address the Successors’ Financial Expectations. The flip side of the coin is the anointed successors’ financial expectations. Just like the founders, the successors will have financial expectations. As in the case of the founders, if the successors’ expectations can’t be met or modified, the successors’ interest in seeing the succession through may disappear. Lest indentured servitude become an option, the successors’ financial expectations must be understood and addressed.
Understand the Firm’s Financial Capacity to Assist and Regulate its Commitment. In most instances, any financial benefit or recovery to the founders will come, at least in part, from the firm. Founders with high financial expectations may find their appetite outsized when compared to the firm’s capacity. Burdening a firm so that the founders are satisfied almost always leaves the successors unsatisfied. Post succession, the firm becomes theirs but only if they want it. A proposal that burdens a firm may lose successor support. If so, a succession plan quickly may morph into a liquidation plan.
Understand that Succession Economics is a Zero-Sum Game. Like settled litigation, a hallmark of a good succession plan is that it leaves founders and successors a little bit happy and a little bit sad. Compromise is often required to find a middle ground between the founders’ and successors’ respective expectations. There is a limit to what founders, successors, and the firm can afford. A little recognition that succession is not a blank check can help greatly.
Align the Economics with a Realistic Time Horizon. As the financial expectations of the founders and successors gain clarity, the firm’s capacity to assist typically becomes crucial. The economics of any agreement of the parties usually requires a contribution by the firm that extends beyond one year. Finding the right period of time to deliver the disparate financial expectations is an essential component in most realistic succession plans. Too short a period can strain the firm. Too long a period can discourage the successors. The time horizon should be, as Goldilocks once said, “just right.”
Law firm succession involves important considerations. Despite the myriad of issues, financial considerations almost always prove to be the most important. As your firm addresses succession, is it focused on the economics?