Law Firm Succession Planning: A Guide

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law firm succession planning

Law firm succession planning is fundamental to the success of your legal practice—regardless of which stage of your law career you’re at. Yet a 2018 Thomson Reuters survey showed that only 37% of law firms had (or was creating) an official succession plan. 

It can be uncomfortable to think about the situations where a law firm exit strategy or succession plan would be necessary. However, the unexpected can happen at any time. A succession plan gives you peace of mind and ensures your clients are taken care of, should anything happen to you. By planning, you’ll know that your clients will not be left in crisis regarding their legal needs.  

We understand that solo and small law firms face unique challenges when creating a succession plan. That’s why we’ve put together a guide on how to develop a robust law firm succession plan. We’ve even kept your professional ethical obligations in mind. You’ll also find a law firm transition checklist so you can put these tips into action right away.  

What is law firm succession planning?

Law firm succession planning for solo and small law firms is a business strategy that involves developing a formal process to transition the legal practice to another attorney or law firm, or to close. This is done to protect you, your firm, and your clients.

Why you should create a law firm succession plan

Other than your ethical obligations outlined by the ABA (we’ll delve into that more below), a law firm and succession plan are must-haves for every firm because:

1. Law firm succession planning is essential for expected and unexpected events. 

Many attorneys tend to assume they only need a succession plan when they’re considering retirement. But you also need to plan for unexpected crises like an urgent change in leadership due to a family emergency, sudden illness, disability, or death. Although this is hard to think about, you don’t want to leave your employees and clients wondering what to do when an attorney at your firm dies. 

2. You don’t want to leave your clients and business in a lurch.

The aforementioned situations are certainly hard to think about. But law firm succession planning is not only for you—it’s for your clients and anyone who works for and with your firm. Solo and small firm lawyers risk their clients and business if they don’t have a succession plan in place. Solo lawyers also typically don’t have a fiduciary who will be responsible for managing their firm should anything happen to them. You don’t want your employees and clients scrambling to deal with angry clients and impatient creditors while struggling to get essential documents together when the unexpected happens. 

3. Law firm succession planning is an integral part of your law firm’s business strategy. 

The key to a successful business is not only measured in its profits, but also the ability to last. A succession plan helps add value to your business because it prevents your business from being disrupted by conflict and uncertainty. It also helps determine which clients need to be transitioned in the coming years and how your firm can continue serving them, mitigating potential profit loss from these client relationships. 

4. Insurers look for a formal succession plan when evaluating your law firm’s risk. 

To insurers evaluating your business risk, not having a proper succession plan and being more focused on origination credits and billings signal a higher risk. Be careful if your firm has attorneys with one foot out the door—like retired attorneys who practice part-time—as it also indicates a higher risk to insurers. 

5. Strong law firm succession planning sets you up to enjoy your retirement. 

law firm succession planning for retirement

Don’t let your years of hard work go to waste. A well thought out law firm succession plan can give you peace of mind now while maximizing your financial rewards during your retirement years. Having a law firm exit strategy also gives you peace of mind should anything happen to you. Your law firm is not only a business or part of your career—it is also your legacy.

Joshua Lenon, Clio’s Lawyer in Residence also recommends planning for succession now in light of the economic downturn. This is especially if you’re looking to pick a successor (more on this below). “This is the best time to hire,” Joshua shares, “These attorneys may not be in the legal industry at a later date. If you can hire a junior associate today, you can train your future successor to eventually and seamlessly take over the leadership role.”

How to plan a law firm succession plan

Although no one plans to fall sick or suddenly lose the ability to work, it is more important to have a succession plan in place to ensure your firm’s ongoing success. Joan M. Burda, an attorney in Lakewood, Ohio outlines the “keys to succession planning” which we’ll expand on below. The following paragraphs also outline how you can plan for a law firm succession plan so you, your firm, and clients aren’t caught in a difficult situation. 

Keep your ethical obligations in mind

Surprisingly, not all U.S. states require lawyers to have a succession plan. You can check this document to see what rules your state has for lawyer succession plans. 

However, we highly recommend that every attorney at your firm develop a succession plan. Again, the exact rules defer from state to state, but in general, your law firm succession plan should:

  • Contain written instructions on how and where client information is stored. This includes bank and other account details. 
  • Include other critical information regarding your law firm. This includes the disposition of closed files, information about law office equipment, and payment of current liabilities. 
  • Contract details with vendors. Think of all the companies your law firm works with or employs, like maintenance work, cleaning, office supplies, etc. 
  • How to access technology and online accounts. This includes computers, voicemail, practice management software, and other tech tools. 
  • Detail how the successor will be compensated. Assuming you won’t be closing down your law firm should you not be able to work.

Create a law firm transition checklist

Your transition checklist should include:

All your clients, their contact info, case details, etc. 

This includes the type of case, status, type of fee agreement, the current status of fees, and which files have documents in them. Practice management software like Clio can provide you with all this information quickly by running a report from within the software. You can then reference these reports on your transition checklist document.

All your passwords and logins for electronic devices and online accounts

Tools like Lastpass or 1Password can help you securely store all your passwords and login details. This includes access to your digital assets like your law firm’s website, email, and social media accounts. The person responsible for executing your succession plan can access this information with just one master password. This reduces the need for a large spreadsheet containing sensitive login information. 

All your law firm’s financial information 

This includes business and IOLTA bank accounts and credit cards. Be sure to make your credit cards payable on death or transfer on death. Your bank will need to authorize someone to be able to manage or transfer funds on your behalf. 

Malpractice insurance information 

This is essential for your firm to continue running with peace of mind. 

Leases and vendor information 

Think about all the external vendors you use, including software and tech tools. 

Access to any additional factors needed to log into digital accounts

Include the login information. If you’ve enabled two-factor or multi-factor authentication (2FA or MFA; we highly recommend that you do, if you haven’t), don’t forget to include access information for that. Depending on how you’ve set up 2FA or MFA, you’ll need to record access information to your personal device or email, and download backup or account recovery codes. Include information on who’s running these digital assets. 

Appoint a triage lawyer

A triage lawyer is someone you will authorize to close, sell, or transfer your legal practice. The American Bar Association Center for Professional Responsibility Standing Committee on Client Protection outlines the caretaker rules for each state. 

You will need to create a detailed, written agreement defining the relationship and duties of this triage lawyer. Be sure to highlight if the attorney will represent your interest or your clients’, and consider potential conflicts of interest. 

In the agreement, authorize the lawyer in writing to reach out to clients for instructions on transferring client files. You should also draft letters for contacting clients and getting authorization to release their files. Remember to notify your malpractice insurance carrier to let them know you’re doing this.

Make sure your IOLTA account is accessible

The precise rules for preparing your IOLTA account for a potential succession of your practice differ from state to state. If your state does not have any rules for this, it is good practice to prepare your IOLTA account for such a situation anyway. 

To do this, you’ll want to execute bank forms to authorize another signatory who is allowed to access the account. This is because an order from a bar disciplinary committee is usually not enough to grant access. Remember to check state disciplinary rules regarding adding a second signatory.

Gather key office information in one place

How this list differs from your law firm’s transition checklist: This list contains details about the day-to-day of your law practice. When transitioning or closing your practice, all external vendors and partners should be informed. Let them know if you’re transferring the point of contact to someone else or if you’re ending the service. If possible, give these vendors ample notice before transitioning or terminating the service. 

Your business records list should include:

  • All leases and contracts for your office space, office equipment and utilities, office services, software providers, etc..
  • Policies for your business insurance
  • Custodial services, including how to end the service
  • Staff names and contact information, including who knows the practice best and who is authorized to access encrypted or password protected files. 
  • Signature cards for bank accounts. This may require you to go to the bank and take a picture of them. 

Make sure your estate planning documents are up-to-date

You will need to update your will and General Durable Power of Attorney (GPOA) and include information about your law firm’s succession plan. You will also need to draft instructions for your family and/or estate executor about the triage attorney’s duties. Don’t forget to include the triage attorney’s contact information. 

Since your family will likely be the ones administering your estate, let a trusted family member (or your estate executor) know exactly where your important documents are and how to access them. This includes your will, power of attorney (POA), bank information, safe deposit boxes, files and other assets.

Store your sensitive information securely

law firm software security

Make sure you have a secure location to store the important information above. This is all the information someone needs to run your firm if necessary. So, you need to take extra care to ensure it doesn’t fall into the wrong hands. 

You could choose to store your important documents in a safety deposit box at the bank, a password-protected external hard drive, a safe box at home, etc. You should also give a trusted family member (and/or estate executor) access to your chosen storage location. 

Alternatively, you could choose to store your important documents with a trusted attorney—a locum tenens. This should be a lawyer that you trust with your clients as well. If you choose to store your information with another law firm, we recommend picking a firm with a security level that’s similar to your law firm or better. 

Choose a succession strategy based on your goals

Before you decide your firm’s course of action in your succession plan, you need to be clear on your goals in two scenarios: 

  • When you retire. What does your ideal retirement look like? What kind of lifestyle would you like to have? How about the kind of legacy you want to leave behind through your law firm? How active would you like to be in your law firm’s affairs should you decide to transfer it to a successor?
  • If you are suddenly unable to work due to an emergency. All emergencies—whether health, family, or something else—are stressful and emotional times for your loved ones. By preparing to make a sudden and unexpected transition as smooth as possible for your family, you can take part of the burden off their shoulders and avoid added stress.

In either scenario, it’s important to be clear on what goals you want your succession plan to achieve. Do you want a retirement nest egg? Do you want to reduce your workload later in your career? Something else? Once you have your goals, you can decide how you would like to transition your firm after you are no longer leading them. Your options include:

1. Closing the firm. 

This may seem like the easier option, as you would not need to invest time and money into picking and training another attorney to take over your law firm. However, you will not gain much (if any) financially by closing the firm you’ve sent years building. If you choose to close your firm, you have an ethical obligation to put your clients in the best position possible to find another attorney. You will need to provide your clients with all the relevant case files and data, and even maintain them as necessary after handing your clients to another attorney. 

2. Creating a partnership with another solo or small firm. 

selling your law firm

This is a great option as your chosen partner attorney or firm can help you gradually transition out of your practice. 

Patrick A. Palace, the owner of Palace Law and former President of the Washington State Bar Association (WSBA), understands the importance of finding the right partnership to help you transition out of your practice. Patrick has led his firm to merge with 3 firms in the last year. He shares, “Through these mergers, Palace Law has helped provide the owners of these firms with a warm and friendly transition where their clients are taken good care of, and the lawyers are at a comfortable place to end their practice knowing their legacy is protected.”

You may also choose to have an “Of Counsel” arrangement. This means you will continue to be involved with clients during your law practice’s transition period, which may take a few years. The extent and length of your involvement depends on your specific agreement.

3. Picking a successor. 

Your chosen attorney will need to be trained to take over your law firm, which can take five to ten years. This will be the person you will entrust your clients’ legal matters with. You can offer this lawyer a partnership concerning your exit strategy, and arrange appropriate compensation for yourself. 

4. Selling your legal practice. 

To sell your law firm, you’ll need to value it based on what you’re selling and what someone would want to pay. If you’d like to sell your law firm, it’s a good idea to get a professional to value your firm properly to maximize your potential gains. Also, note the ABA’s rules for the sale of law practice.

Give clients time to transition 

In many cases, clients pick the lawyer, not the law firm. Because of this, if you’re retiring or otherwise in a position where you’re choosing to wind down your legal career, it’s absolutely necessary to give clients as much time as possible to get used to a new arrangement, whatever it may be. Without ample transition time, clients will be less likely to get frustrated and look for another lawyer at another firm. By having a good transition strategy for your clients, the relationship between your clients and firm will be solidified. This should take no less than three years. We recommend starting with a small number of clients first, so you can learn what’s working and what’s not.

Develop a compensation structure 

Your law firm is not only a place you’ve worked at for years. It’s part of your legacy and you should create a compensation structure for yourself that reflects the years of hard work you’ve put into it. What this looks like is subjective to each lawyer and depends on the agreement between you and your future partner(s) or successor. Make sure you’re also valuing your law firm properly so you receive a fair price if you’re selling your practice.

If you decide to work occasionally or act as a consultant, you may choose to agree on a payment structure on a per-hour or flat fee basis. If you’ve decided to hand off your clients to another lawyer completely, you may still need to maintain your clients’ files and data. In this case, you will need to be compensated for your time appropriately. 

Use legal technology to provide peace of mind

Many of the steps above are time-consuming tasks. Legal technology can help you save time and provide peace of mind. To Patrick, “Technology and succession planning are interlinked and critical. With succession planning, when another lawyer or firm takes over your firm, you have different systems for everything in the business. Those two systems have to come together in a way that is seamless to protect the clients.” 

As mentioned in the section above on creating a law firm transition checklist, legal practice management software can run a report of all your clients and their contact information, type of case, the status of those cases, type of fee agreement, the current status of fees, and more. 

Law firm insights like Clio’s insights dashboard can also help you determine a compensation structure as it can help you value your firm based on past and projected performance.

Conclusion

Law firm succession planning can be an overwhelming task and a huge time investment. From making sure you’re adhering to your state’s rules to preparing the necessary documents and deciding what to do when you retire or are unable to work, it can be hard to set aside time to spend on planning your succession plan. 

If you find yourself pushing aside your succession planning to-do list, try starting small and building your succession plan over time. Not having a succession plan puts yourself, your law firm, and clients at risk. You never know when an unexpected crisis can strike, so the rule of thumb is to be as prepared as possible. 

The key is to start planning early. As Patrick advises, “Start making your plans a lot earlier than you might anticipate. Now is not too early. The earlier you plan, the more options you will have. Life may be making decisions for you that you can’t control. Think of succession planning as a form of life insurance. Remember to involve your clients in the transitioning process. They’re as essential to your law firm as you are.”

Special thanks to the ABA for their recommendations on what makes an effective succession plan.

Categorized in: Business

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