2013 Solo and Small Firm Conference

Transcription

1 Vermont Bar Association Seminar Materials 2013 Solo and Small Firm Conference 8a) Succession Planning May 16-17, 2013 Basin Harbor Club Vergennes, VT Faculty: Dustin Cole, Attorneys MasterClass

2 Succession and Transition Planning Building a Plan for The Next Era of Your Career Speaker Dustin A. Cole Master Practice Advisor President, Attorneys Master Class

3 Law Practice Phase Two P. 2 Dustin A. Cole President and Master Practice Advisor Attorneys Master Class For more than twenty years, Dustin Cole has worked with law firms to help them move successfully through changes, challenges and opportunities, and with attorneys to help them build more successful and satisfying practices. He brings more than 35 years of experience in every phase of business management, business development and team development to his work with the legal profession. Dustin s support of the legal profession began in 1985, after more than fifteen years in private industry, when he founded his own public relations and marketing firm, Public Strategies Florida, specializing in attorneys and other professionals. From 1985 to 1993, Dustin s company served law firms across Florida, receiving numerous awards for marketing and public interest programs. Concurrently, from 1990 to 1993, Dustin also served as Vice President of Marketing for RUMGER Insurance Company, a Florida lawyer s professional liability insurance provider, taking the startup company to a 20% market share in four years. From 1993 to 2001, Dustin was a partner and chief trainer in an attorney training and development organization, and helped the company grow to become one of the leading legal management training companies in the nation. In that role Dustin conducted nearly 200 seminars and firm retreats in 22 states, and worked individually with dozens of attorneys individually to help them expand their practices or deal with specific practice challenges. In 2002 Dustin founded his own organization, Attorneys Master Class, to provide personal support for firms and attorneys in expanding their practices, dealing with professional change, or protecting quality of life. Dustin is a frequent keynoter and guest speaker at legal organizations nationwide, including the ABA, ALA, and State Bars in more than 25 states from Alaska to the Virgin Islands. In 2004, Dustin was invited to present a program on Ethical Marketing at the Florida Bar Annual Meeting. The program received an unprecedented two hours of ethics CLE credit. Dustin has keynoted and helped launch the first State Bar Solo and Small Firm Conferences in Illinois and Virginia, and keynoted similar programs in Indiana, Wisconsin and Michigan. He has also keynoted numerous State Bar Annual meetings. Dustin is a native of Phoenix, Arizona, and holds a degree in Radio-Television from Arizona State University.

4 Law Practice Phase Two P. 3 Businesses are regularly bought and sold based on standard valuation models and facilitated by thousands of business brokers and consultants. But a legal practice is dramatically different than other types of small businesses, and most attorneys have no clear picture of how they can sell their practices for a value appropriate to the decades of effort and dedication the have invested in it. Further, attorneys are often different than traditional business people in that they do not wish to abruptly and completely leave their profession, but would prefer to step back over time. Most large firms have a structure in place for this stepping back. But sole practitioners, unless they have devoted years of planning to the issue, will not have the opportunity to do so. In short, there is no clear model for a process that creates the desired result. Most either close the doors or attempt to sell the book to another attorney as though it were an inventory of saleable products in a traditional business. The most difficult aspect of this sale is that most of the value of an attorney s practice is not in the book but in the personal goodwill that attorney has built with the client and with their referral base. Simply selling a practice results in a drastically discounted value. The thoughtful attorney will undertake a carefully planned and choreographed process to pass a viable and bountiful practice on to a successor in a manner which allows them to cash out their full value, step back over time from the ownership and management of the firm, and remain in practice with the firm for an extended period. This allows not only for a larger sale value over time, but also provides additional income and allows them to stay connected with their profession.

5 Law Practice Phase Two P. 4 Laying the Groundwork for Retirement/Succession Planning Part One: Determining the Owner s Vision for Their Personal and Professional Future Too often we accept what shows up rather than building a picture of what we want and developing a plan to get it. Exercise: Your vision and goals for the future What is your timeline for Phase Two and/or full retirement age and year? o Step back to Phase Two Age Year o Full retirement Age Year What are your professional goals in Phase Two? Continue as of counsel part-time Market earn origination income Mediation/arbitration Special assignments/contract Mentor/advisor Other: Retire completely by age What are your financial goals? o What level of personal financial assets & reserves do you want to have set aside when you move into Phase Two?

6 Law Practice Phase Two P. 5 o What personal assets & reserves do you currently project you will have? o Do you project a shortfall? If so, how much additional would you need to earn or gain from sale of your practice to reach your goal? o What additional income stream do you want to have after moving into Phase Two and from what source(s)? What are your personal goals in Phase Two and beyond? o How I will maintain my health: o What my lifestyle will be: o Where I/we will live: o What hobbies interests and avocations I will pursue: Part Two: Valuing Your Firm and Identifying How to Increase Its Value: Law Firm Valuation Matrix

7 Law Practice Phase Two P. 6 Part Three: Determining the Most Viable Option Based on the attorney s vision and the investigation of the state of the current firm, the attorney can identify which option will most effectively achieve their personal and professional goals. 1. Merger For the most part, merger of mid-size firms is a myth. One firm or the other becomes the dominant force. For sole practitioners, a common approach is to merge with another sole practitioner or small firm. This can end well or badly, depending on the clarity and specificity of the agreement. In too many cases it is simply a way for the attorney to keep working. But without a clear agreement for cashing out the accumulated goodwill value, too many such mergers end in a separation detrimental to the attorney seeking to transition. 2. Sale The traditional sale option for a solo or small firm typically undervalues the goodwill of the firm, and understandably so, since in most cases the person who has built the goodwill leaves. A sale with some level of transition plan to transfer referral relationships which assures the acquiring attorney(s) of significant future business will produce a far greater return than an abrupt sale and departure of the selling attorney. A PRACTICE has little value beyond the book and the goodwill value of the departing attorney. A LEGAL BUSINESS has an intrinsic asset value in its infrastructure, systems and procedures. Attorneys who are not actively building their firm into a successful legal business put its value, and their heirs, at financial risk in the event of a death or serious health crisis. 3. Dissolution Because of the years and decades the attorney has invested in the firm, closing the doors is seldom the desired option, but too often the most viable or the only option.

8 Law Practice Phase Two P. 7 The most common reasons for this include: Death, incapacitation or departure of the owner or key partner Loss of too many important clients and/or referral sources Major negative publicity affecting the attorney s or firm s long-term prospects in their market Major internal conflicts with partners A windfall year of profit to the owner, with little prospect for a repeat performance 4. Continue as a Viable Firm The attorney s retirement vision often includes the desire to continue practicing in a reduced capacity with more time off and with more selectivity, with continued contribution to the firm through marketing and transition of clients to the new regime. In truth, an unspoken part of this is the desire to keep their professional identity and their name on the door. This option require the creation of a successful transition plan which assures future viability of the firm and therefore a place to play for the transitioning attorney. This is often the most complex of options, but can be by far the most personally and financially satisfying. The benefit of choosing this option is that it includes the building of the successful legal business, which not only stages the firm for succession, but even before succession, the business Executing the Successful Succession/Retirement Plan The Eight Key Elements of a Successful Plan 1. Development of a timeline for attorney transition Failure to develop a clear picture, and a clear timeline, for all significant elements of the transition will result in failure to achieve the transition successfully. Without a clear picture, attraction and retention of an appropriate successor will be extremely

9 Law Practice Phase Two P. 8 difficult. The committed successor must be able to understand the game, so to speak. They must be clear on a number of specific issues, such as: The timelines for various steps in the ownership transition, and the target completion date How their compensation will change, and what will be the basis of that compensation What buy-in investment will be required and when How their ownership, and the ownership of the transitioning attorney, will change over time What performance is expected of them, and what benchmarks they will be judged on The timeline for completion of the senior attorney s planned transition out, after ownership has been handed over The best timeline is the longest. Even with the most exacting planning, false starts with wrong candidates are possible, which argues strongly for clear and frequent performance evaluations. At least 5 years is the optimum, since it allows time to recover from false starts. 2. Identification of Successor(s) The traditional attorney plan begins and seemingly ends with the hiring of an associate and a hope that this person may wish to and be qualified to take over the firm. But a normal associate hiring process seldom creates the desired result, due in large part to the fact that few attorneys have the expertise to make the best hire under even the most normal of circumstances. The attorney must begin the process by developing a detailed profile of the characteristics of the ideal candidate, such as: Age range Type and level of skills needed Personal character and motivation Relationship to the community and market Personality match At this time the attorney s career, when the clock is ticking, it is essential to make the best and most insightful hiring decision. The future life of the practice, and the retirement plan of the attorney, is on the line.

10 Law Practice Phase Two P Transition of ownership It is essential for the firm to lay out a specific plan for transition of ownership shares of the firm. In the case of a sole practitioner or a small firm, this often means the actual creation of a legal entity, creation of shares, and the development of a shareholder agreement. Otherwise, there is no official method to provide another attorney with the ability to be awarded shares or buy in. There are several reasons for this. First, percentage of ownership relates directly to the ability to take over the helm. The outgoing attorney must benchmark the transition concretely through a timed plan to surrender some, and eventually all, ownership and thus management control in the firm. Second, for the outgoing attorney, the ownership transition is a principal method by which they can cash out the value he or she has accumulated in building the firm. Within this step, ownership must be translated to shares, and a valuation and compensation model established. In this step, the attorney s practice must be transitioned into a corporate model, which not only values the shares, but relates compensation to percentage of ownership. In order to attract and retain the best successor, there must be a clear picture of how the successor gains ownership and control of the firm over time. A potential successor, who will be almost by definition a reasonably aggressive and goaloriented person, must see a clear path to power rather than hearing vague statements and unclear timelines. Without this clarity the potential successor may pass the opportunity in favor of another more certain path such as building his or her own firm. 4. Transition of management The transitioning attorney has a range of management responsibility, from overseeing financials to hiring & firing, authorizing purchases, etc. For succession to occur in an orderly fashion, these roles must be defined, and a timeline developed for the transfer of roles to the successor over time. The successor needs to understand how and when they take over various aspects of firm management. There is an extra benefit to this process. In small firms, such roles are simply lumped together without definition, since there is only one person responsible for all. The defining of each role actually creates a clearer path to firm growth, as both

11 Law Practice Phase Two P. 10 attorneys become more clear on roles which may be delegated, fully or in part, to others. 5. Transition Of Leadership Management and leadership are distinctly different, although irrevocably interlocked, issues. In sole practices or small firms, staff is used to viewing the attorney as spiritual as well as functional head of the firm. The transition plan must also address how to effectively transition this informal role over time, so that staff accept the succeeding attorney as the authority, and do not maintain sub rosa allegiance to the transitioning attorney. Too often, loyal staff may abandon the practice when the senior attorney steps back quickly, which damages the practice and endangers successful completion of the succession plan. 6. Transition Of Business Development The transitioning partner typically holds most of the business origination through decades of relationship development with other professionals. A plan to transition these highly valuable referral relationships to the successor must be a specific part of the succession plan, to protect the firm s current and future health and revenue stream. This transfer cannot and will not be accomplished overnight with simple introductions because the relationships are a product of years or decades of trust-building. The transfer of relationship requires special planning and focus, as well as a long-term perspective from both the transitioning and succeeding attorneys. 7. Transition Of Client Relationships In assuring the short and long-term success of the firm, transfer of primary client responsibility and relationships is as essential as the transfer of referral relationships. Just as with the referral relationships, the transfer is not accomplished quickly, but through a planned shift in emphasis from the relationship of the transitioning partner to the partner assuming responsibility for the work and the relationship. The most natural relationship transition comes from a planned and increasing involvement of the succeeding attorney with the client and their work. However, it is important for the transitioning attorney to carefully review their client list and develop a specific plan for transitioning of any especially important or sensitive

12 Law Practice Phase Two P. 11 client relationship. This re-alignment of relationships can assure that the future lead attorney can successfully maintain the trust relationship with the client, and the financial viability of the firm. 8. Evolution of Compensation Structure There are two important reasons the transitioning attorney must change the compensation structure from informal to formal: First, for the transitioning partner to achieve their goal of stepping back in their technician role and continuing to be a marketing engine for the firm, there must be a compensation structure which directly rewards originations, and clearly defines compensation for the roles of responsible attorney and production attorney(s). Second, for the firm to attract the highest quality of successor attorney, that attorney must be able to understand clearly how they will be compensated, what they must accomplish to gain their desired income, and the incentives to either work harder or smarter to achieve higher personal income. They must also have reasonable understanding that the majority of their compensation will be objective, and not the result of the subjective decision of the transitioning attorney. The Ten Steps You Should Take NOW to Protect Your Clients, Your Practice and Your Retirement Your practice is the culmination of your career, and the core of your or your spouse s financial future. Treat it with the same due diligence and commitment as you would a client obligation. Anything less is a threat to your clients as well as your personal and family well-being. The following is a comprehensive, although incomplete, list of preparations you should have in place to protect all parties: 1. Hire at least one highly professional assistant or paralegal who is intimately familiar with your client base, current WIP, office procedures and general aspects of your business. 2. Write a contingency plan for your assistant for follow in case of an emergency.

13 Law Practice Phase Two P Deputize a backup attorney to handle urgent matters if you are incapacitated temporarily, or to take over your practice if you are incapacitated permanently or die. a. Put it into a contract which provides compensation independent of any reciprocal agreement. Don t make the responsibility an expensive obligation for the attorney or for you. b. Don t make it a smile and wink agreement 4. Specific directions for protecting WIP and informing clients a. Client notification of the situation, who to contact, the name of the attorney now responsible for their file, and what to do if they wish to move their matter to a different attorney or pick up their file b. Continuances for court appearances 5. Create a written spouse plan to guide them in the event of an emergency. Include: a. The name, contact information and contract for the backup attorney b. A list of all Bar and local resources which he/she may need c. Specific comments and direction on working with the assistant and/or backup attorney d. Specific direction regarding pay and benefits for staff and particularly the assistant, who will be crucial in the transition process. e. Direction on who to use as personal attorney when you are unable to continue in that role f. Direction for CPA 6. Create and maintain current the following procedures and lists: a. Access codes to all password-protected accounts, devices, services, etc. b. All open files with status (Case & Task Manager) c. Firm financial information and reports i. Open accounts ii. Liabilities, payables and receivables iii. Client trust account report iv. Office space lease, mortgage or other information 1. Payment schedule 2. Building manager or leasing agent 3. Tenant rental/lease details 4. Directions re disposal of property or lease

14 Law Practice Phase Two P. 13 Finally: 5. Contact information for real estate agent if needed d. Office furniture and equipment inventory & valuation i. Instruction/recommendation on: 1. Disposal/disposition 2. Handling of data on computers, PDA s, etc. e. Complete information regarding any businesses owned outside the firm, ESPECIALLY those in your name only f. All insurance policies with renewal/expiration dates, location of all policies and contact list for all agents g. Physical and computer filing system and procedures i. How to identify WIP, open and closed files ii. Backup procedure, storage and security h. Durable Power of Attorney for spouse and/or backup attorney Examine all of this as though you were stepping into another attorney s office as backup Have your spouse (or a more objective family member) walk through all of this as though they were stepping in as spouse.

15 Attorneys Master Class Law Firm Valuation Matrix Average of last 2 years annual gross revenue $ Valuation Stage 1 Add % $100,00 or less 0% $100,000-$250,000 75% $251,000-$400,000 85% $401,000 - $500,000 95% >$500, % Stage 1 Working Value $ Write-Off Percentage Add % <10% 10% 10-20% 5% 20-30% 0% 30-40% -10% >40% -15% ADD OR SUBTRACT FROM WORKING VALUE $ Operating Ratio Add % <35% 10% 35-45% 8% 45-55% 0% 55-65% -5% 65-75% -15% >75% -25% ADD OR SUBTRACT FROM WORKING VALUE $ Inventory Add % Estate Plan files % % % % >500 30% ADD OR SUBTRACT FROM WORKING VALUE $ Ongoing clients (>$10,000 last 12 months) Add % % % % >30 15% ADD OR SUBTRACT FROM WORKING VALUE $ Copyright 2012 Attorneys Master Class - All Rights Reserved P. 1 of 2

16 Attorneys Master Class Law Firm Valuation Matrix Percent of practice which is Commodity Add % % -30% 50-75% -20% 25-50% -15% 10-25% -5% <10% 0% ADD OR SUBTRACT FROM WORKING VALUE $ Percent of practice which is brand name (Referral) Add % % 20% 50-75% 15% 25-50% 10% 10-25% 5% <10% 0% ADD OR SUBTRACT FROM WORKING VALUE $ % of practice which is Value or Nuclear Event (Ref Add % % 25% 50-75% 20% 25-50% 15% 10-25% 10% <10% 0% ADD OR SUBTRACT FROM WORKING VALUE $ Number of billers 1 0% 2-10% 3-20% 4-30% 5-40% Valuation Stage 2 $ Copyright 2012 Attorneys Master Class - All Rights Reserved P. 2 of 2