Leaving a legacy

Most small firms and sole practitioners will be acutely aware of the financial, legislative, and regulatory dynamics putting pressure on the industry, and it's now almost two years since the Solicitors Regulation Authority (SRA) classed successor planning as an 'emerging risk'.

For the thousands of two-to-four partner firms and sole practitioners in the UK, the question of what should become of a hard-won client portfolio after they retire or a partner looks to sell his or her equity means considering a range of options, risks, and what-if scenarios.

Prudent business management dictates that business owners should begin thinking about this well in advance of retirement, but the demands of the job, family life, and all the other pressures borne by lawyers tend to mean that, without help, it can become an afterthought.

'Do nothing' scenario

The important thing for the owners of smaller firms towards the end of their careers is to achieve a clean break and retire without uncertainty. The simple choice is to close the doors of your partnership, pay your premium to cover the six years of run-off you'll require as cover against any claims on your previous case load, and move on.

This is certainly the simplest method but it may not be the most cost effective, given that smaller firms have also borne the brunt of insurers' price increases in recent years. Some may simply not be able to afford the run-off cover premium.

Firms with a high volume of residential conveyancing work remain a high-risk category and insurers are increasingly demanding evidence from clients of their approach to risk management, particularly in relation to cyber risk exposures.

This means your ability to secure professional indemnity insurance (PII) isn't determined purely by the type of work you do, but by your ability to show how your firm has put in place sophisticated protections, firewalls, monitoring systems, penetration testing, and data breach response policies. This kind of compliance burden itself comes with a hefty price tag and its affordability has to be considered alongside the cost of PII itself.

Valuing your practice

Nevertheless, a firm or practitioner that can realistically consider run-off insurance is in a much stronger position if they want to look at the other succession planning choices available.

The demographics of the profession suggest there is a proliferation of small practices for which the options of promoting within are fewer. However, there are markets and mechanisms that provide an alternative to succession without passing on your asset to a new generation internally.

Sole practitioners and two-to-four partner firms are increasingly looking towards the sale of their work in progress (WIP) files as a viable option.

Typically, the buyer of a set of WIP files will, rather than paying an upfront component, pay a fee as a proportion to be offset against the amount of settled cases achieved. So, for a personal injury case, if it fails there is nothing to pay; if it succeeds, the seller receives a percentage of the WIP that they had on the clock when the file was transferred.

The acquitting firm will normally be a successor practice, thus negating the need for run-off cover, but even if it is not, the WIP recovered will help fund the run-off premium.

Choosing a partner

Like selling any much-loved asset, you want to be sure the new owner will make the most of its new bounty, and as such, smaller firms should consider a variety of potential acquirers before agreeing a deal.

In doing so, it's likely that a number of offers will be put forward promising either a higher percentage of the recovered costs from firm X, or a tacit guarantee that firm Y will achieve a greater number of settlements.

It's incumbent on seller firms to decide what matters most to them. Both firm X and firm Y should be able to provide you with clear metrics of their own success and recovery rate. The more transparent they are, the better for both your own peace of mind and also to protect the customer journey you've already begun.

The successor planning challenge is perhaps the most individual choice a business owner will ever make. As long as you don't leave the hard choices too late, the options for closure, succession, or sale remain firmly open. SJ

Peter Watson is managing partner at Simpson Millar

@Fostersbristol