Succession planning – the myth

I am often asked to speak at conferences for solicitors. The hot topic for 2017 seems to be succession planning, but this all seems too little too late for many firms.

I am constantly receiving calls and emails from firms I saw seven years ago that are now asking for help with their exit strategy. Needless to say, the equity partners are seven years older with an average age of 65. Who would see this as an opportunity as all the goodwill is in the hands of the exiting partners?

One firm I am working with assumed that the five younger salaried partners and associates with whom they had some conversations would grab the opportunity to become equity partners and allow the remaining three partners to walk away with their capital accounts. This is a firm with over £3m turnover, nearly £3m pounds of WIP, and no debt but with huge capital account balances. Should five future owners in their early thirties jump at the chance to become the new equity owners? Sadly not. With the current uncertainty of both external issues and internal ones affecting the profession, it is a step too far for many.

We have over 3,000 practices all over the UK and many will be unmergeable for a variety of reasons. Many will simply part with ownership of their practice to avoid paying the run-off cover – not the best outcome after three decades of hard work.

Let us explore what options some of these firms actually have. Planning for succession should have happened several years ago but many partners enjoyed the income that a successful practice generated and therefore did not want to share these profits with younger, non-equity partners. If we couple that with the uncertainty over the future of the profession, we have a number of younger potential owners no longer interested in investing into a practice.

So, are the options to see if we have future owners within the practice? Can we identify potential owners within the current staff? Alternatively, we could look externally for a potential investor in the form of a frustrated salaried partner or senior associate elsewhere. Future owners do not have to be qualified solicitors so applying for ABS status could encourage non-lawyers to invest in your practice.

Preparing the firm for merger is another option. However, finding a suitable purchaser might be more difficult. Dealing with corporate structures, underperforming partners and staff will not make you more attractive to a potential purchaser. It is essential that you do not place yourself on a list of firms for sale as advertised in the legal press; it is far better to utilise a broker that could help prepare your firm for merger and contact potential purchasers anonymously.

There is still a risk of purchasers becoming a successor practice and damaging their own professional indemnity cover dependent on your claims history. Claims may not yet have come to light, hence the requirement of many consolidators that any firm they acquire pays for their run-off cover in any case. This then becomes an expensive exercise when paying run-off cover prior to any merger.

These options will not be available to all firms and the alternative is a controlled closure, which will require the purchase of run-off cover. This cover is only available at your annual renewal date and will normally be somewhere between two and half and four times your annual premium and will need to be paid for immediately. This will provide you with six years mandatory cover to meet Solicitors Regulation Authority requirements, but will not indemnify former partners for claims over the minimum limit. Interestingly, 11 per cent of professional indemnity claims come after the six-year period has elapsed. Some practices are reducing their turnover each year to make their run-off cover more affordable.

The options outlined here do not make pleasant reading for many partners yet we still need a dose of reality if you and your practice are facing these challenges. I would encourage you to get help early and explore the options available to you and your practice. Each bespoke solution will be dependent on the circumstances of the individual firm.

Viv Williams is legal services director of SIFA 360

@360legal www.sifa360.co.uk