Succession planning is often something law firms think about when an event is approaching. A partner is preparing to retire. Someone wants to sell their interest in the business. A merger is being considered. By that point, however, some of the available options may already have disappeared.

Succession planning is most effective when it is considered well before there is any immediate need to act. Rather than being a response to a particular event, it can form part of the firm’s normal strategic planning, alongside discussion about growth, investment, people and financial performance.

For partners and boards, regularly asking what the future ownership and structure of the firm might look like can create considerably more flexibility when the time eventually comes to make a change.

Succession should be a part of the conversation

Succession does not necessarily mean retirement. It can involve a partner reducing their role, bringing in a new equity partner, transferring a particular area of work, restructuring the ownership of the firm, merging with another practice or eventually passing the business on to another firm.

The important point is that these possibilities are much easier to consider when there is no immediate pressure to make a decision. Making succession a regular part of partner or board meetings can help firms identify potential issues early. It can encourage conversations about who might eventually take on responsibility for key clients, areas of practice and leadership roles.

It also provides an opportunity to consider what the firm needs to do to make itself more transferable and resilient.

Planning early creates options

One of the biggest advantages of early succession planning is choice. If a partner needs to leave the business unexpectedly, there may be a limited number of practical solutions. Clients may need to be moved quickly, colleagues may need to take on additional responsibilities, and the firm may have to make decisions under considerable pressure.

When succession has been considered years in advance, the position can be very different. There may be time to develop internal successors, strengthen management structures, consider a merger or explore an external transfer of the firm’s book of work.

There is no requirement to commit to one particular outcome simply because succession planning has begun. The value is understanding what the options are before they are needed.

Protecting the value of WIP

For many firms, the value of the firm’s WIP can represent an important part of the overall value to be considered as part of succession planning. Yet WIP can be particularly vulnerable during a closure, merger or transfer.

If matters are allowed to drift, clients leave, or files are transferred without proper planning, the value attached to years of work can be significantly reduced.

Early preparation allows the book of work to be reviewed and assessed before decisions are made. Recovery First helps firms understand their WIP and identify opportunities to preserve value when work is transferred to an appropriate receiving firm.

The value attributable to transferred matters can then be apportioned when those matters conclude, with an independent costs lawyer determining the relevant contribution based on the work undertaken.

This creates a structured approach to recognising the value of the outgoing firm’s work rather than simply writing off WIP when the practice closes.

Exploring the Options for Succession or Closure

Planning for succession does not necessarily mean closing the firm. Several routes may be available, depending on the owner’s circumstances and the needs of the practice.

Succession to the next generation – Transferring ownership to existing or incoming partners can provide continuity for clients and employees. A gradual transition can allow the owner to reduce their involvement while younger solicitors take on greater responsibility.

Sale of the practice – Selling the practice to another firm may allow owners to realise value from the business they have built. A strong client base, profitable departments and well-managed WIP may all be relevant to a potential purchaser. Starting early provides time to prepare the practice and explore opportunities.

Merger with another firm – A merger can provide access to greater resources, shared overheads and opportunities for succession, while allowing owners to reduce their involvement over time.

Employee Ownership Trust – For an incorporated law firm that meets the relevant requirements, an Employee Ownership Trust (EOT) can provide an alternative route for owners looking to transfer ownership to the people working in the business. Rather than selling to another law firm or individual purchaser, shares can be transferred to a trust established for the benefit of employees.

Transfer of clients and live matters – Where the business is not being sold as a whole, clients and ongoing matters may be transferred to another practice, subject to client consent and regulatory requirements. This can be particularly relevant for owners who wish to leave but have substantial outstanding WIP.

Orderly Closure – For some, closure will be the most appropriate option. Where there is no suitable successor or purchaser, a planned closure provides time to manage client matters, meet regulatory obligations and recover value from outstanding work.

The best time to plan is before you need to

Succession is often viewed as something that happens at the end of a partner’s career or when a significant change takes place within a firm. It can be much more valuable when treated as an ongoing part of good business management.

Regular conversations at board and partner level can help firms identify future risks, protect client relationships and understand the value within the business.

Recovery First can support law firms that are considering succession and the future of their book of work. By becoming involved at an early stage, it can help firms review and preserve their WIP and consider how client work could be transferred to a panel of suitable receiving firms if required. Find out more about Recovery First and its services here.