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Focus: Have you planned for your law firm’s succession?

Focus
|Written By Marg. Bruineman

When it came time for his father to retire, lawyer Ian Hull knew his firm needed a solid plan. The firm would still carry the name Hull & Hull LLP but would soon have just one Hull at the helm.

Ian Hull had an advantage in that the lawyer leaving his firm was his father.

Hull was called to the bar in 1990 and started practising with his dad, Rodney, who was working as a sole practitioner until that point. The younger Hull first joined as an associate and the two later developed a partnership.

Hull is thankful his father gave him plenty of notice and wanted to make the transition, which included a payout of his capital, smooth for everyone.

“I had a willing partner who wanted to exit properly,” says Hull, adding that even with two years notice, having a partner retire from a small firm isn’t an easy proposition. “A small firm can’t sustain an immediate capital payout.”

The senior Hull agreed to have his capital investment in the firm returned to him over time. Meanwhile, the younger Hull began to develop a new partnership agreement that spelled out the payment of capital over five years. He continued with the firm and developed the business further to now include four partners.

Hull considers himself fortunate in that the entire transaction was friendly and accommodated both of their needs. As a result of the experience, he learned that a small firm should include three basic aspects in its operations:

•    An exit strategy in the partnership agreement.

•    Health insurance providing for urgent funding to allow the firm to pay out some of the capital to a partner’s family if necessary.

•    That all partners should have powers of attorney and wills.

The senior Hull emphasized to his son that developing a partnership wasn’t so much about establishing a firm as it was about determining exit options.

“It’s really what all small-business owners should be doing,” says Hull.

Hull was able to use his own experience when he sat on a Law Society of Upper Canada committee looking to develop a tool kit for succession planning and set up exit strategies for sole practices, small firms, and professional corporations. The result was a contingency planning guide for lawyers released last June that’s available online.

Succession planning is a significant concern in the legal profession given the older demographics in many provinces. Lawyers, like other businesspeople, often don’t have a succession plan and, surprisingly, some also don’t have wills and powers of attorney.

The problem is even more significant for sole practitioners who may not have the time to look into the future of their business. But these are the lawyers who are most at risk should something happen to them, says lawyer Michael Litchfield.

If sole practitioners don’t start planning the future of their business early enough, they may well have to rely upon a contingency plan.

One of the areas those working on access to justice issues have identified is the lack of movement of lawyers to smaller communities. So a lawyer working alone has few options when it comes to retirement, particularly in a smaller community. As a result, planning and looking for a successor should begin early.

“I’ve actually met very few sole practitioners who have succession plans,” says Litchfield, a management consultant and managing director of Thinklab Consulting Inc. “My recommendation is always to set up a plan. It doesn’t have to be difficult. It can be a relatively simple process.”

Without a successor, the law society becomes responsible for appointing a caretaker should something happen to the lawyer. It can be a costly situation.

There are options for lawyers working on their own who are looking to retire, Litchfield notes.

Merging with an existing firm in the lawyer’s final years of practice ensures a natural form of succession. With the current trend of law firm mergers among both small and large practices, it can be a good move for a lawyer considering retirement in the not-too-distant future. There are also firms looking to grow by transitioning existing practices into theirs.

“Another successful succession strategy is to hire a junior lawyer,” says Litchfield.

The idea would be to transition the new lawyer into the firm as a partner, much as Hull did. Doing so ensures the continuity of legal services.

It’s a good strategy, but Litchfield suggests having the younger lawyer involved in all deals prior to the retirement of the senior practitioner. If that doesn’t happen, a business that dealt exclusively with the senior lawyer may not want to suddenly work with a new person and may consider taking the work elsewhere.

There’s also a moral obligation involved in ensuring the continuation of legal services in small communities. In some communities, there may not be any other access to a lawyer nearby. That lawyer, of course, can only represent one side. In the event of a marital dispute, for instance, the first one to secure counsel gets the local option, a situation that can leave the other party having to travel great distances to access legal services.

Practitioners may consider selling, but Litchfield has found little value there because the worth of a sole practice generally relates to the personality of the lawyer.

The fourth option is to wind things up and shut the doors.

“You can always wind down your practice. It’s difficult,” says Litchfield.

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