Several years ago, the partners at Will Davidson LLP found themselves dealing with four retirements and a death all within a 10-year period.
Several years ago, the partners at Will Davidson LLP found themselves dealing with four retirements and a death all within a 10-year period. There was nothing in place to prepare for that, meaning the remaining partners had to scramble to finance buyouts for the departing lawyers.
“It did put some strain on the firm,” says managing partner Gary Will, with young lawyers having to take out substantial loans to pay out the partners. “We learned a lot from that experience.”
The partner’s death was further complicated by the fact that he was the firm’s managing partner and also a substantial biller.
The Toronto personal injury firm, now made up of 19 lawyers, five of them partners, has since turned to using life insurance policies to finance the exit of partners by borrowing on the death benefit.
The trick, says Will, is to buy the policy early on to ensure lower monthly premium payments and build up a substantial base.
For the lawyers at Shibley Righton LLP, with the prospect of some retirements approaching and the lack of concrete exit and succession plans, it was decided it was time to iron out a clear approach.
With direction from a facilitator, the partners went on a retreat where they addressed the issue, striking a succession committee.
“As part of that retreat, we wanted to address exit strategies for some of the senior partners,” says Deborah Howden, who sits on the now three-year-old committee.
At the retreat, every partner at every level was encouraged to think about whether there was another lawyer to fill in for them if they were not available. They each also considered where the practice was going and whether clients could be introduced to other members of the firm to prepare for their retirement or in the case of illness.
Key for law firms is to come up with exit strategies that benefit everyone, says Jordan Furlong, principal of consulting firm Law21. The law firm wants to ensure its business base is secured even after the lawyer handling that file retires.
But the individual lawyer needs to see some sort of benefit from passing their clients on to other lawyers and leaving the firm in a planned and coordinated way.
“Because law firms are structured as partnerships, once you retire as a lawyer, you are no longer allowed to retain an ownership stake in your firm. So, among the many other things that lawyers resist about retiring is that when you retire, your equity draw goes down from whatever it is down to zero,” he says.
“Whether we like it or not, transitions in partners in law firms have to be financially incentivized.”
The approaches can include changing the structure of the firm that allows partners to retire in a way in which others in the firm can take over the clients without penalizing the lawyer. Furlong suggests that could include reducing the billable targets and instituting a step-down plan. A percentage payout is another option, so that the lawyer receives a portion of the work generated by their clients.
The alternative, he says, is having lawyers facing the prospect of all or nothing simply remaining with the firm to continue to generate income.
“So, if you could bridge that transition between all or nothing and say, ‘No, we can work something out for you,’” that would be ideal, he says.
“It’s also a question of figuring out what position and what role the lawyer is going to play with the firm, if any.”
With some planning, lawyers who work alone or in small firms may also have the opportunity to take care of themselves and their family in retirement.
There are firms interested in attracting lawyers near the end of their careers who may have clients the firms can keep when the lawyer ceases to practise, says Alan Litwack, who works in mergers and acquisitions with Dickinson Wright LLP in Toronto. He also finds himself advising professional firms on those issues. It was in this context that he came to work with a lawyer who had become ill and decided it was time to wrap things up.
“He was a sole practitioner and he had an unbelievable practice in a very specialized area. He wanted to be able to get some benefit from the considerable goodwill he had built up in his practice. And, also, he knew he had some health problems, but he didn’t expect anything to imminently happen,” Litwack explains.
“We negotiated a deal with a firm where he would transition his practice to that firm. And after he stopped practising, he would be paid something, a percentage of the billings, and the percentage would decrease over time. We put the deal together and we signed it on the Friday. He died over the weekend.”
The transition had been in the works for quite a while. That allowed the lawyer to put his clients in contact with the firm, which was then able to maintain some of them. Along with finding a happy pairing with the firm, the lawyer’s family was able to benefit from the transaction, receiving a percentage of the work the firm received from the lawyer’s former clients. The lesson, says Litwack, is that a little foresight and work can make a big difference later on.
“Had he done nothing, he would have died and that would have been the end of it. The clients would have gone somewhere else and nothing would have flowed to his estate,” he says.