Law Times

Law Times • November 30, 2009 FOCUS PAGE 9 Early start the key to law firm succession Y BY I. JOHN HARVEY For Law Times ou might not think it, but your practice could be a ticking time bomb. Th e issue isn't your billable hours or your caseload — it's your retirement plan. A law practice, like any business, is the culmination of hard work and smart thinking, but selling your enterprise when it's time to retire isn't as simple as post- ing an ad on Craigslist. For one, the Law Society of Upper Canada has a few cov- enants and rules around what can and can't be done. But the biggest hurdle is striking the right deal with the right parties since you can't just hand off the practice to anyone. In fact, the law society calls it a huge headache because the number of aging lawyers without a succession plan is a "looming crisis for the profes- sion given the likelihood of dis- ability or death." It goes on to call the issue a "time bomb." Th at's why you need to start thinking about the transition now, says Grant Robinson of SuccessCare Solutions Inc., an Oakville company that helps professionals like lawyers and accountants sell their practices. Th e timing issue is especially im- portant since the process could take a decade to complete. Th e biggest mistake most lawyers make, according to Robinson, is waiting too long to make the decision about sell- ing. "You have to realize that a lawyer's clients are likely to be his or her age, plus or minus 10 years. So at 55 or 60, their oldest clients are going to be in their late 60s [or] early 70s." LSUC statistics reveal that about one third of practising lawyers are between 50 and 65 and therefore should be consid- ering a transition plan or have one in place. Almost 10 per cent are over 65, numbers that make the demographic profi le of the profession decidedly grey. Data from other jurisdictions suggest as many as 80 per cent of sole practitioners don't have a succes- sion plan. Currently, 34 per cent of Ontario's more than 20,000 lawyers are sole practitioners. By and large, Robinson says, the longer a lawyer waits before planning for transition, the more complex the process becomes and the higher the risk of eroding value. Th e issue stands even with a partnership since the lawyers are all likely to be around the same age and all wanting to exit around the same time. Th at doesn't allow much room to bring in new practitioners and makes a sale or merger with an- other fi rm more attractive. "Lawyers stop practising for two reasons that fall into two categories: voluntary and involuntary," Robinson says. In the former, they de- cide to retire or move on and have to put a transition plan in motion that can take up to a decade to complete. In the latter, they stop practising because they be- come incompetent or dis- abled or otherwise have to quit because they've gotten into trouble with the law soci- ety, for example. "Of course, they could just shutter up and walk away," Robinson says. "But then they lose the value of their practice." If a lawyer waits until they are 60 or older, many of their clients will also be retiring or thinking of doing so. Many will simply die, which in turn re- duces the value of the practice since the billing opportunities will start to decline. Th e time to start consider- ing options for a voluntary sale or transfer is around 50 years old, which sounds young. But Robinson argues that given the timelines involved, it's not too early at all. "Th ink of it in terms of car leases," he says. "A car lease is three to fi ve years. So you need to think of selling your practice two car leases before you want to exit." In the case of an internal sale by a partnership, bringing in new practitioners will entail paying them a salary during the transi- tion. Firms may also have to ne- gotiate payments to the outgoing lawyers to carry them through their phased-in retirement. Th is is why it takes up to a decade. A straight sale means the ac- quiring fi rm can start to realize some of the billable hours im- mediately and cut overhead by converging offi ces and resources in order to quickly get on with the business of transition. Been in Law Times? Want a record of it? Promote your law firm by ordering reprints of articles from the voice of the profession — Law Times! Reprints are great for: • Firm promotional material • Suitable for framing • Use on your web site $175 - $225/reprint We provide a color PDF and unlimited reproduction rights. LAW TIMES For more information or to order reprints, please e-mail Gail Cohen at: gcohen@clbmedia.ca Untitled-1 1 www.lawtimesnews.com 5/19/09 11:47:00 AM • Training and education "And I'd say up to 90 per cent of what we do is the soft work — the handholding and helping them through the de- cision," says Robinson. "You have to remember [that] for many of them, this is their life. Th is is how they identify themselves." What are they going to do after retirement? Playing golf gets thin after a couple of weeks, he says, so there needs to be a goal, such as teach- ing, volunteering, consulting or working with a local orga- nization as a board member. Th at's often where a lot of the discussion ends up. One of the key factors in Grant Robinson says many lawyers wait too long to start planning the sale of their practices. Usually, the acquiring fi rm will continue to pay residuals for an agreed period after the lawyer leaves, but that, too, is subject to negotiations, says Robinson. For lawyers at large fi rms, it's an easier transition with a few forms, notifi cations, and trans- fers of fi les to colleagues. But for the sole practitioner, it's a much more complex path. valuating a practice will be the age of the lawyer. Th e other will be the nature of the practice, with criminal law being valued less, for example, than wills and es- tates or corporate law. Th e big- gest mitigating factor in a sale, though, is how much of the risk the vendor is willing to ab- sorb in the transfer, according to Robinson. What he means is that the value of the practice is propor- tional to how much risk the ac- quiring fi rm has to undertake in Trust [ Aleks Mladenovic | the transition. In other words, if the exiting lawyer doesn't want to hang around long, the acquiring fi rm assumes more risk in that the clients it's in- heriting are liable to drift else- where or become problematic. Th e longer the selling lawyer stays to service those clients and introduce them to the new colleagues, the less risk they are assuming and the more they are likely willing to pay. A key consideration is whether the lawyer wants to sell or groom someone to take over the fi rm. Th ere are a lot of fi rms looking to grow by ac- quisition, Robinson says, not- ing that despite the downturn in the economy, prospects are good for law practices. If the lawyer decides to bring new partners in and transition over time, they should be pre- pared for a timeline of fi ve to 10 years for an internal han- dover, says Robinson. However, if the decision is to sell, then the transfer can happen in less than half that time. Since acquisitions can usually be fi nanced through billings and cost effi ciencies, the tight credit market isn't a factor. Th e key, Robinson argues, is to start planning early. LT Every time you refer a client to our firm, you're putting your reputation on the line. It's all about trust well placed. Richard Halpern | Sloan Mandel For over 70 years Thomson, Rogers has built a strong, trusting, and collegial relationship with hundreds of lawyers across the province. As a law firm specializing in civil litigation, we have a record of accomplishment second to none. With a group of 30 litigators and a support staff of over 100 people, we have the resources to achieve the best possible result for your client. Moreover, we are exceptionally fair when it comes to referral fees. We welcome the chance to speak or meet with you about any potential referral. We look forward to creating a solid relationship with you that will benefit the clients we serve. THOMSON, ROGERS Barristers and Solicitors 416-868-3100 Toll free 1-888-223-0448 www.thomsonrogers.com YOUR ADVANTAGE, in and out of the courtroom REPRINTS

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