Preparing for Retirement in Uncertain Times
As the legal landscape evolves, so does the necessity for seasoned attorneys to devise solid exit strategies as they approach retirement. Particularly in the wake of recent global events like the COVID pandemic, the urgency of these plans has become starkly apparent.
I’m an attorney with over 40 years in practice, and a seasoned consultant for attorneys. I’ve guided 200+ solo practitioners and small law firm owners across various specialties in crafting their departure strategies. This blog post explores three critical mistakes that lawyers should avoid to ensure their exit from legal practice is as smooth as possible.
Mistake #1: Adopting the "Hire to Retire" Strategy
Many attorneys envision passing their practice to a younger associate—a strategy that seems mutually beneficial. In this scenario, the seasoned attorney gets to retire comfortably, knowing their clients are in good hands, while the younger lawyer inherits a ready-made business. However, this "hire to retire" approach is fraught with challenges, as illustrated by the case below.
Mary, a solo immigration lawyer based in Philadelphia, reached out to me at the age of 65, clearly distressed. She recounted her experience from three years prior when she had optimistically hired a recent law school graduate. She hoped that after 4-5 years of collaboration, this associate would purchase her practice, securing a seamless transition as she retired.
However, contrary to her expectations, the associate departed after only three years without buying her out. Furthermore, he chose to directly compete against her. To worsen matters, Mary discovered that two of her top clients had followed her former associate, leaving her feeling deeply betrayed and questioning where her strategy had failed.
This scenario exemplifies what I refer to as the "hire to retire" strategy—a plan that, while appealing in theory, is riddled with fundamental flaws.
Finding a reliable associate who aligns with your business philosophy and client management style is challenging. Moreover, financial hurdles such as law school debt can delay or derail an associate's ability to buy into the practice, leaving the retiring attorney vulnerable and the succession plan in jeopardy.
Instead of this risky strategy, consider alternatives such as merging with another firm where synergies in practice areas can lead to smoother transitions and shared risks, or seeking an external buyer who can provide a clean break and immediate financial return.
Fortunately for Mary, she still had time for a “do-over.” Together, we found a local firm for her to join in an “of counsel” role that provided her with all the benefits she had hoped to receive from a buyout.
Mistake #2: Relying on Inaccurate CPA Valuations
Valuing a law practice is a complex endeavor that requires more than just a formulaic approach. The following story serves as a cautionary tale.
David, an estate planning lawyer based in Los Angeles, had worked with two highly competent associates for over 15 years. An internal buyout seemed like the perfect exit strategy. To set a fair price for his firm, David consulted his longtime CPA, who advised him to price the firm at three times its gross revenue—a common valuation method for many professional service firms. However, she had never appraised a law firm specifically.
Excited by the potential payout, David presented this valuation to his associates. The high figure immediately raised concerns, leading them to suspect that David was attempting to exploit them. The negotiations deteriorated rapidly, and six months later, the associates, still keen on a fair acquisition, left to start their own practice.
This experience underscores a critical lesson: avoid relying solely on formulaic valuation methods, commonly referred to as "multiples" or "rules of thumb." These approaches, while perhaps suitable for more mature markets like dentistry or accounting, do not translate well to the legal sector, where the market is less developed and more opaque.
Valuation formulas attempt to project future revenues, but predicting such revenues varies significantly across different legal practices. For example, the revenue forecasts for estate planning are vastly different from those in immigration, family law, or criminal defense. These practices share little in common besides being legal disciplines, making a universal valuation multiple impractical. The complexity and individuality of each practice area demand a more tailored approach to valuation, reflecting the unique aspects and potential of each firm.
Under my method, the Ginsburg method, I carefully analyze precisely how the revenue is generated. I understand the nuances of practice areas and how that impacts future revenue predictions.
Accordingly, one can only provide “ballpark” figures. That is what I ultimately provided to David. This method not only ensures a fair assessment but also facilitates smoother negotiations during the sale process. Then, working with a more realistic valuation, we ultimately found another law firm to buy his practice.
Mistake #3: Procrastination Pitfalls: The Dangers of Delaying Exit Planning
One of the gravest mistakes retiring lawyers can make is to delay planning their exit strategy. This procrastination not only jeopardizes the financial valuation of the practice but also risks leaving a chaotic situation for loved ones to manage. The next story illustrates this peril vividly.
John had built a practice that thrived on long-term, stable client relationships. Despite his firm's apparent value and appeal, John hesitated to plan for his exit. After reaching out to me, John abruptly halted the process, sending me an email that read,
"I’ve decided now is not the time to give up the ship. For the moment, I will continue to kick the can down the road. Life is just too perfect to consider changing."
Tragically, two years after deciding to delay his retirement planning, John passed away unexpectedly after a brief illness. His widow, Debbie, was left to handle the aftermath. Overwhelmed and grieving, she struggled to manage his ongoing cases and maintain client relationships. Many of John's clients eventually sought legal services elsewhere.
In an attempt to salvage anything from the situation, Debbie contacted me. After much effort, we secured a buyer, but the practice sold for far less than its potential value, effectively becoming a fire sale. Reflecting on the ordeal, Debbie lamented,
"Thank you for all of your help. John was always grateful for your excellent assistance. I knew that you had tried to lead him down the right path, but he just wouldn’t listen. Of course, I wished he had, as well as his clients."
This tale is a stark reminder of the critical importance of proactive planning. Starting early allows for strategic decisions that can optimize the practice’s value and ensure continuity for clients and employees. It also provides peace of mind to the retiring lawyer, knowing that their legacy and family are protected. When in doubt, take action. Don't leave your loved ones to sort through the chaos of a postponed exit strategy.
Securing a Legacy: The Imperative of Strategic Exit Planning
“He who fails to plan is planning to fail.” - Winston Churchill
Retirement planning is a crucial yet often overlooked aspect of a lawyer's career. Avoiding the mistakes above can enhance both your retirement and the longevity of your legal legacy.
As you consider your own exit from the legal profession, remember that expert advice is invaluable. Do not wait until it is too late to plan your departure from the practice of law. Engage with a seasoned expert who can tailor a strategy that fits your unique needs and ensures your practice thrives even in your absence. Reach out today to begin your journey toward a fulfilling and secure retirement. Contact Roy Ginsburg at 612-524-5837 or connect online.
