Fortune Favours the Prepared: Legal practice owners should embrace succession planning to maximise value

Succession planning in the legal profession is crucial for equity partners to ensure the smooth transition of their practice and the preservation of its legacy.

However, when there is a lack of interest from within the firm to take over, partners must explore alternative strategies. The considerations of selling a legal practice well in advance of retirement are explored below. By proactively addressing these factors, partners can secure the future of their practice, protect their financial interests, and facilitate a successful transition.

Addressing Succession Challenges

When internal successors are not readily available, selling a legal practice early becomes an attractive option. By initiating the sale process ahead of retirement, partners can ensure that succession planning is in place and the legacy of their practice is preserved. This allows sufficient time to identify external buyers who possess the necessary profile and vision to lead the firm forward.

Minimising the Financial Burden

One significant financial consideration when retiring from a legal practice is the cost of professional indemnity insurance run-off cover. This insurance protects against potential claims arising from work conducted prior to the closure of a practice and currently costs around 3.5x the usual annual premium. A sale provides partners with the opportunity to avoid this burden, with the buyer becoming the successor practice as a result of the acquisition.

One significant financial consideration when retiring from a legal practice is the cost of professional indemnity insurance run-off cover.

By sourcing a succession pathway well in advance of retirement, partners can ensure the risk of run-off cover is mitigated and is not a factor for a buyer to take advantage of when negotiating the purchase price. An acquiring party will be aware of the expensive run-off cover premium the selling partner faces and could use this as leverage in negotiations.

Maximising the Value of the Practice

The market demand for established practices remains robust, as buyers recognise the advantages of an existing client base, reputation, operational infrastructure, and a partner willing to continue in situ beyond any earn-out period. By selling early, partners can position themselves to negotiate a fair price for their practice, maximising its value. This provides financial security for retirement while ensuring a smooth transition for clients and staff.

Local Competitor Risk

As referred to above, the knowledge that a partner plans to remain on at the selling practice post-sale is a significant factor for most acquirers. A number of equity partners, particularly when they are sole owners, struggle to find a buyer when they have short-term exit plans.

This reduces the pool of potential suitors mostly to those firms who already have a presence in the local area. A common difficulty partners face in this situation is the business risk associated with having sale discussions with a local competitor. In the alternative, acquirers further afield may see too much risk involved in acquiring a practice where the leadership and management will soon fall away - recruiting a partner to run the new office is not an easy task with the current battle for talent.?

By selling the practice early, partners can actively participate in the transition process, ensuring their expertise and insights are passed on to the new owner

Facilitating a Smooth Transition

Transitioning a legal practice requires careful planning and knowledge transfer. By selling the practice early, partners can actively participate in the transition process, ensuring their expertise and insights are passed on to the new owner. This collaborative approach fosters continuity and maintains the trust of existing clients.

It is common in legal market M&A for most of the purchase price to be paid in deferred instalments or contingent in the form of an earn-out. Partners can play an integral role in facilitating a smooth handover, thereby protecting the bulk of the sale proceeds from clawbacks and/or ensuring any earn-out targets are achieved.

Opening New Possibilities

Selling a legal practice long before retirement offers partners the opportunity to explore new personal and professional endeavours. By securing the future of their practice early, partners can embark on their retirement journey with peace of mind, free from the administrative and managerial responsibilities of running a firm.

This newfound freedom allows partners to pursue other interests, such as consulting, mentoring, or engaging in philanthropic activities. Selling early enables partners to shape their retirement on their own terms, ensuring a fulfilling and rewarding next chapter.

Timing is of the essence when it comes to selling a legal practice. From a potential buyer's perspective, the closer an owner leaves it to sell their practice, the less valuable it becomes. There are two critical factors that influence this: the liability for professional indemnity insurance run-off cover and the impending loss of fees generated by the retiring partner. Selling the legal practice sooner rather than later not only maximises its worth but also minimises the risks and uncertainties for both parties involved.

When considering the sale of a practice upon retirement, partnering with a legal M&A consultant can prove to be a crucial strategic decision for any practitioner. The process of selling a practice can be complex and multifaceted, often presenting challenges that require expert guidance to navigate successfully. An M&A consultant brings a wealth of experience and specialised knowledge to the table, offering invaluable insights on market trends, valuation techniques, and a network of potential acquirers. By teaming up with an M&A consultant, retiring partners can maximise the value of their practice, streamline the selling process, and ultimately secure a seamless pathway to retirement.

If you are a Legal Practice owner and would like to discuss any of the above further, including your exit plans, merger or indeed growth plans via acquisition, please contact [email protected] for a confidential, no obligation conversation.

We are well equipped to advise you of the options open to you, and ensure you achieve the objectives you would wish to reach for any next chapter of your business.