What Could Retiring Partners Cost Your Law Firm?

As a wave of senior partners retire, many law firms will contend with demands for costly capital repayments. Partners often build up significant capital accounts over long careers. Repaying their capital contributions can drain a firm's cash flow, especially if multiple partners leave around the same time.

Tapping into current profits to pay out retiring partners can negatively affect profit sharing and bonuses for remaining partners. When departing partners are top revenue generators, it adds another blow to a firm’s short-term financial stability.

Capital account caps, structured retirement plans, succession planning, and other tactics can help mitigate these issues in the future. However, achieving financial stability merely fortifies a firm’s foundation. Ambitious leaders want their firms to thrive! Here’s how to set your firm up to grow even as more retirements occur.

Untie growth initiatives from partner capital contributions.

In late 2023, Bloomberg Law reported that approximately 22% of law firm partners in the top 200 firms by revenue are estimated to be age 61 or older. About half of the top 50 US firms and four UK Magic Circle firms have age-based mandatory retirement, most commonly at age 66.

There’s another aspect that adds to the impending financial pinch. Many firms have traditionally relied on partner capital, rather than external sources, to fund operations and finance cases, a 2024 Citi Hildebrandt Client Advisory recently highlighted.

With mass retirements potentially depleting their capital reserves, firms may stall their investments in growth areas such as lateral hires, technology upgrades, and marketing. The firm’s overall pool of funds to finance ongoing cases and pursue new ones can also take a hit. The impact can be particularly detrimental for complex litigation and other practice areas that require significant upfront investments.

Litigation financing protects law firm growth.

Third-party funding can provide much-needed relief. Also known as litigation financing, third-party funding allows law firms to access capital from outside investors in exchange for a share of the potential future proceeds of a case. Firms dealing with growing waves of partner retirements get several benefits:

• Litigation financing fills the void left by departing partners' capital, ensuring firms have the resources to finance ongoing and future cases.
• With access to external funds, firms can invest in strategic growth initiatives such as lateral hires, technology, and marketing to expand their expertise and attract new clients.
• Litigation financing offers a flexible solution compared to traditional loans. Repayment is contingent on case outcomes. Firms share the financial risk with funders, diminishing upfront financial stress.

While recruiting lateral partners can help bring in new capital, litigation financing stands out as a more immediate and reliable source of funds. You’re instantly back in control and able to offset potential shortfalls and invest in continued growth.

In short, litigation financing gives firms the financial stability to pursue growth opportunities and continue delivering top-notch legal services to clients, regardless of the number of partners that retire.

Embracing litigation financing is just one part of adopting a forward-thinking approach that helps law firms navigate change and thrive in the years ahead. The expert financial and legal analysts at Amicus Capital Group have been Transforming the Business of Law? for over 25 years. Call 1-877-926-4287 to evaluate potential litigation finance opportunities to help your firm grow amid evolving economic and market conditions.