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The oldest members of the baby boom generation began reaching retirement age in 2011. From that year until 2030, some 10,000 baby boomers will hit the age of 65 each and every day. The aging of this massive generational faction has many implications for the legal profession, but one of the most significant is this: there is now a glut of law firms that are looking for a new generation of lawyers to fill the shoes of their founders. And a lot of those firms are unprepared for the task.
For those that loathe the idea of succession planning, here’s a bit of good news: it’s entirely optional. There are some situations in which it may make sense to call it a day when the leader or leaders of the firm retire. The firm can wind down its operations, its remaining lawyers can look for a merger partner or asale of a practice can occur. Many firms will feel an imperative to continue the operation, but whether there are good reasons for doing so is a questionworth asking. In fact, it is the first question that small firms should ask themselves as they begin their succession planning.
The founding generation of a small firm may have gotten by without clear roles and responsibilities, but that’s not a recipe for long-term success. If a firm is to last over time, it should have a clear decision making structure. Most frequently, that takes the shape of the full partnership acting as a board of directors, a managing partner acting as an executive leader reporting to the board and individual partners reporting to the managing partner. The question of who to select as the future leader of the firm, of course, is a separate and equally important one. Speaking of which . . .
Determining the future leader of the firm is critical. It’s hard to enumerate all the qualities a successor should have, but New York attorney Bruce Stachenfeld has identified some “do nots” for firms choosing future leaders. Don’t split the job between two people; don’t base the decision on billings; and don’t pick a successor through a committee. Instead, he advises letting the firm’s current leader make the choice.
It’s much easier to execute a smooth succession process when a firm has a good generational mix of ages. If your firm has one generation of attorneys in their 50s and up, a giant void, and then a younger generation in their 20s and 30s, it may be time to consider hiring mid-career laterals to diversify thefirm and establish a bridge from one generation to the next.
A succession plan will probably require the firm to value itself—most likely, to determine the value of partnership shares being transferred between exitingand entering partners. Unfortunately, there’s no simple answer to how to do this. Firms can attempt to value a firm by determining the value of its assets,and subtracting liabilities; they can multiply one year’s gross revenue by a factor of x (for law practices, one expert suggests that the appropriate factor is between .6 and 1.0); or it can be based on an estimate of future cash flows, among other methods.
The firm should think hard about whether its compensation system gives its lawyers incentives that support its succession plan. A firm that is shorton future leaders, for instance, will want to ensure that its compensation system rewards attorneys for taking on responsibility and demonstrating leadershipquality. Likewise, if its client relationship partners are all older, it may want to deemphasize the financial reward that comes with that status.
One factor that makes succession planning difficult is the reluctance of senior partners to give up control. When the 70-year-old lawyer in the corner office is the firm’s biggest rainmaker, it’s hard to tell him or her to pass the torch. A mandatory retirement age can ease this process by effectively tying the hands ofthe firm and its aging partners. But there’s an ageist quality to mandatory retirement ages, and some warn against applying too rigidly. “Too many firms are strict in their insistence of mandatory retirement dates as absolute,” says Michael Allen of Lateral Link. If there’s no succession plan in place for the practice, he says, firms should relax the rule to allow “a transition period during which the lawyer could operate in a mentoring capacity.”
Anytime money is involved, tax implications should be considered—probably by an outside tax lawyer.
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