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Failing to plan is planning to fail: 5 steps for successful legal firm succession planning
Legal practices of all sizes face a constant battle to retain and develop talent. Steve Deutsch, chief executive of Wesleyan Bank, outlines five key steps that law firms must take to achieve successful succession planning.
Law firms, like other businesses, must make provisions for their future by ensuring that losing partners doesn't mean losing clients.
A November 2017 study by ALM Legal Intelligence (ALI) suggests that many UK legal practices have not made adequate leadership plans to replace retiring partners.
ALI's study reveals that over a third of respondents do not have a succession plan. Almost half admitted they don't have a plan in place for nurturing aspiring partners towards assuming responsibility for managing client teams.
As the saying goes: failing to prepare is preparing to fail. There is evidence from the Open University that the cost to UK businesses which fail to address staff shortages and widening skill gaps now amounts to more than £2bn a year in higher salaries and recruitment fees.
And SMEs who fail to recognise the importance of succession planning are likely to see an impact on their bottom line. ALI's research discovered that 52 per cent of law firms lost on average at least a quarter of a retiring partner's book of business when they left the business.
Create a long-term succession plan
It's difficult to determine the best course of action for your business and your personal finances without a long-term plan. If your succession planning strategy is well-executed you will be in a stronger position to enjoy a good retirement whilst your legal practice is left in safe hands.
It's equally important to keep an open mind and adjust your plan depending on your personal circumstances and the evolving needs of the business.
Ask yourself these questions:
- How much money will you need to retire on?
- What levels of investment are needed to ensure your practice is attractive to potential buyers?
- How are you going to identify and nurture potential future leaders and aspiring partners?
Review your retirement options frequently
Busy lawyers rarely have the time to regularly review their retirement plans. According to 2016 research by Wesleyan, lawyers are confused by pensions – more than half of those surveyed did not understand the key features, and almost three-quarters were unsure of how much to save each month.
In-firm seminars are a service offered by Wesleyan Financial Consultants, who are trained to understand the specifics of lawyers' pay, benefits, and career paths. Advice is offered on a no-obligation basis.
Identify future leaders
It's arguably of greater importance to create a clear pathway for success, so that talented employees can be prepared for partnership positions when the time is right. Succession planning shouldn't just focus on mitigating risk if senior partners were to leave or become incapacitated.
To identify potential future leaders, consider the specific attributes you will need prospective partners to possess. Communicate to them that they are being considered as part of the long-term future of the firm and explain what the buy-in process involves. This will enable them to focus on honing their skill sets to stand out from others and make them less likely to leave and seek other opportunities.
Seek support from finance providers
New equity partners often need support to smooth their transition from salaried employee to a shareowner in the business. They are required to assume greater financial risk and make capital contributions based on the equity interest they hold, which may present cash flow concerns. Data gathered by Armstrong Watson in 2017 estimated that the average capital account for partners is £164,000, depending on the size of the firm.
Bespoke equity purchase loans from specialist finance providers allow individuals access to funding of up to £250,000, over terms of up to 15 years, providing new partners with a more manageable means of buying into a practice.
Alternative lenders can also offer multiple financial solutions including interest-only, unsecured and secured options to ensure that the loan new partners take is right for their own personal circumstances and can help to preserve vital working capital to grow the business.
Flexible alternative finance solutions can reduce the considerable burden of partners' tax liabilities by enabling them to spread the cost of their bills over six or 12 regular monthly instalments, instead of having to pay a lump sum.
Invest in technology
Legal practices that keep pace with technology are more likely to attract the next generation of business savvy partners who are looking to embrace new innovations to boost revenues and increase productivity.
Modern technology assists law firms to offer enhanced service levels to clients through faster response times to queries and requests for critical case information. It can also safeguard employee retention levels.
Succession planning is a major challenge which is prompting many law firms to reconsider their future direction. Becoming a partner at a legal practice offers several potential benefits, from earning a higher income to gaining additional trust from colleagues. However, the transition from salaried employee to profit share can have a major impact on an equity partner's personal finances.
Specialist financial providers offer expert advice and tailored solutions for new equity partners and retiring partners who are selling their share in a practice to guide them through the process to ensure it progresses smoothly from beginning to end.
Views expressed in our blogs are those of the authors and do not necessarily reflect those of the Law Society. Wesleyan Bank is one of the Law Society's partners.
See also our blog by Douglas McPherson author of The Visible Lawyer: I wanted to be a lawyer, not a sales rep: 4 steps to tackle business development
Justin Rourke of Armstrong Watson Financial Planning on 6 personal financial planning tips for solicitors