Succession planning for small firms: the pros and cons

When we are nearing the age we want to retire, the subject of succession planning – and the most effective and profitable way to achieve it – becomes a major focus.

It is all the more important to smaller firms, where there might not be a natural succession of younger partners or directors wanting to buy into the practice.

The important thing with succession planning is not to leave it too late.

With the decisions you will need to make in the journey to retirement, leave at least three to four years to achieve your succession plan.

Your options will often be to:

• transfer your share in the practice to your partners or fellow directors or bring in a new partner or director from the employees
• merge your firm with another practice
• sell your legal practice to a third party
• close the firm

You will need to get accountancy advice as soon as possible to discuss the options open to you and their tax consequences.

There may be other opportunities, for example, a management buy-out or a transfer of ownership to all your employees, but I will concentrate on the four options above.

Transferring your share

In this scenario, you have colleagues who are willing to purchase your share in the business and take on the responsibility of running the business.

It is essential to find this out as soon as possible and then, over a period of years, train and support them to take over the role.

This will create as little disturbance as possible to the continuation of your business and to your clients.

There are, of course, many ways in which this sale can be achieved in respect of the payment of the purchase price and the logistics of the transfer.

Agreement will need to be reached so your colleagues have the finance and time to pay the purchase price and it is as efficient as possible to you for tax and cash flow for your retirement.

Merging or selling

If you cannot find any colleagues who wish to take on the financial commitment and responsibility for your practice, then you should consider merging or selling.

A merger with another practice can be an attractive proposal, as it allows you to seamlessly transfer your client base to a merged practice.

If the merger takes place over a few years, you can remain with the merged practice to facilitate the merger towards your agreed date of retirement and introduce your clients to colleagues in the merged firm.

However, there have been problems with mergers.

You will want to ensure any firm with which you merge has the same business outlook and ethos as your firm and that longstanding staff are protected from redundancies.

Alternatively, you may prefer to sell the whole business to a third party. This may realise a higher sale price for you but will not always give the flexibility that a merger may give or protect your longstanding staff.

Closing the practice

For most practitioners, closing your practice will be the last choice because, whilst it may be the easiest option, there are various disadvantages.

You will not be getting any financial reward for the firm you have spent years building up and you will have to pay run-off cover to continue professional indemnity insurance for six years after you have closed.

Run-off cover will normally cost you about two to three times the cost of your last annual premium.

Additionally, if you choose to close your firm, you have an obligation to put your clients in the best possible position to find another lawyer.

You will have to provide your clients with all their case files and information to take to their new lawyer.

Additionally, you will have many responsibilities to the Solicitors Regulation Authority to comply with its requirements on closure of a firm, breach of which could result in a fine or a report to the Legal Ombudsman.

Conclusion

Subject to your accountant’s advice, if you can find colleagues in your firm who are willing to purchase your share in the business, this would seem the most sensible way to plan your succession.

However, the most important thing to remember is that you can never start too early in planning your retirement. Please don’t leave it too late.