Arizona Attorney Magazine: Succession Planning
Preparing Your Law Firm’s Future
BY DAVID FRENCH
My father was always a planner. He would arrive at the airport three hours in advance of his flight time. And he had a 10-year supply of his daily vitamins.
He had once attended the University of Arizona College of Law—likely drawn toward the logic that required professional skepticism. He considered himself a “realist,” but his grandchildren called him Grumpy. Grumpy was prudent in his spending (unless it was on classic cars) and judicious in his business dealings, and he always provided us with the baseline for the “most conservative” option.
His closet was filled with “backup” clothing items, duplicates of things he already had, only new with tags still attached. He also had replacements for his favorite navy-blue cashmere sweaters, orthopedic shoes, khaki pants and dress shirts. His garage was filled with 20 gasoline cans, he purchased gold as hard currency, and he maintained a somewhat self-sustaining farmhouse in Kansas.
He looked ahead.
But while he was prepared for the end of the world, he was, ironically, not prepared for the end of his life.
Of course, we all know that life is filled with unforeseen events. Often when unexpected circumstances arise, we are able to correct or modify our plans to accommodate these unanticipated changes. We all do that in our own lives.
For instance, if you unexpectedly lose your job, you could work through the steps of preparing your resume and finding new employment. If you break your leg, you would immediately seek medical attention, followed by physical therapy to work toward rehabilitation. We try to plan for these types of unanticipated life events by common measures, such as keeping (ideally) a year’s worth of savings and maintaining health insurance. And for most of us, we spend hours thinking through the “what if” scenarios to ensure we are prepared.
But we don’t always think of everything.
Last year, I received a phone call from the hospital. An emergency room doctor told me that my father had unexpectedly passed away. His heart had stopped at his desk while he was on a conference call—not the way any of us envision going.
The months that followed his death were eye opening.
We learned after my father’s death that he had failed to transfer certain assets into the trust and didn’t finalize his estate. Therefore, my family, with the help of some talented attorneys, had to pull together and unravel a lifetime of financial matters. But while this was wildly inconvenient and costly to our immediate family, the lack of succession planning in his business was much more damaging.
At 73 years old, my father ran the day-to-day operations of a large family company. As we discovered, there wasn’t a back-up plan or a prepared successor to take his role—despite the fact that there were many employees who relied on the business operations to feed and provide for their families. In addition, many other companies relied on the services provided by our family business.
Even though age 73 is not considered old these days, my father should have had plans in motion to ensure there was continuity for both the business and its clients. Many of us do not like thinking about mortality and death, but I now know from experience how important it is to face those difficult realities and to make the decision to plan ahead before unforeseen life events occur.
When we launched our legal recruiting and advisory firm, a big part of our business plan was servicing the baby boomer generation of lawyers, many of whom we knew would be seeking to retire or change their workload in the coming years. We knew our assistance could include anything from finding a new purpose for them within their existing firms, to helping both small and large firms with senior partners navigating succession planning to ensure continuity for both the firm and clients.
During our first few years of business, we also have encountered a number of firms and solo practitioners struggling to recover after encountering adverse situations, such as the death of a partner or even simply not paying attention to rising overhead costs.
Many of these recovery problems are preventable with a little planning. Just as people are advised to create wills to settle their estates, lawyers are encouraged to create succession plans to ensure that both partners and clients will not be left out in the cold when the unexpected occurs. Particularly in this day when a law firm is a marketable entity, it is important to consider contingency plans to ensure its continued existence.
Recently, the Arizona Supreme Court recognized the ethical importance of succession plans and amended its rules to include the development of a succession plan as an essential part of fulfilling client duties. Specifically, the rule changes now require a lawyer to appoint a successor counsel for all clients (Rule 41(i)(2), Ariz.R.S.Ct.). This ensures that clients will promptly receive their files and trust account moneys in the event the lawyer is unable to continue as the client’s counsel, such as if they have died, disappeared, become disabled, or been disbarred.
Without a designated successor counsel, a client may have to wait until a judge assigns a conservator to handle the client files. Otherwise, the State Bar is often appointed as conservator, which requires it to inventory the files and contact each of the lawyer’s clients in an attempt to return their file. It is a time-intensive process, and the Bar is often unable to get in touch with a client, which forces the organization to store these files for indefinite periods of time. Besides the hiring of personnel to process these files, the State Bar has even had to lease separate warehouse space in order to house all of them. Ultimately, this harms clients because they are unable to retrieve their file to prepare new counsel during their legal matter. It becomes a question of ethics when the lawyer could have designated a successor to handle these files—and chose not to.
To ensure you do not run afoul of this new rule as members of the bar in Arizona, it may be prudent to review certain succession planning steps as provided in the Succession Planning Handbook prepared by the State Bar of Arizona, and complete relevant accompanying forms.
A few of these steps include:
- Begin arranging for a colleague or other trusted practitioner to agree to act as transition or successor counsel and assume the responsibilities of protecting, transferring, and disposing of client files and materials, in the event an adverse event occurs to you. You may wish to have several potential counselors in the event that conflicts of interest arise.
- Thoughtfully consider adding an additional Authorized Signer to your trust account in the event that you are unable to provide consent for access. This signer does not necessarily have to be your successor counsel, and it eliminates the additional step of having the court designate a conservator over your account, thus ensuring your clients receive their moneys quickly.
- Notify clients about your plan and obtain consenting signatures to authorize access by your successor counsel. This may be done within the fee agreement or in a standalone document.
- Understand that if you fail to make these arrangements, any fees incurred by the designated conservator may be billed to you or your estate. If your office is kept in good order and requires minimal work, it can be a marketable asset with proceeds forwarded to you or your estate.
Succession plans are not just for unexpected events that leave clients left in a lurch. They also can be valuable plans to ensure the sustainability of one’s practice or for a firm that is in danger of becoming insolvent. While all thoughtful attorneys want to leave a lasting legacy and ensure their clients are in good hands, planning for it is not always top of mind. Many firms simply do not anticipate the potential for dissolution due to partner retirement or withdrawal, emotional or mental impairment, failure to continually recruit young legal talent, or rising overhead costs.
For these situations at law firms, or for practitioners looking to pare down, expand, or transform their practice, there are a number of options to explore when developing a succession plan:
- Groom a new associate to take over in a few years. This ensures your legal skills will be imparted to your successor. You can feel confident knowing successor attorneys have taken the time not only to learn your practice area thoroughly, but to understand the nuances of your unique clients.
- Bring on a new experienced partner. Select someone whom you feel you could immediately entrust your practice to, which will allow you to slow down. This lets you maintain some control while helping your clients adapt to this new partner.
- Merge with another similarly sized firm. With two strong balance sheets, you will be in a better position to begin a transition, whether now or in the future. This should be discussed from the outset, even if the plan is not to be implemented for a number of years.
- Join a larger firm. If slowing down is your desire and bringing in an associate or partner sounds like a lot of work, sometimes identifying a seasoned group to take care of your clients is the best option.
- Consider selling your practice. Since 2003, attorneys have been able to sell their practices in Arizona (Ethical Rule 1.17, R.Prof.Conduct). It should be noted that valuations of law firms rely heavily on the personal goodwill the selling attorney has maintained with clients. It is important to note that an outright sale in which the selling attorney simply walks away from the practice and clients will not usually work. Also, traditional financing is hard to come by in a law firm sale, so while our company has identified a few sources that will look to provide capital in these transactions, an earn-out of some sort will normally be the best approach.
All of these options are time-intensive and will likely take some emotional toll. They also may take a larger network than most attorneys have access to, and may require significant financial analysis. While some of this planning is not the most exciting, it will ease the pressure in the long run for everyone involved.
In my family’s case, if my father had planned ahead, we would have been better able to honor his wishes. Grumpy could have helped us adopt his realist perspective on life. Instead, we are still working through decisions necessitated by his death. How much more enjoyable it would have been to make those decisions while he was still around, giving us his thoughtful input.
DAVID FRENCH is the founder and managing director of D. French Advisors, a legal recruiting firm. He and his team strive to be an extension of law firms and corporations, giving candidates a great opportunity to find the right fit. The firm is committed to strengthening the local legal industry by guiding firms to plan for a stable future through both strategic growth initiatives and comprehensive succession planning.
 See www.azbar.org/media/807754/succession_planning_task_force_final_report_with_appendices.pdf