When Bill, age 64, came to us for help with designing his exit strategy, he had devoted his life to a very specialized area of the law and was well known for his expertise. Unfortunately, he had recently dealt with a health issue that wasn’t fatal, but serious enough to have him contemplate his end game. Like most attorneys he thought he’d either transition his firm to a successor or sell his practice outright so he sought out our advice to develop the plan.

Two Critical Decisions

In talking with him we found that he had assembled a robust team of legal assistants and paralegals combined with a couple of junior associates who were supporting players. Regrettably, his fear of hiring associates who might leave and later become competitors meant he’d made two critical decisions: he never trained anyone to the point that they could duplicate his work (he also acknowledged that he lacked the patience to train other people, preferring to do the work himself). And he had personally controlled communication with all of his clients and referral relationships to further mitigate the chance of creating future competitors.

As a result of these two decisions, it came as no surprise that there was no logical successor in the pipeline. And the likelihood of his finding the perfect buyer – and then patiently training this person to use his methodology – also looked remote.

An Expert Weighs In

Fortunately, according to Randy Ellington, a former business and tax trial attorney and founder of SmartWealth LLC in Maitland, Florida, there’s an alternative solution gaining traction among small firm owners who aren’t good candidates to sell or transition their firms. It is a delayed retirement scenario in which the owner brings in a CEO or manager who assumes the operational responsibility for the firm and allows the attorney-owner to retire – just from the things he or she doesn’t want to do.

When it is done well, engaging a CEO or manager allows small firm owners to focus on what they enjoy most about the practice of law and delegate what they don’t. Typically, this means they’ll focus on the legal work and relationship management, while delegating their management headaches. They may also take the opportunity to work a reduced work schedule to lessen their stress.

How This is Done Elsewhere

The purest form of this business model is commonly seen in the world of manufacturing. Why? The assembled economic unit of a manufacturing plant is a better fit for this kind of arrangement. Once a manufacturing business is beyond the start-up phase, the economic engine of a factory is very much driven by the efforts of the employees. The owner does not work on the factory floor generating a percentage of the revenue. He or she may have contributed time, effort and capital in the start-up phase, but then revenue production is driven by the employees.

Not so in many small law firms. Unlike a factory, the economic engine in a technician-driven law firm is made up of both the owner and the employees. In fact, depending on the composition of the firm and how poorly it is leveraged, the owner may be the biggest contributor to the firm’s revenue. Firms owned by attorneys who command high fees due to their accumulated experience and expertise tend to structure their firms this way. In this scenario, the attorney owner is on the factory floor, substantially contributing to revenue and critical to the profitability of the firm.

In a law firm where the attorney is easily cloned, another attorney could step in, assume the client relationships and provide the technical skills needed to easily replace the revenue generated by the former owner. But when the attorney is not so easily replaced, as in the case of our client, this manufacturing model provides a workable alternative.

Financial Impact

According to Ellington, who is not only an attorney, but also a financial planner and a Retirement Income Certified Professional, this is not only a great solution for those who want to delay their exit and focus on what they enjoy; it has a significant impact on the owner’s nest egg. This strategy buys the owner another five to ten years in the marketplace, depending on the attorney’s health and desire to work. The additional income generated is often critical for those who haven’t planned their retirement very well: it allows them to pay down a significant amount of debt and grow their nest egg while they focus on what they love to do.

Control Is Good

The financial benefits may be obvious, but Ellington points out that this is a good idea from another standpoint as well. Prior to a sale or succession an attorney owner retains 100% of the income and 100% of the control of the firm. Along with this, of course, comes 100% of the management headaches. When an attorney sells his or her firm, the attorney retains a small percentage of control, if any, and only a percentage of the income – on an installment basis (if the buyers actually make the payments) – until it ends in three to five years. For an attorney who values control over work product and client relationships, but wants to reduce management headaches, this is a good alternative way of maximizing the return on their time and talents.

Alternative Approaches Can Work

When a firm is entirely dependent on the skills and talents of its owner, it is not easily transitioned or sold because the attorney really is the business. They are inseparable. By bringing in a CEO or manager who manages the operational aspects of the firm, the attorney instead maintains more control and gains more income during that five to ten year period while they focus on doing what they love to do. All in all, this is not a bad exit strategy for the attorney who discovers at a late date that he has spent all of his time developing his technical skills, his firm and his reputation — but not his successor.

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Atticus, Inc.

This article was written by an Atticus staff member.

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