By Mark Powers & Shawn McNalis
Today’s retirement-age attorneys are healthier and more energized than any previous generation. Many are eager to work and stay relevant beyond the traditional age of retirement. They also want to make additional money to fund their retirement whether they envision relaxing, traveling or exploring a second career.
To support attorneys taking a proactive interest in designing their futures, we held a workshop, Targeting Your Exit Strategy, geared for small firm and solo practitioners. On the first morning, a 59 year old estate-planning attorney raised his hand and summed up the sentiments of the group: “I worked so hard trying to get into the practice of law, and then I worked so hard trying to build my practice-I never anticipated I’d have to work on how to get out.”
Retirement is simple, right? You just have to stop working.
Perhaps that was true twenty years ago, but contemporary notions of retirement are rapidly changing.1 Even the word “retirement” is being retired in favor of words like transition or evolution. In the workshop, the attorneys spoke of their careers as “morphing” into something different, or “going to the next stage.” Almost no one wanted to close the doors of the firm and just walk away. They wanted new opportunities and innovative arrangements that allowed them to ratchet down their involvement while remaining in the game.
Define New Retirement Needs
This still vital generation doesn’t want to reenact grim historical stereotypes: the hardworking, older attorney who “dies at his desk,” the aging attorney who is mentally retired but physically present, and, in larger firms, the attorney who is forced out due to archaic retirement rules.
Workshop attendees wanted fresh examples of how to map futures. For example:
- Solo practitioners speculated about whether or not they could sell their practices. Having spent their lives building firms, they were justifiably interested in a robust return on their investment.
- Partners in small firms wanted to transition in the next couple of years, but were paralyzed because their firms couldn’t return their original capital investment or pay them a retirement benefit.
- Founding partners-the marquee names on their letterhead-wanted to travel, but feared their firms would nose-dive without their involvement or rainmaking abilities. Naturally, if their firms did poorly after they left, their retirement benefits would be at risk.
- Other practitioners were reluctant to leave their firms because no other attorneys had sufficient expertise to succeed them.
To begin the process, we first determined that all of the participants were healthy. We then asked them to assess their financial situation: could they afford 25 to 30 years of retirement? According to financial advisers, people need at least three-quarters of their pre-retirement income to support themselves after the transition-if they plan to downsize somewhat. Obviously, the more people downsize their lifestyle, the less expensive it is.
While a great many attorneys happily choose to work through all or part of their later years, some have to work. Second only to the state of your health, whether or not you intend to continue working is the most important piece of the retirement puzzle. Resolve this first so you can then create a realistic vision for your future.
Envision Your Future
We then gave the participants a list of various transition scenarios and asked with which one they most identified. Here is a short version of the list. See which scenarios resonate with you.
1. Part-time, Of Counsel Position with a Substantive Focus
This “of counsel” position is the ideal solution for a partner in a multi-partner firm who loves the practice of law and whose firm requires his ongoing technical expertise. Post-transition, the semi-retired attorney is able to cherry-pick his cases and work 2 or 3 days a week, gradually winding down through the first 5 or 10 years of retirement. This allows him to stay relevant longer, keeps his mind engaged, and further funds his retirement.
As part of this plan, the attorney may negotiate an initial break in service to enjoy a sabbatical or long-awaited vacation.
Compensation is based on production-typically 33% to 50% of collected fees, though the attorney may request to be paid a straight hourly rate.
The semi-retired attorney may maintain an office at the firm, share an office or work in the firm’s conference room, or have a home or remote office. He may require some staff support depending on the level of production. Typically, the attorney turns over his managerial or administrative responsibilities and loses his vote as a member of the partnership.
2. Part-time, Of Counsel Position with a Client Development Focus
As in the previous scenario, the attorney in this position works part-time, may take an initial break in service, and stages her departure on a scheduled basis. Client development, not production, is the focus of her work.
This is an ideal position for the firm’s marketing partner or senior rainmaker who wants to bring in new clients, maintain established referral relationships, train younger partners and associates on client development and eventually, to transfer all referral relationships.
Due to the value of her network, compensation is based mainly on origination-typically 10% to 33% of collected fees with allowances made for new work from existing sources.
This attorney will leave her name on the letterhead for a negotiated period of time, maintain an office at the firm, share an office or meet clients in the firm’s conference room. She will require minimal or no staff support. Typically, the attorney turns over her managerial or administrative responsibilities and loses her vote as a member of the partnership, but should be consulted when marketing strategies are discussed.
3. Of Counsel Position-“In Name Only”
The founding partner-in this case, someone whose name is an important part of the firm’s brand-ceases production and virtually all participation in the firm except for special occasions, but continues to lend his name to the firm.
His actual presence at the firm is negotiable; compensation is based solely on the value associated with the partner’s name and is usually paid as a fixed monthly fee for a specified length of time, often 5 to 10 years. To determine the fee, the firm must track the number of new work and new client inquiries attributable to the partner for 1 to 2 years prior to the partner’s transition. Based on this history, a monthly value is assigned.
The attorney, who may maintain a token office at the firm, share an office or occasionally meet clients in the firm’s conference room, depending on the degree of presence agreed upon, requires minimal or no staff support.
4. The Succession Approach
(Solo practitioners and multi-partner firms)
Over a five to seven year period, the firm founder or partner in charge of a practice group transitions to an of counsel position, while an associate attorney is trained, and/or becomes partner and assumes leadership of the firm or practice group. The founder or practice group leader trains the new attorney.
Existing staff may remain in place, or be replaced with new staff depending on what the founder or partner and the new attorney negotiate. To fund their capital investment, an upcoming associate may contribute a lump sum or may contribute through payroll deduction over time (usually five to seven years).2
5. Outright Sale Approach
(Solo practitioners and multi-partner firms)
In this case, the attorney/owner sells her practice to an attorney/buyer who did not come up through the ranks as an associate. The transition period may take six months to two years unless an urgent situation (failing health, for example) necessitates the sale.
The price of the firm is based primarily on the type of law practiced, the value of the firm’s book of business, the potential for repeat business, the transferability of referral relationships, the firm’s proprietary systems and sometimes the reputation or “goodwill” attributable to the firm. While other factors come in to play, these are the most important. 3
During the transition, the selling attorney may maintain an office at the firm, share an office, or meet clients in the firm conference room. Alternately, the seller may have a home or remote office.
The seller will need support staff only during the transition, not after it’s completed. Often, the selling attorney becomes of counsel to the old firm to further fund its retirement, provide additional expertise or to help maintain referral relationships.
6. Transfer Book of Business to another Firm and Become Of Counsel
(Solo practitioners or a partner in multi-partner firm)
The attorney transfers her book of business out entirely (with the signed permission of the clients obtained in advance and in accordance with all local ethics rules).
If the attorney is a solo practitioner, she has usually closed up shop entirely. Partners in multi-partner firms leave in a manner consistent with whatever contractual agreements were in place.
The attorney becomes of-counsel to the new firm and is paid either on a percentage or an hourly wage to support the resolution of the cases she brought.
7. 2nd Career Approach: Teach, Write a Book, Manage Investments
(Suitable for all attorneys)
For attorneys who want to leave their firms and yet remain active and involved, who are financially independent and can make money outside of the law, who do not seek post-transition employment, or who cannot sell their firms, this is a recommended scenario. They can spend time doing pro bono work as an emeritus attorney, teach, write, pursue a second career, or manage real estate (for more information, see the ABA’s website.
Spend some time with these scenarios deciding which one will be most helpful to you. If you deny or avoid the subject, you won’t form an exit strategy that engages you, excites you or pulls you forward. You need a clear vision to approach this critical stage of your life. Harry Emerson Fosdick said it best: “Don’t simply retire from something; have something to retire to.”
1 Phyllis Korkki, “When Retirement Collides With Reality,” The New York Times, January 20, 2008.
2 James D. Cotterman, Editor, Compensation Plans for Law Firms, 4th Edition Chicago, Illinois, American Bar Association, 2004.
3 Edward Poll, Selling Your Law Practice: The Profitable Exit Strategy, Law Biz Management Company, 2005.