Transitioning Successful Senior Partners

Posted by: Brian Kennel on March 18

 

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Successful senior partners are often larger than life figures within their firms. They often enjoy an individual brand that is more prominent than the firm brand. In these instances, it is nearly impossible for firms to find a single successor. Additionally, these distinguished partners often struggle to walk away from a lifetime of achievement.

 

There are a number of individual reasons that motivate people to continue working rather than retiring. One significant factor is the lack of remuneration for their income generating asset. Of course, this income-generating asset is their client base, which may or may not be transferable.

 

Compare this situation to the owner of a successful operating company. In most instances, the owner of the company can sell the business or pass it along to family and reap a reward for his or her lifetime of work.

 

Since this is not the case with small and mid-sized law firms, especially defense firms, these firms struggle with senior partner buyouts. Some of the more common reasons for these struggles include:

 

  • Most small to mid-sized firms compensate for originations and profits, which will be affected in the transition years for those partners involved in a buyout;
  • Buyouts need to be a transaction between the retiring senior partner (seller) and the individual partner or partners assuming control of the work (buyers);
  • Other partners are often reluctant to fund a buyout from which they do not directly benefit;
  • The firm or partners cannot afford a buyout;
  • There is a risk associated with not being able to keep the business;
  • Other partners may feel that all clients are "firm" clients. If a senior partner was paid fairly along the way, he or she is not entitled to any more money;
  • The timelines of the remaining partners may be shorter than the potential rewards reaped from buying a senior partner out; and
  • The reality that relatively few transitions are fully successful.

All of these reasons have validity, and firms must overcome them for any transition to occur. I recommend that clients evaluate each situation as if it were an individual transaction. They should assess the relevant risk factors along with the determination of a buyout structure. I prefer a three-year buyout period with a declining payment schedule based on a measure of fee income or profitability before buyout costs.

 

Firms that remove the economic disincentives for senior partner retirements have a better chance of a successful transition. 

Topics: Transition Planning