Succession planning for sole practitioners Peter Scott Peter Scott Consulting

Succession planning for sole practitioners

Peter ScottPeter Scott Consultingwww.peterscottconsult.co.uk

http://www.peterscottconsult.co.uk/

PETER SCOTT CONSULTING

Who is currently thinking about how to deal with succession?

How far have you developed your plans?


Why do sole practitioners need to plan ahead?

• Age / retirement issues

• Resource issues

• Professional indemnity / run-off cover

• To build capital value


What should a succession plan for a sole practitioner’s practice aim to do?

To secure the current and future well being of everyone in the firm and the interests of clients

Sole practitioners need to think creatively how to make the best use of what they have


Options?

• Continue practice by taking in a partner

• Merge / sell practice

• Close practice

• Other?


1. Continue the practice by taking in a partner

• Choose the right partner!• On what financial basis will they become a partner? • Get the partnership agreement right • Agree the financial basis for your ultimate retirement

NB – Plan ahead to get your practice into ‘good shape’NB - Take good accounting, valuation, tax and legal advice

Who has done this / tried to do this / is thinking of doing this?


2. Sale / merger

What does a lawyer have to sell?

• Services / labour?

• Hard assets?

• Goodwill? (the difference between the net hard asset value and a total price)


What do you have to do so you have something to sell?

Need to create something of value:

• which someone else needs• which they cannot provide (easily or at an economic cost) for

themselves• The value of which does not depend on your remaining in the

business


Three elements to creating something of value in a law firm

• The nature of the business you create• Your relationship with that business• The need to find a buyer

Above all you need to create a business


1. Need to build a competitive business

• Focus is all important

• Focus on work types / client types

• Sectors where there is / likely to be sustainable growth

It is about picking winners


Picking winners?

• Research / analysis of the market• What kind of law firm should I be building….. to create capital

value?• Strategic planning to achieve objectives• Implementation


Need to build a practice that is showing a pattern of…

• Increasing turnover

• Increasing profitability

• On a sustainable basis

• With a stable and growing client base


2. Your relationship with the business

• You need to separate two elements:

- your ownership; and - your operational involvement

• Reduce / eliminate the dependence of the business on your skills and labour for its continuing well-being


If you do this in a way that…

• The business can continue without you

• With a sustainable income stream

• With sustainable profitability

• Which is transferable - then you may have something of value to sell


How can you achieve this?

• Build a team around you

• Delegate – NB the importance of leverage

• Retain ownership

• Build flexibility into the firm – e.g. no long term lease obligations


Divorce your ownership

So you can walk away from the business with your value either…

- immediately on sale or

- after a bedding in period linked to an earn out arrangement

Owner

delegation and leverage

Lawyers Lawyers

New Owner

delegation and leverage

Lawyers Lawyers


3. Need to identify a buyer

• With whom there is a strategic fit

• Who needs what you have

• Who has the resource to continue the business (particularly if receiving your value depends on an earn out)

You may need to sell the vision of putting the two businesses together


Ensure you receive your value

• The terms upon which you sell

• How you structure the sale / merger

NB Take advice – valuation, accounting, tax and legal


A case study

A law firm

• 1 partner• 3 other fee earners• No lease obligations


The nature of the business?

A niche firm

• A growing sector – practice attracted work nationally • Practice limited itself to narrow areas of work in that sector• Broad range of existing and growing clients• Owner had built a reputation in the sector• Profitability hit by the recession

Did the owner have something to sell?


Did the owner have something to sell?

• Nature of the business?• Owner’s relationship with that business?• His age?• Potential buyers?• Basis of valuation?

Outcome?

Practical issues arising on sale / merger?

• Professional indemnity insurance – - run off cover – cost? - successor practice

• Some PI issues? - buyer’s preferred approach Vs seller’s preferred approach - how to satisfy both? - the buyer’s excess

NB – Take advice

More practical issues

• How to realise your WIP and Debtors?

• Know your buyer – NB - due diligence

• Your future position / status / liabilities

• Get the sale / merger agreement ‘right’

NB – Take advice


Any questions?

Documents

Succession planning for sole practitioners Peter Scott Peter Scott Consulting