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Succession planning: Handing over the practice

Succession planning: Handing over the practice

By Karin Derkley

Practice Management Succession 

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Every year hundreds of Victorian lawyers face the dilemma of what to do with their legal practices because of age or simply a desire to move on.

After 25 years as a sole practitioner, Michael Kane says he knew it was time to pass the baton. On top of his practice, he was also working full-time at Leo Cussen as a mentor in practical legal training. 

“I got to the point where I realised I was enjoying my work at Leo Cussen more than private practice,” Mr Kane says. But he didn't want to hand over his practice to just anyone. “It was important to hand over the practice to someone I trusted and had confidence in.” 

Happily for Mr Kane, the solution to his problem was already working for him. Maelein Foo had started as a graduate lawyer with Kane Lawyers in 2013, and was senior associate by the time Mr Kane realised she was the perfect person to hand his practice over to.

“She was a good and loyal employee, and she already had a great rapport with the client base – so I felt confident I was putting the practice into good hands,” he says.

For Ms Foo, the offer to take over Mr Kane’s practice came at a good time. “I’d just got to the point where I was thinking about moving on to something else, and the chance to run my own firm was one of the options I had been looking at.”

“I’d been dealing with the clients here and they all knew my name, so it just made good sense from a commercial point of view to take on Michael’s practice. Plus it was a great opportunity for me to do things the way I wanted.”

The transition was smooth, with Mr Kane staying on for four months until Ms Foo took over completely in December 2017. No money changed hands in the transaction. Mr Kane says he was grateful to be able to hand over his firm gratis to Ms Foo. 

“For me it was not about the money. What was important to me was to have some control over who to pass it on to – it would have been a shame to have to close it up.” 

Every year hundreds of Victorian lawyers face the decision as to what to do with their legal practices, because of age, ill health, or simply a desire to move on to some other area of interest. 

Many don't plan for the transition – putting themselves, their clients and their families in a difficult position if they fall ill or die without succession arrangements in place. 

In some cases the Victorian Legal Services Board (VLSB) has had to take over administration of firms where the principal has died without leaving arrangements. The principal's estate has to wear the expense, which can leave little left for surviving family.

The LSB is now encouraging practitioners to put in place a practice contingency plan that nominates a personal representative to take control if they die or can no longer run their practice.

“Practice contingency plans are a great idea for sole practitioners and sole directors of [incorporated legal practices] ILPs,” Legal Services Commissioner Fiona McLeay says. “They offer these practitioners a measure of control over their practice if they cannot continue to work.”

A plan allows someone to nominate a practitioner friend or colleague to manage in their absence, or to wind up the practice if ultimately necessary, she says.

There are a number of options for practitioners wanting to offload their practice: merge with another firm, pass it on to the next generation, try to sell the business, or simply close.

LIV Council member Simon Libbis says he felt lucky to be able to merge his specialist property law practice earlier with general legal practice Prior Law after assuming he would just have to close his doors if he wanted to scale it down. 

“When I turned 65 last year I contemplated how I could remain involved with my area of practice, remove the administrative and compliance burden and have an exit strategy if and when desired. 

“Nearly all my work was referred to me by other practitioners. That meant I didn’t have a client base as such and I imagined that if and when the time came to retire I would have to wind my practice up.”

He’d had dealings with Dan Prior in the past, and initially the two set up a referral arrangement, where he would refer some of his work to Mr Prior and would be engaged as a consultant where required. 

“But this didn’t provide a solution to my dilemma. As referring on clients who had been referred to me personally often didn’t work.” The firms decided to merge on 1 January this year. “All my work is done by the firm and I provide assistance where required,” Mr Libbis says.

“The merger has lifted the burdens of practice from me, and enabled me to keep doing the work I enjoy and given me a painless exit strategy. Dan now has some new matters that interest him and I’m there to assist if required.”

For Denis O'Brien of O'Brien Lawyers in Horsham, the solution to winding down from the firm he has been running for more than 40 years was also close at hand. Now 72, he says he had been pondering retirement for some time, but worried about the impact on his clients. “You don’t feel like you can just walk away from people who have entrusted their affairs to you all these years – you can’t just abandon them.” 

Handing-over-Horsham-lawyers-Denis-O'Brien-and-Patrick-SmithSo Mr O’Brien was delighted when Patrick Smith, who had come to the practice in 2017, agreed to buy him out. Mr Smith had been a financial planner before moving into the law, and displayed a level of maturity and competence that Mr O’Brien says gave him the confidence to hand over the firm’s clients to him. Mr Smith was also happy to take on the responsibility of managing half a dozen staff and the around 12,000 deed packets going back years of the firm’s history. The transition will be made easier by the fact that Mr O’Brien is staying on as a part-time consultant for a couple of years. 

For Mr Smith, the opportunity to buy the practice has cemented his return to his home town after a few years studying and practising in Adelaide. “I’m really looking forward to being in control of the direction of the firm and glad that I will be able to seek Denis’ guidance whenever I need it,” he says.

Not everyone has the good fortune to have someone they know to hand their practice over to. Increasingly practitioners are selling their firms on the open market, using specialist legal practice brokers like Gatehouse Business Brokers’ John Castello to guide them through the sale process, introduce them to potential purchasers, and help nut out the negotiations. 

Alan Rochman came back from a holiday a couple of years ago and realised he’d had enough of the ever-increasing administrative work associated with his sole practice of 41 years. “I was ready to finish up and thought I’d like to sell my practice, but I had no idea how to go about it.” 

He came across Mr Castello’s classified advertisement in the back of the LIJ. “When I spoke to John he thought there was a market for my practice and so we spent the next few months preparing a detailed memorandum for potential buyers.”

A long-list of interested purchasers was whittled down to three seriously interested parties, with Mr Castello finally negotiating a sale to bayside firm Jessop & Komesaroff. 

“It was great to have someone as a go-between in the negotiation process,” says Mr Rochman. “I didn’t want to have to deal with the whole sale process, so John was a great help in that and I was very happy with the outcome.”

Selling on the open market doesn’t mean you can just hand over the keys to the practice and take off to Europe though, Mr Castello points out. “In most cases purchasers will want vendors to stick around for at least 12 months post-settlement to help them transfer the goodwill of the business, introduce the purchaser to their clients, and share their knowledge and experience on matters and areas of law.”  

Part of the deal with Jessop & Komesaroff was Mr Rochman staying on as a consultant to help transition his clients across. “It was initially for 12 months, but I’ve been there for two years now and it’s working really well. I’m a free agent, and I can pull back over the next year or so as I feel ready,” he says.

Sometimes, however, lawyers decide it is simpler to just shut down. One family lawyer has decided to close his doors later this year because he believed the effort involved in handing over to someone else wouldn’t be compensated by the sale proceeds from his practice. “It’s sad for anyone who runs a business to close it down, but it’s a good time for me to retire,” he says of his decision. 

But there is still plenty of preparation that needs to happen in the lead up to closing the doors. The lawyer has been planning his exit since the beginning of last year, gradually informing existing clients of his plans, and making decisions as to whether to take on new ones.

“Given how long it can take for matters to be heard in the Family Court, there was a point late last year when I had to think about whether I could take on new clients if they weren't going to be resolved by the time I plan to close.”

One of his concerns was making sure his opponents in litigation would not use the knowledge of his firm’s closure to stall on settling on matters. “The safest course is not to tell opponents,” he says, explaining why he has preferred to stay anonymous. “You don’t want to give them a green light to do nothing to settle the matter until after you’ve closed down.”

The last few months of his practice will be taken up with administrative matters, such as attending to trust account balances, terminating his practising certificate and insurance arrangements and consolidating the premises he shares with another law firm. 

“The frustrating thing is that for these last few months my income has dropped significantly as my practice has dwindled, even while my overheads stay the same. But I guess that’s something you have to accept as the price of closing down.”

What you need to do to transition out of your practice

  • Start preparing your exit strategy well before you plan to wind up – at least a year, and preferably more. Some suggest you should be planning your exit from when you first establish your business.
  • Make an audit of your finances, stock, deeds held, contracts, any work in progress and closed files.
  • Contact the Victorian Legal Services Board to notify them of termination of provision of legal services and that you want to discontinue your practising certificate. If your practice is an Incorporated Legal Practice you will also need to meet ASIC requirements regarding closure.
  • Notify the LPLC you will not be continuing your professional indemnity insurance. 
  • Ensure you have complied with your obligations in relation to retaining or transferring files and documents held in safe custody. A handy guide to safe custody procedures can be found here.
  • Give clients at least 14 days notice in writing that you will be closing your practice to give them an opportunity to collect their documents or direct where they should go.
  • Close the trust account. Information and forms can be found on the LSB website.
  • It’s not compulsory, but it would be helpful to advise the LIV’s Legal Archives Register of the closure of practice details so former clients and other practitioners can trace their deeds and files.

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