The alternative to planned succession is problems

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Published on 4/2/07

For the small firm, and especially the sole practitioner, selling a law practice to another qualified lawyer can alleviate a host of succession planning issues.

However, without adequate planning for a sale, a sole practitioner can face alternatives that could be disastrous if entered into hastily.

Consider a lawyer with younger children and an older spouse. The spouse suddenly has a serious illness, and the lawyer wants to devote more time to family care than the practice allows. Without having planned for a sale, what are the lawyer's alternatives?

  • Ignore the illness and hope for the best -- and always live in fear of family and financial loss.
  • Groom an associate to temporarily take over the process -- and, upon returning to practice, face the loss of clients to the new lawyer with whom they have bonded.
  • Merge with or hire another partner-level lawyer who has an option to buy the practice -- and risk having the other lawyer leave or otherwise reject the deal before you are ready to return.
  • Buy another practice to add more lawyers to your own while adopting a more detached, managerial role -- and incur the major expense and risk of an unplanned expansion.

Any of the latter three changes in practice status involves ethical considerations. The codes of professional conduct in most states require that, if you are no longer active, you must inform clients, opposing counsel, courts and agencies where you have pending matters, your errors and omissions insurer and the state bar counsel.

You also have a fiduciary obligation to preserve, indefinitely, any valuable property (securities, wills, settlement agreements) that belongs to and has not been returned to clients. Some states require years of file maintenance after completion of active representation. None of this can be resolved on the spur of the moment.

Consider also the issue of goodwill: the client base and client loyalty that a lawyer has created over the life of the practice. Typically, smaller firms understand the value of client relationships and reputations and, when negotiating for the sale of a practice, seek compensation for goodwill.

Now, however, some state bar associations are creating problems. The new marketing regulations adopted by the New York State Bar specifically assert that "a lawyer in private practice shall not practice under a trade name."

If lawyers' names must be used in the title of a firm, as this seems to require, any lawyer who takes over a law firm would either have to "retire" the previous lawyer (and keep the name in the firm "trade name") or change the firm name.

If the firm name is changed, one might question whether the value of the firm's goodwill is decreased, or even destroyed. Many buyers assert that clients will not remain with the firm once its proprietor leaves.

The selling lawyer then is left to assert that goodwill infers that the reputation of the firm continues beyond the removal of any one individual. With that reputation comes the client list, the phone number and the on-going nature of the practice staff and systems. This position is more difficult to sustain with a name change being required.

Such complexities suggest only one conclusion: Before you are forced with the necessity to change your firm ownership status, you should plan for how you will transition ownership.

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