Financial Considerations for Law Practice Succession Planning -

By Matt Hansen

It is well known that the phrase “Baby Boom” refers to the era when the American population spiked after World War II. Now, as Baby Boomers reach the ages of 55-73, they’re likely retired or preparing to retire. Business owners of this generation are creating what I call an “Exit Boom,” as they’re preparing for the sale of their companies. The focus of this generation is likely shifting from strategies designed to build their businesses to strategies related to the successful sale or transition of their businesses.

According to the American Bar Association, about 75 percent of attorneys work in the private sector[i][1], and many of these work in their own firms, with about 48 percent having no partners. Firms that employ over 100 lawyers represent only 1 percent of the law firms in the US. Most firms, approximately 78 percent, have between two and five attorneys. A large number of these[2] also fall into the Baby Boomer or Gen X generations, who may be considering retirement.

Among business owners in their forties, fifties and sixties, 57% are planning to exit their ownership positions within the next five years and another 22% say they’ll divest of their companies in the following five years. ⁴

There are four factors business owners may want to consider before retiring:

Client Transitions – Before one chooses to sell his or her private practice business, it is helpful to focus on ensuring a smooth transition of clients that is fair to the clients and equitable to a successor. Transitioning client relationships can be difficult and, often, a process that takes several years to complete. A private practice owner may want to consider their transition 3-5 years prior to retiring.
Real Estate – Some law firms or partners may have purchased their office buildings. Consider what financial planning strategies regarding the ownership or sale of the building can be planned for and taken advantage of. If the law firm partners decide they are going to sell their practice or transition out, what would the realized value of that real estate do to their financial plan?

Other questions to consider:

Does selling the building outright help meet future goals?
How would leasing the building out to another law firm or key partner change their cash flow needs?
If they sell the building outright, how will taxes affect their plan and what strategies can be derived from their plan for the transition?
If they lease the property post transition, how will planning for improvements cut into cash flow needs?
How would an improvement outlay or sudden vacancy affect cash flow?

Issues like this come up quite often for all types of business owners. Having a business, asset and succession strategy in place prior to retirement can be key in making the ultimate decision of how and when to ride off into the proverbial sunset.

Cash and Equity – Following the sale or transition of a law practice, the former owners/partners may want to start thinking like long-term asset managers for their personal financial goals. Two of the challenges can be investment related: The need to create a financial plan that seeks to provide for their family’s needs and goals and timing the implementation in a responsible way.
Financial Strategies – Managing one’s finances in retirement is only a small portion of the overall planning one needs to do prior to transitioning their business. Equally important items to cover include:

Asset allocation
- Portfolio allocation doesn’t just happen at the asset level, but rather the account registration level as well.
- It’s important to think through the right mix of taxable income from 401(k)s, IRAs, and Roth IRAs, then blend that with after-tax withdrawals from a non-taxable investment portfolio.
Wealth transfer: Strategies to help plan for heirs
- It’s not uncommon for a retiring attorney to either have no estate plan, or to have not updated their plan in several years.
- With changes to tax law, estate plan documents can become outdated or simply obsolete. It may be time to reassess.
Wealth preservation: Strategies to help preserve assets
- The risk of one spouse greatly outliving the other can be high, so planning for one’s surviving spouse and their assets is key.
Charitable giving: Maximize the impact of one’s charitable gifts
- What do they want their legacy to be?
- If they are charitably inclined, have they set up the right structures to help out their causes, or possibly set up a family foundation for their heirs to run someday?

With all these concerns looming before and after the sale or transition of a practice, it’s easy to delay, or just give up the thought of retirement. Working with a financial professional with can help provide the experience to pursue your goals and objectives.

Matt Hansen, CFP^®, CEPA^® is Senior Vice President-Wealth Management of Hansen Wealth Management at UBS Financial Services Inc. He can be reached at matt.hansen@ubs.com

2 Source: https://www.wisegeek.com/what-percent-of-the-us-population-do-lawyers-comprise.htm

3 Source: https://www.americanbar.org/groups/bar_services/publications/bar_leader/2015-16/march-april/feeling-the-pinch/