Financial Aspects of Succession Planning

With law firms beginning to recognize the reality of the generational shift, more and more are putting succession planning on their to-do lists. However, many fail to fully sense the urgency of the situation and how the number of partners who are currently nearing retirement age may have a devastating impact on firm revenues absent effective planning.

Stephen Mabey Author

Karen MacKay
Karen MacKay, MBA, CHIC
President, Phoenix-Legal Inc.*

Take the state of Washington, for example, where the number of lawyers in practice who are over 60 years old has grown 309.1 percent from 2001 to 2011. Current figures aren't available for every jurisdiction, but the figure for should drive home the point that succession planning is an urgent matter that needs to go at the top of a firm's priority list.

The following explores the financial ramifications that can result when senior partners, who are typically the biggest billers in most law firms, begin to retire in large numbers—and some steps firms should take starting today in response. With some proper planning, firm mindedness and a good bit of luck, the firm will be serving clients long after today's partners retire.

Understanding What's at Risk: Digging into Revenue Streams
In assessing the financial risk to the firm, the first step is to understand the firm's revenue stream, in terms of the percentage of revenues that senior partners typically generate in comparison to more-junior lawyers. As an illustration, let's take a firm where all partners generate combined revenues of $8 million. Let's also say this firm has a formula-based partner compensation system in which every hour delegated to junior lawyers has a negative impact on the partners' personal earnings, so over time the middle of the firm has eroded.

Revenue GeneratedNext, let’s look at how this sample firm’s revenues are generated by age group, as shown in Figure 1. Those under the age of 60 represent less than half of the total revenue, at $3,500,000. The partners who are over the age of 70 represent the smallest percentage, with $500,000, so if they leave tomorrow, the impact on firm revenue won’t be too immense. But what if the partners between the ages of 60 and 64—who bring in $2,750,000 of the total revenue—decide en masse that it’s time to retire?


The rest of this article is available in Stephen Mabey's new Book

Book Cover - Leading and Managing a Sustainable Law Firm - Tactics & Strategies for a Rapidly Changing Profession by Stephen Mabey

Available for purchase on BookBaby.

 

 

 

Comments or Questions?

*Co-Author - Karen MacKay was President of Phoenix Legal and worked with law firms in consulting, career counseling and outplacement.

 

Previously published in Law Pratice Magazine May 2011 and reprinted in April 2012 Volume 58, Number 4 edition of the Multnomah Lawyer which is put out by the Multnomah Bar Association in Portland Oregon. Copyright © Applied Strategies Inc & Phoenix Legal Inc..

Legal Strategy Consultant