Why Close Down Your Law Firm When You Can Cash Out?

Americans are living longer, and US population as a whole is growing older. By 2030, roughly 20% of the US population will be 65+. People are also working longer, often well past traditional retirement age. Lawyers are no exception to this general trend, and, in fact, may be even more likely to work into their later years.

According to a 2007 report by the Joint Committee on Aging Lawyers, the legal profession could be witnessing what one member of the Committee glibly called a “senior tsunami.” ABA lawyer demographics show the median age for lawyers has gone from 41 in 1991 to 49 in 2005; moreover, in 1991 only 20% of lawyers were aged 55+, but by 2005 that number had risen to 34%.

What this translates into is a huge number of lawyers that will be transitioning out of their law practices in the near future. You may be one of these lawyers. If you are, keep in mind: These transitions will be either voluntary or involuntary, profitable or unprofitable.

There isn’t necessarily one right answer, since what will end up being the right transition method will depend on your practice, time frame, and circumstances. But I definitely believe that there are wrong answers, answers that don’t let you realize any of the benefits of running and growing a successful law firm for so many years.

The Easy Path That Ain’t So Easy

All too often, small firm owners or solo practitioners wait to have discussions about exit strategies until those discussions are forced on them by external factors (e.g. they start to get burnt out, feel their age, or have a pressing life event). At this point, perhaps they decide work for a couple more years, wind down the business, and close up shop because they presume that selling their firm would be a huge hassle. 

This choice is predicated on the idea that closing up shop is an “easy path.” But, being a lawyer, you should know that nothing is as simple as it sounds. When you close down your firm, you’ll need to tackle a long list of issues (warning: this list is not comprehensive):

• Notify clients, in writing, that you are closing your firm,
• Transfer any open matters to other counsel,
• Reconcile trust accounts (and plan to retain trust account records for the state-required period of time),
• Send final client bills and disburse or reimburse funds,
• Catalogue and distribute or destroy old client files,
• Decide on malpractice or tail insurance coverage,
• Inventory and sell hard assets (furniture, fixtures & equipment),
• Close software accounts, case management services, websites, phone and internet services, etc.

Worse yet, it’s entirely possible (and it happens more than we’d like to admit) that something catastrophic could happen during this home stretch period where you, the attorney, become disabled, incapacitated, or even die. In this case, inventorying and distributing files, reconciling trust accounts, distributing funds, all of the above tasks become the burden of your loved ones or the inventory attorney.

 

But barring any unforeseen circumstances, when you do get this entire list done and you shut the doors for the last time, there’s a good chance that you’ll feel like this t-shirt:

Not only is closing your firm not exactly an “easy path,” but it also leaves you with little or nothing to show for the years of hard work you put in building the firm. Though you may have gotten some money for your computers, desks, and old law books, you didn’t receive any value for the client relationships, referral arrangements, and other intangibles that you worked so hard to develop and nurture. To return to what we started with, then, I strongly believe that closing down your firm is one of the wrong answers for how to transition your practice.

Get a Retirement “Bonus” in a Few More Steps

The good news, however, is that selling your law firm requires many of the same steps as closing down your law firm. I’m not going to tell you that selling your law firm will be a cake walk—it won’t. But, if you’re willing to complete a long list of requirements just to walk away from your firm with nothing, why wouldn’t you add a handful of additional items to the list, sell your firm, and add a considerable padding to your retirement fund?

Moreover, you aren’t the one who has to complete these additional tasks. You aren’t valuing and marketing the firm, screening potential buyers, writing the sale contracts. You are going to bring on a team of professional advisors (e.g. CPA and business attorney) to help you complete the sale, and they’re going to handle them.

You get to continue to work and generate revenue, and when you finally sell and transition out of your firm, you will do so with a considerable “retirement bonus.”

If that wasn’t enough, planning ahead to sell your firm also has added benefits for your employees and previous clients. Your employees are happy knowing that they still have gainful employment in a law firm that is in good hands, and past clients have a law firm they’re comfortable with to service their legal needs.

How Do I Get Started?

Carrying out a successful sale of your law firm will require some planning. To begin with, you want to ensure that you have a saleable practice. We will cover that topic in more detail in a future piece, but for now here are a few areas of your practice you can assess that aren’t revenue-focused:

• Client intake and case management systems: Having effective and efficient systems and processes in place both for client intake and case workflow increases the attractiveness of your firm to buyers. Knowing that they’ll be able to step right in and pick up where you left off with little to no downtime in production is vital.
• Client and referral source databases: Depending on your area of law, returning clients may constitute upwards of 70–80% of your business. A disorganized or nonexistent client database decreases your firm’s ability to remarket your services to previous clients. The relationships you’ve built with your previous clients (i.e. goodwill) makes up much of your firm’s value, but that value is diminished if the buyer(s) won’t be able to make use of those relationships.
• Marketing materials: A well-rounded marketing program (both digital and print) that promotes the firm and its services to new clients and also targets previous clients gives confidence to a buyer that the firm’s business will not suddenly drop off once you leave the firm. The buyer will not have to start from scratch in promoting the firm and can drum up new clients immediately.

Again, you would need to get your client contact lists in order if you were simply planning to shut down your firm. You would need to have a case management process in place, which includes a means for disposing of files, if you were just going to close the doors.

Why not do the same steps but then leverage those new or improved systems and processes into an offer to buy your firm?

For the valuation of your firm, the marketing to and screening of potential buyers, and the rest of the sale process, you should speak to an experienced advisor, someone who’s dealt with law firm sales and knows the specific rules—both business and legal—that will affect your sale.

We’ll Help You Plan a Profitable Exit

If you are one of the thousands of attorneys nearing retirement age, take an extra second to think about how you want to exit your law practice. There are only four ways that you can leave your firm, and before you decide to “close down” I’d strongly urge you to consider all the benefits of “cashing out.”