Succession planning for sole practitioners Peter Scott Peter Scott Consulting

PETER SCOTT CONSULTING Who is currently thinking about how to deal with succession? How far have you developed your plans?

Why do sole practitioners need to plan ahead? Age / retirement issues Resource issues Professional indemnity / run-off cover To build capital value PETER SCOTT CONSULTING

What should a succession plan for a sole practitioner’s practice aim to do? To secure the current and future well being of everyone in the firm and the interests of clients Sole practitioners need to think creatively how to make the best use of what they have PETER SCOTT CONSULTING

Options? Continue practice by taking in a partner Merge / sell practice Close practice Other? PETER SCOTT CONSULTING

1. Continue the practice by taking in a partner Choose the right partner! On what financial basis will they become a partner? Get the partnership agreement right Agree the financial basis for your ultimate retirement NB – Plan ahead to get your practice into ‘good shape’ NB - Take good accounting, valuation, tax and legal advice Who has done this / tried to do this / is thinking of doing this? PETER SCOTT CONSULTING

2. Sale / merger What does a lawyer have to sell? Services / labour? Hard assets? Goodwill? (the difference between the net hard asset value and a total price)

PETER SCOTT CONSULTING What do you have to do so you have something to sell? Need to create something of value: which someone else needs which they cannot provide (easily or at an economic cost) for themselves The value of which does not depend on your remaining in the business

PETER SCOTT CONSULTING Three elements to creating something of value in a law firm The nature of the business you create Your relationship with that business The need to find a buyer Above all you need to create a business

PETER SCOTT CONSULTING 1. Need to build a competitive business Focus is all important Focus on work types / client types Sectors where there is / likely to be sustainable growth It is about picking winners

PETER SCOTT CONSULTING Picking winners? Research / analysis of the market What kind of law firm should I be building….. to create capital value? Strategic planning to achieve objectives Implementation

PETER SCOTT CONSULTING Need to build a practice that is showing a pattern of… Increasing turnover Increasing profitability On a sustainable basis With a stable and growing client base

PETER SCOTT CONSULTING 2. Your relationship with the business You need to separate two elements: - your ownership; and - your operational involvement Reduce / eliminate the dependence of the business on your skills and labour for its continuing well-being

PETER SCOTT CONSULTING If you do this in a way that… The business can continue without you With a sustainable income stream With sustainable profitability Which is transferable - then you may have something of value to sell

PETER SCOTT CONSULTING How can you achieve this? Build a team around you Delegate – NB the importance of leverage Retain ownership Build flexibility into the firm – e.g. no long term lease obligations

PETER SCOTT CONSULTING Divorce your ownership So you can walk away from the business with your value either… - immediately on sale or - after a bedding in period linked to an earn out arrangement

Owner delegation and leverage Lawyers

New Owner delegation and leverage Lawyers

PETER SCOTT CONSULTING 3. Need to identify a buyer With whom there is a strategic fit Who needs what you have Who has the resource to continue the business (particularly if receiving your value depends on an earn out) You may need to sell the vision of putting the two businesses together

PETER SCOTT CONSULTING Ensure you receive your value The terms upon which you sell How you structure the sale / merger NB Take advice – valuation, accounting, tax and legal

PETER SCOTT CONSULTING A case study A law firm 1 partner 3 other fee earners No lease obligations

PETER SCOTT CONSULTING The nature of the business? A niche firm A growing sector – practice attracted work nationally Practice limited itself to narrow areas of work in that sector Broad range of existing and growing clients Owner had built a reputation in the sector Profitability hit by the recession Did the owner have something to sell?

PETER SCOTT CONSULTING Did the owner have something to sell? Nature of the business? Owner’s relationship with that business? His age? Potential buyers? Basis of valuation? Outcome?

Practical issues arising on sale / merger? Professional indemnity insurance – - run off cover – cost? - successor practice Some PI issues? - buyer’s preferred approach Vs seller’s preferred approach - how to satisfy both? - the buyer’s excess NB – Take advice

More practical issues How to realise your WIP and Debtors? Know your buyer – NB - due diligence Your future position / status / liabilities Get the sale / merger agreement ‘right’ NB – Take advice

PETER SCOTT CONSULTING Any questions?