Meeting the Challenge of Succession Planning for Law Firms

The law firm landscape is one of the most rapidly-changing in the UK today.

If your firm, like many, is a smaller practice with four or fewer partners, you’re at risk of disappearing as small firms are swallowed up by larger firms with lots of capital available, wanting to grab a bigger slice of the market.

What do these challenges mean to you as someone who wants to grow your firm now and sell it when the time comes?

The Legal Environment Today
Succession planning for law firms carries the added difficulty that law is becoming a difficult legislative environment to operate in.

The requirement that your firm carries indemnity for three years after stopping practice often means that the consolidation of firms is the only real choice, not to mention that smaller practices are often simply acquired by larger firms through aggressive takeover.

Can you take advantage of this trend as you prepare for your own exit?
Absolutely.

How to Plan for Your Exit and Succession

  • Be aware of what’s happening

Don’t be forced into an unwanted takeover. Instead, pay attention to the market and make sure that your firm is actually worth a solid selling price.

  • Be able to show potential buyers good business planning and financial discipline

You should be able to show prospective buyers detailed financial projections for the current year and up to five years ahead. Monitor these projections monthly to make sure your firm is performing as you projected and take corrective action quickly when it’s not.

  • Have a strong cash position

You’ll put yourself on the defensive if you are heavily dependent on your bank for funding. You should have a strong cash position and balance sheet before you decide to sell.

Clean up your books, know your ‘work in progress’ in detail and understand who owes you money and when they are going to pay. Get a system in place to effectively manage debtors.

  • Tidy up your claims position

Try to settle any claims and have a detailed record of what those claims were and how you dealt with them. If any claims can’t be closed, have a clear plan for dealing with them

  • Know – and practice – your speciality

Ideally, you should be able to show that you have excellence in a particular field and niche. Pay attention to what potential buyers are truly interested in to make your position stronger.

  • Begin to ease yourself out of day-to-day operations

As it comes time to exit and find a potential buyer, you’ll need to be able to show that you don’t need to be there every day for your firm to run successfully.  If your practice can run without your day-to-day input, it will be in a strong position for merger or acquisition.

Although there are specific challenges to succession planning for legal firms, having an awareness of those challenges and creating an exit plan well in advance can help you navigate any obvious pitfalls.

Start creating your plan today with our exit planning checklist.

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