Succession and business continuity have never been more pressing for small firms. Given their numeric weight in the legal ecosystem, this is a potential problem for the entire profession. In 2018, sole practitioners and firms with four or fewer partners accounted for 87% of all 9,500 or so private practices in England and Wales. They are grappling with huge challenges.
‘We currently have a succession crisis, with ageing male-dominated partnership models no longer viable,’ says Symphony Legal consulting director Viv Williams. He predicts ‘greater consolidation and law firm failures over the coming years’.
This crisis is most acutely felt in smaller firms, with the age of the owner inversely proportional to size. The average age of sole practitioners is 52, almost 10 years older than that of all partners and owners in private practice, the Law Society’s 2018 annual statistics report shows.
The figures also show that there are twice as many male partners as female, with black, Asian or minority ethnic (BAME) solicitors accounting for just under a quarter. Moreover, the failure to attract a more diverse workforce is compounded by the rise of the footloose millennial generation.
Other challenges facing smaller firms include poor location, the death of the high street, the lingering effects of the financial crisis, the rising cost of professional indemnity insurance and tightening regulation.
Firm closures already outstrip openings, with 603 firms closing in the 12 months to the end of August 2019, data from the Solicitors Regulation Authority shows. Of these, 54% ceased operations, while less than a quarter (23%) merged or amalgamated.
Succession in smaller firms is a particular vicious manifestation of the war for talent
Barry Wilkinson, Wilkinson Read & Partners
For Tony Williams, principal at Jomati Consultants, succession ‘is a baby boomer issue, fundamentally. I see this increasingly in my consulting work. Particularly in the smaller firm sector you have got firms where the partners joined in the 1970s or 1980s when the profession was growing very rapidly’. Post-financial crisis, many of these outfits did not make up any new equity partners and so ‘the really good people who could succeed them got fed up and frustrated, and left’.
John Scott, a consultant at North Shields-based Hindle Campbell Law, and formerly a sole owner, says: ‘If you look at the demographics of sole practitioners and small firms, most of [the principals] are white men in their late-50s or 60s.
‘Inevitably, nature will take them. Within 10 years half of them will be gone one way or another, so when it comes to proper preparation for retirement you can’t really start young enough,’ says Scott, who sits on the Law Society Small Firms Division committee.
He knows this better than most. Five years ago he temporarily lost sight in one eye, then in the other. ‘That came from absolutely nowhere,’ he says, but made him realise that sole practitioners are in ‘an incredibly solitary position’ and that ‘they have to be aware that disaster can strike at any moment’. Hence, they must ‘plan ahead and plan for the unexpected’, he counsels.
Barry Wilkinson is a partner at legal consultancy Wilkinson Read & Partners and a Law Society Law Management Section (LMS) committee member. He advises practitioners to think about succession ‘as soon as possible and long before it becomes urgent’. This is at least five years beforehand and involves understanding the different options: finding a successor, merging with another firm, or closing down.
The firm will need ‘positioning’ if the best solution is a merger. ‘You want to be able to do that on the best possible terms; you don’t want it to be a distress event,’ he says.
The risk of leaving it too late is that by the time a sole practitioner is ready to retire, ‘his or her business is not as good as it was because of age or ill-health, and very few firms will look at it’, warns Robert Banner, executive director at Banner Jones Solicitors in Sheffield a member of the LMS committee.
Tony Williams, who laments that too many of the smaller firms he sees are already at the ‘crisis stage’, says the best way to prepare for succession is to ensure the business is ‘robust’.
‘The better your financial hygiene, the better your financial management discipline, the better your client delivery, the stronger the position you are in,’ says Williams, who also recommends upgrading the business by investing in technology. ‘If you are leaving a business that is operating in the way it did in the 1980s and 1990s, you are making it even less attractive for somebody else to come in,’ he says.
In the absence of a suitable successor, joining forces with another firm has its benefits. ‘One of the best ways to cover yourself is to grow and merge,’ counsels Banner, who did just that in 1990 when his firm amalgamated with another local outfit to create the largest firm in Chesterfield. The firm’s other locations now include Sheffield, Mansfield and London.
Asked whether the issue of succession influenced this decision, Banner says: ‘[The merger] made us much stronger as far as the future is concerned. It gave us a much bigger band of ages and abilities, so the answer to that is yes – it certainly played a part and it certainly helped succession.’ The firm now has 17 business owners whose ages range from 30 to 65. ‘There is no real succession problem. We have five shareholders who are retiring now, the business pays them out and carries on as normal.’
Scott’s high-street operation, Reed Ryder & Meikle, was acquired in October 2017 by HCL: ‘Mine was a rock-solid practice, we had been around for more than 100 years,’ he says. ‘For an acquiring firm, it is quite attractive. It is the easiest way in business to increase your turnover.’
Scott is not the only one to endorse consolidation as a means of tackling succession, particularly for smaller traditional firms in provincial towns. ‘When I first arrived in [North Shields] almost 40 years ago there were something like nine firms of solicitors. I think they are now down to four or five, and probably the ideal would be three,’ Scott says.
‘I wish I had done it years ago,’ Scott says of his decision to sell. ‘I love being a consultant; compared to running my own practice it is a walk in the park. I no longer have to worry about compliance, VAT, staff issues. And I obviously retain all my old clients.’
Selling, but staying on as a consultant, is a popular exit strategy for a retiring partner or sole owner: it allows them to pass on goodwill and knowledge to the acquiring firm, while circumventing professional indemnity run-off cover, described by Wilkinson as ‘brutally’ expensive. Firms closing down are required by the SRA to obtain six years’ run-off cover for post-closure claims that is equivalent to about two to three times the last annual premium.
Banner, whose firm has taken on sole practitioners as consultants, says the first step is to contact the insurance company for a quote which combines the premiums of the sole practitioner and the buyer. ‘The sole practitioner joins our firm, probably first as a business owner with a view to retiring in a year’s time… and the merged firm has one insurance premium rather than two,’ he says.
Emma Macpherson, 56, set up her one-woman band, ELM Solicitors, in Newbury in 2009. She tells the Gazette: ‘Occasionally, I think when I want to give it all up, how am I going to manage, because it is quite complicated and expensive.’ Macpherson, who has no employees and only about a dozen active files at any one time, says that winding down the business would be ‘easy enough’ were it not for the fact that ‘I’d have to carry on paying my run-off insurance’.
You do hear occasionally of horror stories of people who get sick and they ultimately have to be made bankrupt just because they can’t manage their [insurance] liabilities
Emma Macpherson, ELM Solicitors
Run-off insurance cost is a sticking point because ‘most firms don’t have any intrinsic value’, she says. ‘You do occasionally hear of horror stories of people who get sick and they ultimately have to be made bankrupt just because they can’t manage their [insurance] liabilities,’ Macpherson says.
She may eventually opt to be a consultant (her partner owns a small firm in the same town) following in the footsteps of many other sole practitioners she knows.
Macpherson suggests the new breed of freelance solicitor introduced by the SRA in November could herald some relief, for example through a reduction in PII premiums for smaller firms. ‘That might help us ultimately,’ she says. ‘Why should we have to carry this heavy burden, if freelance solicitors don’t even need to be insured?’
When closing down, there are other expenditures to consider: these include collecting money tied up in work in progress and debtors, lease penalty clauses and redundancy costs. And it is not just about money. ‘In small firms the staff are very loyal, so you have got a huge moral responsibility,’ says Scott. He managed to transfer his secretary, who had joined him when she was 16, to HCL.
The risk of leaving it too late is that by the time a sole practitioner is ready to retire his or her business is not as good as it was because of age or ill-health, and very few firms will look at it
Robert Banner, Banner Jones Solicitors
Storing away for the winter, as in Aesop’s fable, is one way of coping with run-off and other costs. Banner says those who want to be sole practitioners for the rest of their lives should factor these payments into their business model from the start, so there will be sufficient funds for this on the last day of business. ‘If you don’t, you are in such an unenviable position, being at the end of your career, wanting to retire gracefully and there is no way you can,’ he says.
These ‘zombie firms’, as Tony Williams calls them, cannot be sold because they are ‘not sufficiently successful’. Nor can they stop trading because ‘the cost of closing down a firm is very high’.
Banner points out that in his firm the ‘succession problem is on a departmental basis, because each department has two or three very, very talented lawyers who we would miss if they left or retired, and that is the succession that I look at in particular’.
Firms should, in fact, kick off preparations for replacing staff as soon as they are hired. ‘You need to consider how you would succession-plan for that role,’ Louisa Scanlan, director of HR consultancy Collaborate Business Solutions, advises. ‘Consider who is ready now, ready in six months and those who could take on the role in two to five years’ time with the correct training, development and coaching. You need to develop a long-term pipeline of talent to ensure that you can handle a change within any role in the business.’
Ann Harrison, chairwoman at Stephenson Solicitors, says: ‘Succession equates to career development in my book. The sooner you can think about training younger people to step into more senior positions, the better.’ She advises owners to ‘think about the role rather than the person’, and ‘if you can promote internally, this can then cascade down to present other opportunities [down] the line’. Harrison, who is LMS chair, highlights one of the most common mistakes firms make – ‘failing to look internally’.
‘External recruitment to fill a senior post may lead to disgruntled employees who thought they were perfect for the role,’ she warns.
Succession equates to career development in my book. The sooner you can think about training younger people to step into more senior positions, the better
Ann Harrison, Stephensons Solicitors
Clients aside, human resources are firms’ biggest assets, and as Wilkinson observes: ‘Succession in smaller firms is a particular vicious manifestation of the war for talent.’ Even more so if a firm is located five miles from a city centre.
The financial crisis led to a slump in trainee recruitment between 2007 and 2012. ‘There are simply not enough solicitors in their 30s,’ Wilkinson says. ‘So the firms that are looking for successors are looking very much in a sellers’ market.’
Demographics compound the problem, especially since the younger lawyers are today also much more likely to be women, Wilkinson says: ‘A lot of the cultural attitudes and deference that go with [smaller] firms – the all-singing and all-knowing [male] partners who can do anything that they want – that culture just doesn’t wash.’
Then there is the generational shift, where employee loyalty has adapted to a new ‘hire and fire’ world of work where staff and firms come and go with increasing frequency.
‘When you lose a partner, say, in a five-partner firm you lose their earning capacity, you lose their contacts, and you lose their capital,’ Wilkinson explains. But he asks: ‘Why would you, in your 30s, borrow a six-figure sum to shore up something that might not be there in five to 10 years’ time?’
There are, of course, ways of tackling these problems. One, Wilkinson points out, is to take a bottom-up, long-term approach, by making the firm ‘attractive for the next generation to work in. They have to become more flexible, and more work-life balance friendly’. He adds: ‘You need people with different backgrounds to bring different thought processes to the table… I would also encourage the salaried partners, as far as possible, to be involved in the running of the firm.’
‘Think about succession early, talk to others, take professional advice, pray.’
Nicholas Woolf, Nicholas Woolf & Co
‘Be prepared to talk to other firms which in the past might have been considered bitter rivals, but actually need to be allies in the future.’
Barry Wilkinson, Wilkinson Read & Partners
‘Consider selling and becoming a consultant.’
John Scott, Hindle Campbell Law
‘Communication with the outgoing person, with staff, with clients, and with potential recruits is vital; support the outgoing person and successor.’
Ann Harrison, Stephenson Solicitors
‘Upgrade your business to make it attractive to potential investors.’
Tony Williams, Jomati Consultants
‘If you can’t or don’t want to sell and have no successor, start saving for the run-off cover.’
Robert Banner, Banner Jones Solicitors
Succession affects clients too, and one way of protecting income is to focus on them. Tony Williams says it is a mistake to ‘suddenly bounce an important client into a transition’, and ‘a period of introduction’.
‘If you just suddenly say I am retiring and Fred is taking over, the client may say, “I don’t know Fred, so no he is not”.’
Harrison advises the successor to work alongside the departing partner for up to three months, and if this is not possible for there to be a ‘handover document’. She also recommends that ‘key clients are owned by the business, not individuals’.
‘I always advocate two people,’ Scanlan says. ‘The line manager has a significant role in ensuring that the work is transitioned effectively across. It is also essential that the individual has access to a coach or mentor who they can talk to about how they are feeling during the transition and any issues which are non-work-related but need discussing.’
Firms need to be both far-sighted and flexible. ‘Although there is a saying that God laughs at those who make plans, plan it well in advance but remain pragmatic as to change of circumstances,’ counsels Nicholas Woolf, director and principal solicitor at Nicholas Woolf & Co in London.
The benefits of getting it right are manifold. You avoid the costs of having to close and gain ‘the reassurance of some certainty’, Woolf says. And you also gain a ‘seamless transition, new opportunities from “new blood”, whether internal or external, and revitalisation of teams’, Harrison adds.
Perhaps the biggest barrier to succession planning is having to deal with one’s mortality. ‘The view of some lawyers is that they are eternal and that this is something for five or 10 years’ time. It is not,’ says Tony Williams. Once that psychological hurdle is jumped, succession boils down to sound business judgement, although it feels like writing a will: ‘We never want to recognise that it is ever going to be needed.’
Marialuisa Taddia is a freelance journalist