All Good Things: Planning a Graceful Exit from the Practice of Law
Retirement. Some lawyers see that word and sigh wistfully. Others roll their eyes and wonder what could possibly be more fulfilling than practicing law. The rest fall somewhere in between.
That said, the one common thread I see amongst older lawyers, particularly solo and small firm lawyers, is a lack of planning for retirement. Some lawyers grind along assuming they will hit a big case before they’re done or that they will fund their retirement by selling their practice. Some never intend to quit but unexpectedly find their health declining or their client base shrinking. For many, retirement is not so much a strategy as a verdict.
Retirement planning is about more than identifying a colleague to sign trust account checks if you are incapacitated or understanding the technical points of selling a practice to someone else. It is about pondering your intentions, getting your house in order, and being realistic about your financial situation. Here are some factors that solo and small firm lawyers need to consider. (Some of the ideas in this article are unquestionably the fruit of multiple conversations I had over many years with Paul Floyd and Roy S. Ginsburg, both of whom also advise lawyers on winding down and transitioning their practices.)
The magic number is 62. For this discussion, assume you are in reasonably good health, enjoy the practice of law, and have been able to generate sufficient income to save a modest retirement nest egg. Let’s say your magic number for planning purposes is 62, five years before you hit full retirement age for social security purposes. Social Security eligibility is a retirement benchmark for many lawyers; if your goal is to take benefits early, move your magic planning number up to 57. But even if you think you might work longer, 62 is still a good focal point for beginning the process.
At 62, you need to do several things:
1. Think hard about how much longer you intend to work. There are basically two routes to go here, both of which still require you take the steps in sections 2 and 3.
Route A: Why in the world would I retire? Some lawyers’ identities are intertwined with their law licenses. The sense of purpose, the rewards of helping people, the challenges of problem solving, and the appreciation of clients can be difficult to give up. These lawyers still need to think about what their practices will look like in five years: whether their clients themselves will retire and whether they can remain relevant in the face of changes in the profession and technology. George Dow, a coach for professionals in transition later in their careers, encourages his clients to think of the “portfolio life” they may want and what steps they need to take now to allow them to meaningfully engage in later years in nonprofit board service, pro bono work, teaching, or mentoring newer lawyers. (http://georgedow.com)
Route B: Set a target date for your blow-out retirement party. My brother-in-law retired from the law before 62. Now, his life is filled with travel, grandchildren, baking bread, foraging for exotic mushrooms, learning a new language, and a half-dozen other activities of which I have lost track. Picking an end date may raise financial questions. Unless you have been financially successful enough to simply wrap up your cases, shut off the lights, and walk out the door, you may be looking to wring some cash out of your existing practice. Alternatively, you may want to transition your firm to a new lawyer for the benefit of your existing clients or staff (who might otherwise find themselves unemployed).
As you ponder this question, consider several cold truths about the monetary value of a law practice.
a. It’s probably not worth that much. Accountants like to value businesses at two to three times annual earnings. Not so for law practices. Why? Because Rule 5.6, Minnesota Rules of Professional Conduct, prohibits noncompete agreements. As a result, the associates in your thriving practice can just form a new firm and ask the clients to follow them there, which most clients will do. Elaborate marketing systems, a well-known law firm name, a hot website URL, an established phone number, etc., may have market value, but not being able to control who your clients hire limits the market value of your firm.
b. You likely distributed your retirement already. Some law firms have provisions in their shareholder agreements to pay out retiring lawyers over time, such as three or five years. But unlike other businesses, most law firms distribute all of their profits to the owners at the end of each year. This makes sense in the short term, to take advantage of personal income tax rates that tend to be lower than business tax rates. Down the line, when it comes time to pay out retirees, there typically is little or no equity in the firm to pay those benefits. This means the money has to come out of cash flow, i.e. out of the revenue that the remaining lawyers generate each year. So now the remaining lawyers are paying out part of their annual income to retired lawyers who are no longer producing. Once again, working lawyers have little incentive to stick around.
c. Low marketability. Although purchasing an older lawyer’s practice can be a good way for a newer lawyer to get started, some older lawyers’ practices are not marketable. Take a good look at your practice: are your clients mostly your vintage or is there an inter-generational mix? Perhaps more importantly, look at the age of your referral sources. Older clients and referral sources, like you, may be considering retirement, which limits the stream of future cases.
Take a look around your office. If you see only old computers running legacy software that the developer no longer supports, paper files stuffed with emails you printed out, rolodexes, and administrative staff who type up your handwritten time entries and keep trust account records on index cards, you are going to have a difficult time attracting a younger lawyer to take over your practice. It is not too late at 62 for a practice facelift, but it requires investments of time and money. At 62, it’s now or never if you want to increase the likelihood that you will be able to find someone to take over your practice.
Regardless of whether you choose “work forever” or “get me out of here,” it’s time to address a few undesirable tasks.
2. Tackle your old files. In a traditional, paper-based law office, managing closed files is the task always left for another day. By age 62, that day has arrived. Many lawyers have decades of files in storage facilities, empty offices, basements, and attics. Depending on how those files have been managed, it may take a long time to deal with them. If your files could contain original wills, deeds, pre-nuptial agreements, or other important original documents, you may need to fish those documents out of the files and return them to the clients. If your clients were not routinely offered copies of their files when their matters ended, you may want to contact them. Or you may want to hire a high-school student to just scan all those files and toss the paper. If you don’t deal with the closed files, you may scare away prospective buyers or create a headache for your heirs. And if you decide to transition to a part-time practice, you don’t want the drag of those storage costs decreasing your flexibility.
In the same vein, 62 is a good time, if you haven’t done it already, to inform all your current clients that you will be destroying their files within X years of when the file is closed. “X” depends on your practice area, but for most lawyers it is somewhere between six and ten years. That way, whether you retire at 67 or not, you at least know when you are going to be able to dispose of your files. You could just give them all back to the clients as their cases end but most lawyers want a copy for themselves, in case the client raises an ethics or malpractice claim later.
3. Deal with your trust account. Last year I advised several lawyers who were filled with anxiety because they were trying to close their practices but discovered small problems with their trust account. The accounts reconciled just fine but there were loose ends: old uncleared checks that had been tracked but never resolved; funds held for clients whose cases had ended years earlier and now could not be located to return the money. Occasionally, there are excess funds not readily attributable to any particular client. Resolving these questions may require reviewing several years of records and hunting down former clients. Take care of it now, before your long-time bookkeeper also retires and moves to Arizona.
4. Manage your leases and staff expectations. At 62, you probably do not need to stop buying green bananas but you may not want to sign a five-year office lease. It is difficult to make that call unless you have some idea of your plan for the next five years. Share your plan with your staff; you do not want them to jump ship because they think you might retire when in fact you intend to continue practicing. Conversely, if you are planning to retire you may want to incentivize them to stick with you to the end, so you do not lose that administrative support when you really need it.
And, please, if you hire a lawyer with the expectation that you will retire in five years and the lawyer will take over the practice, stick to it. Don’t be like Lucy with the football and pull it away as your retirement date gets closer. Then the associate or junior partner will leave, their clients will follow them, and you will be left without a plan.
Make a plan. Happy retirement. Or not. Your choice, as long as you make it.
Eric T. Cooperstein
etc@ethicsmaven.com
Eric T. Cooperstein, the “Ethics Maven,” defends lawyers and judges against ethics complaints, provides lawyers with advice and expert opinions, and represents lawyers in fee disputes and law firm break-ups.