Oregon State Bar Bulletin NOVEMBER 2013
Two years ago, when the Washington State Bar Association’s Senior Lawyer Section gave a presentation on succession planning for sole and small-firm practitioners, the speaker asked the some 45 lawyers who attended, “How many of you know you can sell your practice?”
“Two people raised their hands,” recalls Michael Badger, associate director of the association’s Lawyer Services Department. Even now, he says, “A lot of lawyers still don’t know they can do it.”
This lack of awareness of that possibility is understandable, because for years the option of buying or selling a law practice was discouraged or even prohibited.
That changed in 1990, when the American Bar Association dropped its opposition and added Model Rule 1.17 to the ABA Model Rules of Professional Conduct. States soon followed, with Oregon adopting its own version of the rule in 1995, which became Oregon RPC 1.17 when Oregon adopted the Rules of Professional Conduct on Jan. 1, 2005.
Selling a practice serves as an antidote to: 1) giving away for nothing to another lawyer a practice you have worked for years to build, or 2) closing the doors and walking away, leaving you with memories and mementos but no additional cash. Lawyers who have offspring who went into the law may recognize that they can transition their practice to their children, but the many attorneys who don’t have this advantage often assume their only option is to shut down, Badger says. That notion persists despite the fact that other professionals, such as accountants and dentists, have been selling their practices for years, he notes.
Still, there are ethical and professional responsibilities for attorneys to consider. Helen Hierschbiel, general counsel for the Oregon State Bar, says the questions she gets asked most often about succession relate to payment arrangements. That’s because sometimes the terms of a sale provide for payments over time to the selling lawyer, and attorneys inquiring to her office are aware of rules that prohibit a lawyer from sharing legal fees.
Her response is that a lawyer may sell or purchase all or part of a law practice, including goodwill, in accordance with Oregon RPC 1.17. The conditions set forth in the rule are intended to protect clients from breaches of confidentiality and conflicts of interest, as well as to recognize clients’ right to choose their own counsel.
The rule does not place any restrictions on the terms of payment for the law practice, other than to say that fees charged to clients may not be increased except with the client’s consent.
“Some lawyers have expressed concern that payment to the selling lawyer of a percentage of the fees earned for a period of time after the sale may violate prohibitions against fee-sharing,” she says. “While there are no ethics opinions in Oregon that directly address this issue, sharing of fees between lawyers generally is allowed under certain conditions, and even those conditions are not meant to prohibit payments to a selling lawyer for the sale of a law practice” pursuant to Rule 1.17, she says. (See RPC 1.5(d) and (e).)
Moreover, when a lawyer purchases a law practice from a deceased, disabled or disappeared lawyer, the purchasing attorney also may pay the estate or other representative of the lawyer, notwithstanding the fact that the estate or representative is not a lawyer. (See RPC 5.4(a)(2).)
Even so, selling a law practice is a different kettle of fish from selling a dental practice, emphasizes Roger E. Delles, owner of Professional Practices Group in Tigard, who for years has represented professionals in buy-sell arrangements. “One of the huge differences is, in a dental practice you have a pretty continuous book of business, because most of the patients are set up for return treatment,” he says. “If you are in the insurance business or legal practice, a multitude of clients come to you for one-time needs.”
Thus, placing a specific value on your law practice is challenging. “The guarantee of those clients returning is difficult to do,” he says. “Your goodwill is the cornerstone of the value.” Frequently, the success of the practice has been based on the personal relationship between lawyer and client.
Sole and small practices often wait too long to plan what will happen to their clients when the lawyer moves on or becomes disabled. “If you don’t plan for those transitions, the value goes downhill,” Delles says. “You’re losing value by delaying.”
Meeting a Mutual Need
The OSB’s 2012 Economic Survey found that, by size of practice, the majority — 56 percent — of all OSB members practice in offices with from one to six attorneys. The number of these practices ranged from a low of 36 percent in Portland to 84 percent on the Oregon coast.
What’s more, 35 percent of respondents said they plan either to retire (18 percent), leave the profession but not retire (7 percent) or reduce their practice (10 percent) in the next five years. A total of 8 percent of active members were either “part-time lawyers due to lack of legal work” or “working, but not in legal work and wanting legal work.” Further, almost one-third of the newest OSB members not working as lawyers are those who have been members from zero to three years.
The number of Oregon attorneys in private practice, based on the list of those covered by the Professional Liability Fund, shows 30 percent are age 60 and over, while 29 percent are 40 and younger. These demographic trends, along with a still only slowly improving economy after the Great Recession, translate into a large number of younger people looking for placement and older people wondering how to transition out of practice, either soon or in a few years.
In response, OSB President Michael E. Haglund, who reviewed these demographics in 2012 with the Legal Opportunities Task Force and the bar’s Board of Governors, set as a high priority to develop practice opportunities for Oregon lawyers in part by matching up these two age bulges in the attorney population. The board’s Special Projects Committee, chaired by Travis Prestwich, developed the idea into a new “Law Practice Transitions” series of short CLEs and networking events. Prestwich says Oregon’s lawyer population shows demand is greatest outside the Willamette Valley. In each of the towns the Board of Governors has visited over the past year, he has discussed the topic with local lawyers who have said they would welcome newer lawyers coming to their communities to practice. Interest is also strong among new lawyers and even law students, who may be most interested in a mentoring relationship that also works as a succession plan for the senior lawyer.
That was how one Southern Oregon sole practitioner, who asked not to be identified by name, came about his current law practice. An established attorney took him in as a junior partner when he was a young graduate, and after three years, sold the practice to him. Now this lawyer himself is ready to retire, but he was not sure how to handle a transition or how to valuate his practice. He would like to sell rather than close and abandon his clients.
“I thought of this some time ago,” he admits. “I probably should have should have started a little earlier. I’d rather make a little bit than just give it away, but up until two months ago, I thought selling a law practice was not possible.” He found out differently from the OSB, then contacted Oregon’s three law schools to ask for names of potential new graduates who might be interested in taking over his practice. He is willing to introduce a new attorney to his existing clients and consult with and mentor the new person, but he wants to stop practicing at the end of this year.
“I suppose there are other sole practitioners in southern Oregon I could refer to, but I really think selling my practice would be a service to a newly minted attorney,” just as he benefited from a similar opportunity when starting out.
Scott McArthur, a Monmouth lawyer, sold his sole practice about 12 years ago to a lawyer whose parents were clients of McArthur’s. The new lawyer wanted to move to the Monmouth area, so he rented space from and worked with McArthur for six months. The subsequent sale of McArthur’s practice to the new attorney was “something we talked out between the two of us,” McArthur explains. “There’s the value of the practice itself. Very often the price you sell the practice for is the physical part of the office. The problem people have had in finding a successor is mainly whether that the person you leave in charge of your practice is going to do a good job for your clients.”
Sometimes planning a succession can have unexpected results. OSB President-elect Tom Kranovich, of Kranovich & Lucero in Lake Oswego, planned to retire at age 62. But hiring an associate fresh out of law school prompted him to stay in practice longer than he anticipated. His associate and now law partner, Angela Franco Lucero, speaks Spanish, which “opened up a line of business for me in insurance defense that I otherwise would not likely have gotten,” he says.
As the business grew, and the recession took hold, Kranovich made the decision not to retire yet. He now is 64 and plans to retire no sooner than in four or five years, but that “will depend upon us, not just me, hiring someone that will get sufficiently get up to speed” so that Lucero “can continue the practice we have built with me only coming in part time.”
Thomas McDermott, a lawyer with the 14-attorney firm Lindsay Hart in Portland, says that after he turned 60, “I began consciously focusing on mentoring the younger lawyers in my firm. This was partly to provide clients with some certainty about succession planning despite (my) not having set a date to retire yet, but also to help develop the younger lawyers and teach them some of the tricks of the trade.”
“It’s not easy going from ‘leading the charge’ as a litigator to providing support for others to get their opportunities, but it’s imperative for the profession, and clients benefit greatly, as well,” he says. “For me, it’s been personally rewarding and a different kind of success, how you can bring a young lawyer along and help them establish a presence with long-term clients who are used to dealing with a specific partner but who also want to see some succession planning. It can be a tricky balance to maintain.”
A new associate, Gavin Bruce, has been working in the maritime law area with McDermott but did not have any “sea time” in the Navy or Coast Guard or in commercial fishing, as many maritime practitioners do, McDermott says. “In order to give him some real-life experience, I asked one of our clients if (Bruce) could ride along on a tugboat.” The client agreed, and this past July, Bruce sailed out of Tacoma, Wash., to Vancouver B.C., then back to Tacoma. McDermott viewed the experience as a good opportunity for a young lawyer to get direct client contact.
Some lawyers see the best way to expand their practice as buying other lawyers’ practices. That is the intention of Garry Schnell, a sole practitioner with Lawstein Corp. in Portland, who notes that “that’s the way every other business does is buy other businesses. It doesn’t seem like there are a lot of lawyers who realize they can sell their book” of business, he observes. “My approach to all of this is, lawyering is an art, coupled with knowledge, but it’s also a business.” Many attorneys don’t think that way, he acknowledges, but the current marketplace of law practice is so competitive that “we have to think outside the box.”
After obtaining his law degree, Schnell earned an LL.M. degree in tax and worked for a couple of large accounting firms, a period in which he learned about growing through acquisition. Now he is using his knowledge from that experience and applying it to law practices.
“It seems perfectly natural and a good way for lawyers to do this,” he says. He sees the process of selling as very similar to when a lawyer leaves a firm and takes his client portfolio to a different firm. Schnell seeks to strike an arrangement in which, if the selling attorney’s clients return to the purchased practice over the following five years, the retiring lawyer gets an agreed-on percentage of earned fees.
Where does all this leave sole and small-firm practitioners who either are seeking work or to wind down their careers? Because of the large number of lawyers who are baby boomers or older, there is growing interest by them and by those who represent them, such as bar associations, to spread the word about how to go about succession planning (see sidebar on page 19).
Even though law practice sales may not be common, Prestwich thinks figuring out the mechanics of the process will be less challenging than helping potential sellers find the right buyers. Some transitions, especially those involving experienced practitioners and existing firms looking to expand, could happen quickly, but transitions involving newer lawyers entering sole practice will need a longer transition and more involvement from the seller.
From a practice management viewpoint, a sufficiently long period of transition almost always is in the best interest of both buyer and seller, Washington State Bar Association’s Badger counsels. Whether that be a few months or several years, an adequate transition time allows sellers to wind down their careers while developing a plan for their next stage of life. For the buyer, a transition period provides time to learn the ropes and about the firm’s existing clients. Allowing two to five years for a transition is ideal, he says, and the timeline needs to show both a schedule for the transitioning-in and one for the transitioning-out.
Oftentimes a transfer from new lawyer to retiring lawyer can be accomplished using a phased purchasing agreement, says Professional Practices Group’s Delles. With this type of plan, the buying attorney agrees to purchase the lawyer’s book of business based on repeat business coming in. The retiring lawyer signs an agreement that he or she will receive, say, 50 percent of proceeds the first two years, then 25 percent the third, fourth and fifth years. After that, the buying lawyer receives 100 percent.
“I think the key thing a lot of people get hung up on is, people go looking for a specific model,” Delles says. “If there’s a willing buyer and a willing seller, there’s some way to bring those two together, to find a transition model that’s best for both sides, what they want from a personal standpoint.” Such deals are “all individual; no two are the same. It’s the challenge of bringing people together that keeps me excited to come to work.”
ABOUT THE AUTHOR
Cliff Collins is a Portland-area freelance writer who has been a frequent Bulletin contributor since 1991.
© 2013 Cliff Collins