Succession Planning for Law Firms

For those starting out their journey in the legal profession, the world seems wide open with possibility. And while becoming a successful legal practitioner can seem to be a competitive and mysterious process for those in the thick of it, there is a lot of infrastructure devoted to transitioning young law students into young professionals.

Exit planning is the process of preparing your business, and yourself, for the day you transition out of ownership. It’s not just about selling your business; it’s about doing so on your terms and achieving the best possible outcome – financially, emotionally, and strategically.

Whether you’re a small law firm principal, a partner in a large practice, or a sole practitioner, exit planning is crucial in how it transforms your business from a practice heavily dependent on you into a valuable, transferable asset.

1.     It Secures Your Financial Future

For many law firm principals, the business is their largest asset. A well-crafted exit plan ensures you can maximise its value, providing the financial freedom to retire, fund other ventures, or support your family.

2.     It Protects Your Legacy

Your firm is more than just a business—it’s the culmination of your hard work and dedication. Exit planning allows you to pass the torch in a way that preserves your reputation and ensures the continuation of your firm’s mission and values.

3.     It Safeguards Clients and Employees

Without a clear exit strategy, your departure could create uncertainty for your clients and staff. Planning in advance allows you to build a succession structure that ensures continuity of service and stability for those who depend on your firm.

4.     It Increases the Value of Your Firm

The process of preparing for an exit often uncovers inefficiencies, risks, and opportunities for improvement. For example, shifting client relationships to the firm rather than individual lawyers, or introducing retainer-based revenue models, makes the business more attractive to buyers.

When Should You Start Exit Planning?

Craig suggests that every business owner should “begin with the end in mind.” Just as you wouldn’t invest in a property without a plan to sell, running a business without an exit strategy is shortsighted.

Factors to consider for a successful exit

Success in exit planning is subjective—it depends on what you value most. Some principals focus on financial gain, while others prioritise continuity, legacy, or employee welfare. According to Craig, the most successful exits are those planned years in advance with consideration of key factors such as:

Your ideal buyer

Who would you want to buy your firm? Identifying this early can streamline your exit planning strategy. Potential buyers typically fall into two categories: external buyers, such as other law firms looking to expand, and internal buyers, such as employees or partners within the firm.

For external buyers, showcasing a niche specialisation or a strong recurring revenue model can make your firm an attractive acquisition target. Internal buyers, on the other hand, may benefit from an employee share ownership plan or other structured buy-in strategies. However, these require time to implement. “If you’ve got 10 years, employee buy-ins can be a very effective strategy,” Craig suggests. By cultivating successors and transferring institutional knowledge over time, you ensure that the firm’s culture and client relationships remain intact.

Goodwill value

Goodwill value is a significant component of a law firm’s sale price, but it’s also one of the hardest to build. In many firms, client loyalty lies with individual lawyers, not the brand. This dynamic makes it challenging to transfer value during a sale. As Craig explains, “if a lawyer moves, their clients often follow. This leaves the business with little goodwill value.”

Shifting the client’s connection from their lawyer to the firm can involve having multiple lawyers involved in client relationships or providing online legal services and software-based offerings to create innovative, consistent client experiences. Law firms need to think about how they service clients and what relationships look like at the firm level.

A law firm’s value lies in more than just its client list. The underlying business model—how services are delivered and monetised—plays a pivotal role in determining sale price. Subscription-based models and retainers, for instance, are seen as more reliable revenue streams compared to hourly billing.

Craig finds that these models can significantly increase value, with subscription businesses typically attracting multiples five to eight times higher than firms relying on traditional billing. Transitioning clients to recurring revenue arrangements can make your practice more appealing to buyers.

Retainers, or subscription-based arrangements ensure predictable income enhances the perceived value of your firm. Buyers see recurring revenue as a sign of stability and reliability, often rewarding such firms with higher valuations. Lawyers can start small by transitioning a portion of their client base to retainer agreements, gradually building a foundation of consistent revenue.

Building a successful exit strategy is a long-term project. Craig suggests using tools like annual valuations to track progress. Regular reviews allow principals to adjust their strategies and address gaps before it’s too late.

For example, if your goal is to sell the firm for $10 million in five years, a yearly valuation can highlight whether you’re on track or need to implement additional changes.

Challenges of Law Firm Succession

Small firms: key person risk

For small firms, the reliance on individual lawyers creates significant key person risk. Transitioning client relationships to the firm rather than an individual by creating goodwill value is crucial.

For large firms, the focus shifts to leadership succession. Younger professionals today are less likely to see equity partnership as an appealing career goal.

Craig emphasises the importance of creating new pathways: “You may need to consider group ownership models or alternative leadership structures to retain and motivate the next generation.”

As younger professionals increasingly prioritise work-life balance over traditional leadership paths, the pool of potential buyers within firms is shrinking. This shift calls for creative solutions, such as offering group ownership models or diversifying potential buyer bases.

Craig advises tackling key performance concerns before the sale. “If retention of clients is the buyer’s worry, address this ahead of time by transitioning client relationships to other team members well in advance.” This proactive approach not only reduces the reliance on earnouts but also strengthens the overall appeal of the firm.

“Imagine if one big client leaves after the sale—it’s a major issue,” Craig notes. By intentionally broadening your client portfolio, you create stability and a stronger bargaining position.

Planning your exit may not seem urgent, but the earlier you start, the more options you’ll have. Whether your focus is financial, personal, or professional, thoughtful succession planning allows you to leave a lasting legacy and achieve your goals.