A Vital Lesson Learned
The economic downturn was a wake-up call for lawyers: since the 2008 crash, there has been a trend towards firms adjusting their priorities to maintain their solvency and liquidity.
Law firm succession and exit planning are among the greatest management challenges facing legal practices, as failure to manage the risks effectively can lead to loss of talent, clients and funds.
Failure to plan for any exit or succession has recently been highlighted as a “priority risk” by the SRA. “This factor can lead to a number of regulatory matters, such as abandonment or poor standards of service,” says the regulatory body in its Risk Outlook 2014-15 report.
Highlighting a considerable increase in unreported abandonments in recent years, the SRA also draws attention to firms closing without notifying clients. “The reason behind many abandonments is a failure to plan for what will happen if the firm has to close or be sold. We are likely to see this risk increase as more solicitors reach retirement age but do not plan for the sale or closure of their firm,” it says.
Even when there are transition plans in place, closer scrutiny can reveal that they lack realistic contingency plans, contain strategic gaps, or make assumptions that are too optimistic. Failure to successfully transition key clients with resulting loss of revenue presents a key succession planning concern, as well as leadership succession and loss of expertise.
Claire Russell, managing director of leading independent chartered insurance broker Hettle Andrews, offers her thoughts: “There is a compulsory regulatory requirement for law firms to place run off cover for a minimum duration of six years should their firm cease to practice as a discrete entity, without a suitable successor – and the cost of run off cover is considerable: three times the expiring annual premium,” she says, adding “If a firm wishes to cease in practice they must place run off cover, or find a suitable successor.”
The future health of your firm depends on how well you put strategies in place to protect and maintain your valuable client relationships and plan for the loss of senior members of staff. Succession isn’t limited to a single strategy: assessing and evaluating areas for improvement is important, while ensuring clear business plans are in place, and securing tailored run off insurance will assist in mitigating the risks.