Tag Archives: succession planning

A FRESH LOOK AT LAW FIRM VALUATION

by Leon Sacks and Nick Jarrett-Kerr August 5, 2020

The legal industry has consolidated slowly over the years, but this process will be accelerated by the impacts of the current crisis, its economic effects, and the operational changes it drives. Some practice areas will flourish, and others will be negatively impacted. Some firms will need to bolster infrastructure (technology, remote working), requiring investment, while others will have excess infrastructure (office space, back office) that can accommodate growth.

Adopting the right strategy and taking decisive actions at this time are key to optimizing the future of the firm and protecting the interests of its clients and its people. Not only does the current crisis warrant such attention, but it provides a case for change that would not be politically viable during normal economic conditions.   Additionally, there are now very few firms in the fortunate position to be able to rely on organic growth to ensure a successful future.

Most firms will evaluate how to restructure their business, particularly in the light of future financial perspectives. Partners of firms will also be evaluating their own individual status and professional goals. Considerations by firms will include:

  • Acquisition Strategies – enhancing competitive advantage by luring laterals or acquiring competitors (referenced in “Planning for Recovery: 7 Strategies for Opportunistic Law Firms” authored by N. Jarrett-Kerr) or merging with another firm
  • Succession Strategies – maintaining the financial health and strength of the firm through the transfer of ownership to younger partners and/or retirement of founding partners
  • Consolidation Strategies – selling the firm to take advantage of the brand and investment resources of the bigger firm as well as a means of realizing goodwill and to allow older partners to depart (assuming the firm is in reasonable shape)

Such changes will involve valuation issues, be it the valuation of firms or shares in them. While traditional methodologies of valuation may be used as comparative benchmarks, they do not necessarily focus on the real value involved in any transaction.

  • Capitalization rate/multiple of earnings: it is difficult to justify these methodologies due to the absence of a real market/market information on deals between law firms and the differing circumstances of each transaction. Why, as is often touted, should the value be between 1-3 years of profits and, even if it is, how do you arrive at the value within that range?
  • Discounted economic income or discounted cash flow: it is similarly difficult to determine a discount rate to apply to future earnings/cash flow. Any increase of the cost of capital based on risk (the “risk premium”) is prone to be subjective.

To illustrate this conundrum, consider a few situations.

Acquisition

In an acquisition the acquirer will pay for net assets as well as any goodwill since the seller will relinquish control and management of its business, even though its partners may continue to participate in the acquiring firm. The value of goodwill, if any, will depend on the added value an acquirer foresees.

An acquirer is unlikely to want to pay much just for an increase in size of business represented by the summation of its revenues with those of the seller (i.e. 2+1=3) unless that results in a significant increase in profit per equity partner. The latter may arise for several reasons:

  • leverage is increased and the increase in the number of equity partners is disproportionately less than the increase in projected income
  • reduction in infrastructure and support costs (i.e. economies of scale)
  • profit margins of the seller are significantly higher than those of the acquirer and its profit per equity partner exceeds the perceived market compensation for their peers

Note that any value judgements here are based on projections of the acquiring firm’s position post-acquisition and not on the economic income projections of the seller or a multiple of its earnings.

Acquirers are more likely to pay for value in the form of incremental revenue flows and/or the cost avoided by having to develop business (i.e. acquiring a new practice area, a new geographic region or a new client base). This arises where there is a strong synergy between the business of the acquirer and the seller, manifested by

  • enhanced service offerings for the captive client base
  • accelerated ability to compete in new markets
  • complementary capabilities and intellectual capital

The value of goodwill could be significant and again does not necessarily bear a direct relation to the previous or projected earnings of the seller. A seller may argue that their business was developed over years and significant investments were made but, if that is not perceived to generate any value to the acquirer, there is no use in applying traditional valuation methods to determine sales value.

Clearly the degree of certainty that incremental revenues/avoided costs will be realized impacts the value attributed to them. Factors that will influence the outcomes include

  • retention of seller’s client base and the predictability of future revenue from it
  • maintenance of key partners/attorneys and referral sources of seller
  • characteristics of seller:
    • brand reputation and profile
    • nature of relationships (institutional or transactional)
    • susceptibility of business to economic/market changes
    • diversification of clients and practice portfolio
    • level and durability of institutional knowledge and intellectual property

In summary, there are multiple factors at play in determining the value of a firm. Tangible assets are quantifiable but the value of intangible assets, or goodwill, will depend more on the projected post-acquisition dynamic than merely on the ability of a seller to generate earnings in its own right. 

Merger

In the case of a genuine merger, where two or more firms are contributing their resources and net assets to a new merged firm for mutual benefit, the concept is different. Generally speaking, each firm, and its equity partners, will assume responsibility for the realization of pre-merger assets and payment of liabilities and any resolution of pending items will be the subject of the merger agreement. The same applies to settlements with partners who will not join the merged entity.

The initial allocation of shares/equity participation and the partner compensation system of the new merged firm will regulate profit sharing.  Together they should represent fairly the relative value contributed by the parties at the time of the merger and in the future, as well as protecting against dilution. Financial projections of the new merged firm and simulation of participations will be a key part of this process. In essence, the “goodwill” pre-merger is being translated into future profits to be distributed equitably amongst partners.

Restructuring of partnership

Usually there are rules or methodologies in place to govern incoming and outgoing partners, the transfer of their shares and profit sharing. In any case, in contrast to acquisition by an outside party, the partners are familiar with the business and any added value to continuing partners will be based less on synergies and more on the retention of clients and referral sources, as well as the profits  “liberated” by retiring partners.

As shown, valuation is not a simple mathematical exercise and values will vary in accordance with the type of transaction, the characteristics/profile of all interested parties and the value perceived by those acquiring an interest in a firm. Traditional valuation methods, such as multiple of earnings or discounted cash flows, can be used as benchmarks or as a reference point for sellers to establish an asking price for a firm or their shares, but they have limitations. A customized approach analyzing the different elements involved is necessary.

Those in acquisition mode will be searching for value at the most economic price possible. However, they will be avidly calculating the value that any acquisition target can bring to the firm.

A seller, with the luxury of time, can always optimize its own business and organization to enhance its value but, finding a buyer that would find most value in its attributes should be a priority. Offering the buyer greater certainty of increased economic income by, for example, agreeing to a period during which certain key partners remain and clients are transitioned, adds even further value.

A planned transition of ownership also adds value in an internal restructuring. Unless there are extenuating circumstances or disputes, a phase-out of retiring partners, over a period of time, should diminish any disruption of the client base and management of the firm as well as lessen the immediate financial burden on continuing or incoming partners.

In summary, entrepreneurial firms should forget how things were traditionally done in the legal sector or in their firm and should consider how a radical restructuring strategy might benefit the firm, its clients and its people and what smart plans can be deployed to  evaluate how value can be optimized.

Leon Sacks is an international executive with over 30 years’ experience in consulting and law firms. He is based in Miami and currently advises such firms on business strategy and operations with a focus on the Americas (has worked extensively in Latin America).  Contact: leon@edge-international.com

 Nick Jarrett-Kerr is one of the leading UK and international advisers to law firms on business issues, strategy, leadership and management. Contact: nick@edge-international.com

 

 

 

Simplicity

There is one thing I have learned over many years helping run large law firms and since then consulting to professional service firms: keeping things simple and as brief as possible is the essence of achieving success. That means ‘easy to understand and to apply’.

The reasons are simple too. Professionals, in particular those in ownership or senior roles, simply don’t have the time, motivation or gas-power to take on yet more complex, lengthy systems or processes to get things done, especially when it is outside their comfort, practice or client-zones.

I have spent most of my time figuring out how to deal with relatively complex issues and challenges, but in a way that is easy for busy professionals to understand and apply. Put another way, I learned early on not to put anything on the table that was too complex or time-consuming. People simply switch off or don’t give it the attention it deserves. Also, philosophies, concepts or approaches have to be simple enough to able to ‘walk around in peoples’ heads’. Then they don’t need to consult a lengthy document or manual to remember the essence, or need a new dose of discipline to get these things done.

One rider to this; simple approaches and ways of doing things take a lot of thought, dedication and effort to identify, work out, test and prove in the field. This is sometimes not so simple! So, this is one of those things that is easy to talk about, but tricky to achieve in practice.

Let’s take a brief look at a few areas where these principles can be applied in practice to good effect. Coincidentally, they happen to be the areas where I do and enjoy most of my work.

Strategy

Strategy is one. This principle applies equally to strategy for the whole of the firm or for a department or individual: only include the essentials, use a practical, proven framework that gets results, and which can be summarised in six to ten pages or less. Break the exercise down into pre-strategy essentials that need to be settled, actual strategy formulation and then post-strategy implementation and stress-testing. Be able to summarise the key aspects on one ‘strategy snapshot’ page – ideal to hand out to new recruits or even existing and potential clients so that they know what you are about.

Finances

We can never move too far away from the finances when discussing anything to do with firm practice in professional services. In this area, after dealing with many firms internationally, it has struck me how often partners and staff are drowned in reams of lengthy financial reports and analyses. It soon becomes clear that very little of this material gets absorbed and truly serves any purpose.

All of the excess material might keep a certain type of management happy – those who like to think, ‘At least they can’t say they didn’t have the information’. But that of course is not the point. The point should be to help everyone get results.

In this area, I have found a key is to produce a monthly (or on-demand) one- or two-page financial snapshot or dashboard report that is colour-coded, and summarises partner, partner-team, department and firm standards for performance and actual performance on key financial variables. If one needs to dig deeper in relation to a key variable – e.g., total lock-up days – one can always request that detail from the finance or accounts team.

Following the earlier point, it took us about three years of formulation and testing until we got this right, and working to our complete satisfaction. Then it was a case of refining it each year.

People

I long ago came to the conclusion that the key to results in the management of people is ensuring a truly genuine interest is taken in anyone for whom one is responsible. We developed a new philosophy, system and approach to ensure this took place throughout a firm – the Responsible Partner and Development Discussion system. With this system, most people at every level reached something like their full potential, they were happy, partners attracted good staff who stayed longer, and our employment brand and engagement levels grew stronger.

Again, this was kept as simple as possible. That is a key reason why it works.

Succession Planning

The system we developed for the management of people has a number of off-shoot benefits. One is addressing the hardy annual issue of succession planning. So many firms struggle with this. Some introduce quite complex monitoring and management systems to address it, but with limited results.

As in other areas, succession planning can be kept quite simple. If something like the Responsible Partner philosophy mentioned above is adopted and applied rigorously, over time it automatically builds succession throughout a firm, and it has the benefit of being organic. Let me expand on this a bit. If a partner uses the approach successfully and builds a high calibre team of professionals at different experience and competency levels over time, she or he will find successors start to pop up within that partner team. It takes a good few years, but it is guaranteed to happen: this has been proven time and again.

Achieving success in practice today undoubtedly takes high levels of competence and performance in a number of different areas. It used to be that working like a dog and looking after clients was it. The rest could more or less take care of itself. Those days are long past.

Contribution Criteria

Practice and client needs have become much more sophisticated and challenging. Trouble is, in many firms, partners and staff still don’t really know what they should be expecting of themselves or one another. It is important to spell this out in summary in a positive, constructive way which propels the firm forward and acts as a motivating guide to individuals to contribute in various key areas. These will include hardy annuals like financials, business development, people and support for the firm, but also things like building the capital fabric of the firm, building succession and active support for the brand, and raising each of these to exemplary levels through innovative approaches.

Brand

Finally, brand is another key area which can get attention. Everyone in the firm should understand what the firm’s understanding of brand is. ‘Brand,’ as I teach it, is the aggregate of what other individuals think and feel about the firm as a practice, as an employer, its services and the key individuals within it. Everything brand-related flows from this simple framework and makes it easy for everyone in a firm to grasp the nuances, concepts and necessary support systems to strengthen a firm’s brand, its employment brand and the brands of individuals within it.

Dare I say it? I believe that adopting this ‘simple’ approach to everything relating to leadership and management also makes this part of practice fun. More practitioners and staff will want to participate in and contribute to these initiatives as they will feel they ‘get it’ and don’t need a course in management to get results and get things done. This in turn grows future leaders and managers internally.

Edge Principal Sean Larkan is a former corporate/tax lawyer with extensive experience in conference and retreat presentation and facilitation. As an Accredited Practitioner of Human Synergistics International and a certified Master Coach, he offers Edge clients knowledge and experience in such areas as leader, group and organisational behavioural and cultural diagnostics and coaching, and serves as a critical adjunct to firms’ strategy implementation. He is the author of Brand Strategy & Management for Law Firms. 

Merger Fever in the Air

2018 is shaping up as the year of the merger. Somewhat understandably, the legal media only report the larger mergers and there have been three of them – one concluded and two announced – and as I write we are not even at the end of March.

Far greater numbers of smaller firms are entering into or examining some sort of merger. Over the past 12 months, I have been involved with a number of these mergers or sales, and this year I already have another two on my books. Some logical questions are:

  • What are the motivations for firms to seek mergers?
  • What is the reception of target merger partners?
  • What are the likely outcomes?

Motivations

Motivations for mergers will vary from firm to firm. On the positive side, firms with an expansion mindset see acquiring a firm or practice group as the fastest and cheapest way to grow their business. They will usually have a support structure that can accommodate – both physically and managerially – an additional practice or two, which provides economies of scale.

At the other end, an acquisition or merger can provide a firm with a circuit breaker for some of their managerial challengers or deadlocks. This could be anything – ranging from succession, to disparity in contribution, or a hollowing out of market share.

Those firms who see succession as a looming issue cite their lack of success in developing or retaining likely internal successors. The hope is that by joining with another practice, there will be a larger pool of talent that can service the clients as retirement of the partners looms, and that the newly merged firm (or one of the youngsters) will have the financial resources to purchase the equity of the retiring partners. There are a lot of moving parts in this scenario, and the likelihood of success is based on the idea that a larger merged firm will have the staffing and financial resources to effect an outcome.

The reception of targets

In my experience, all potential targets I approach are happy to talk. Nothing is lost from a discussion about what is possible, and humans are naturally curious – particularly if they think someone is interested in them. It is not that different from the school yard.

A meeting of the minds is the first step before any information is shared. The crucial question is ‘Do I want to be in business with this person’? More often than not the answer is ‘Yes’, or ‘I am not against being in business, as long as the deal stacks up’.

Likely outcomes

Assuming the threshold issue of cultural fit has been cleared, it then boils down to the financials. Many perfectly good mergers have floundered on the rocks once the due diligence is complete.

The right financial fit is important. I have been involved with a smaller firm that sought to be acquired by one of Australia’s national firms. There was a good fit in terms of complementary practice areas and experience of the partners. The deal fell apart because the smaller firm was profitable in its existing lean structure, but the modelling showed that when the gross fees were put into the structure of the larger firm, the profitability of the partners would be halved.

As attractive as the brand of the larger firm was to the smaller firm partners, the financial haircut was too much for them to swallow. Ultimately they ended up merging with a similarly-sized firm with an equally lean structure.

In most cases, discrepancies in profitability between merger parties will exist, but the merged entity should be able to deliver economies of scale (or cost savings by removing duplication), with the result that the financial might of the merged entity is greater than the sum of its parts.

There are of course many factors that need to be taken into consideration for a merger to be successful; a quick Internet search will provide you with any number of comprehensive due-diligence checklists if you don’t already have one. What I wanted to convey in this article is that the appetite for mergers – or at the very least exploring the opportunities – is high. Firms that are considering their options should explore the market without fear of rejection.

 

Star Watching

As law firms wrap up the evaluation season, much of the conversation revolves around the under-performers and what should be done to get them “up or out.”

At the same time, every firm acknowledges that they have both rising stars and established stars. What attention did they get and how will they be watched and supported in the year ahead?

In our conversations with firms that have top talent management practices, here are some of the guidelines we hear for “star watching.”

For Associates

  • The firm should have a clearly defined “path to partnership,” with specific communication points. Associates want to know what competencies to work on next and whether they are “on track” for partnership.
  • Provide the stars a complete evaluation message, including goals for improvement. Stars are often told, “keep up the good work,” but they don’t believe that they are flawless; they’re highly motivated and want specific direction for improvement.
  • When the firm has to deal with disruptive change (layoffs, mergers, significant partner departures or lateral arrivals), sit down with the stars and assure them that their path in the firm is secure and on course.
  • Make sure they get assignments that will cross practice groups and offices. This gives them a chance to demonstrate their qualities in a bigger arena and will help them cross-sell work in the future.
  • Provide them (and insist) with training on client relations, business development and management skills.
  • As they become more senior, share responsibility for budgeting and billing practices.
  • In their year leading up to partnership consideration, provide a partner “sponsor” who will help the associate make the case for partnership and clear obstacles. (The sponsor usually is not on a decision-making committee.)

All of these practices will keep your stars close. Think of the “star that could have been” who left your firm for in-house work or another firm. Could the firm have done a better job of making it more attractive to stay?

For Partners

Management by now is well aware of the impact of aggressive recruiting in their back yard. Rising star partners are getting regular invitations to depart with their book of business. What can you do to assure them that yours is the right galaxy for them?

  • Give these partners feedback from senior management at least three to four times throughout the year, even after a positive performance evaluation.
  • Give them opportunities to cross sell and join other partners in requests for proposals. The message is that our teams are strong, and that solo originations are not the only measure of success.
  • Bullet-proof your compensation system to make sure you can give rewards for exceptional year-to-year performance and teamwork. Many lockstep systems need some “tweaks” to make this possible.
  • Acknowledge the reality of the partner recruiting industry that surrounds your stars. Make it easy for them to talk with someone in senior management about outside offers.

Finally, rising stars are the future of your firm. Will they have significant responsibilities, status and compensation in the near future? The firm’s succession plan also sends a message. For the associate, will there be a partner opening in my practice group? For the star partner, will the senior people start stepping down in a predictable manner? Succession planning, transparent to the partnership, will help keep your stars at home.

Successful Succession

As has been predicted for a while now, the legal profession is undergoing a significant transfer of ownership and clients from one generation to the next. This is happening whilst the pressures arising from the oft discussed ‘new law’ models make their presence felt.

Many ageing lawyers look blankly when asked about their succession plan. Given the demographics, it’s fairly obvious that small firm lawyers who fail to plan for their succession are likely to find themselves confronting a very crowded marketplace when eventually they are ready to test the market.

Equally, it’s highly likely that younger lawyers may be apprehensive about parting with good money to buy an interest in a firm. Many younger lawyers are already saddled with university debt, and have young families to support and substantial mortgages to service.

Successful succession requires careful and unhurried planning for the transition of clients from one generation to the next and the transition of firm management to a new generation, coupled with the associated transition of equity and the financial machinations that come with it.

Options for Small Firms

Anecdotally, discussion about succession issues in small firms is more difficult than in larger ones, as succession has a much more personal focus. As a result, discussions about principal intentions are often delayed or avoided, resulting in a less than satisfactory transition for all parties. If succession within the firm is not realistic, there may be other options worth considering.

Sell the Practice

Well managed, profitable, organised law firms with repeat clients are worth real money. With organic growth proving to be difficult, many firms are looking to grow by merging with or acquiring complementary practices.

Practices considering selling their equity externally would benefit from conducting an “operational due diligence” to identify what needs to be done to maximise the sale price.  Small practices seeking an eventual sale would do well to focus on:

  • developing a track record of annually increasing profitability;
  • ensuring that as much legal work as possible is systemized and process driven, and where possible delegated to employed fee earners;
  • having robust management accounts as well as an up-to-date and accurate client data base;
  • repeat clients who can be readily transferred to a nominated successor or new owner of the practice.

Devolving Equity

Instead of waiting until retirement is imminent, another course of action is to implement a staged sale of equity over a number of years.  A price is struck and the sale takes place as equity is transferred. This approach benefits both the vendor and purchaser as it enables, among other things, a smooth transition of roles and responsibilities, certainty for clients, and easier payment terms for the purchaser. The options are many and various and limited only by the creativity of the participating practitioners.

Options for Larger Firms

For larger practices with a number of partners that haven’t yet established a formal succession model, a sensible starting point is to identify when senior practitioners and managers are likely to retire. This will at least set a timetable for discussions and identify when and in which practice areas the firm may be exposed. These gaps can then be translated into a plan that addresses the firm and individual approach, and hopefully leads to a well-managed transition.

Set an age to begin discussions

The first step is to set an age – say 58 years – when the firm will begin work with a partner to develop a plan for the eventual succession.  By developing a firm-wide succession plan, an individual principal need not feel threatened – after all, it is firm policy and everyone is subject to it.

Equally, there is no reason for the plan to spell the end of a principal’s working life. The plan is in place should they decide to depart; if they decide to stay, then the net result will be better trained and more productive junior lawyers.

The best outcomes are achieved if there is a minimum of several years, and sometimes as long as five years, of preparation.

Developing Successors from Within

At its most basic level, an effective succession plan should address six key areas:

  • Technical expertise and range of specialties offered
  • Client retention
  • New business development
  • Firm and departmental management
  • Profitability and cash flow
  • Options for the departing partner

The transition of clients from one generation to the next is not an individual responsibility but a firm responsibility, as clients should be thought of as clients of the firm, not clients of the individual lawyer.

Many practices are complacent regarding the relationship between the responsible lawyer and the client. As such, it is common that the only person with information regarding the client is the responsible lawyer. This makes transition difficult and a ‘my client’ culture can develop.

Conclusion

Successful succession will involve the firm’s ability to develop a plan for retiring partners and develop the skill sets of the existing personnel. For those lawyers who don’t consider a structured internal succession plan as feasible, there are a number of external succession options such as selling the firm, the chambers practice model, or the outsourcing of management.  Any of these options may make the transition to retirement easier.

As is said so often, failing to plan is planning for failure, and this applies particularly in the succession of law firms.

Succession Doesn’t Just Happen

2 unnamed“We need a succession plan. My partners and I formed this firm thirty years ago. We started with clients aplenty, and spent the early and middle years – in fact, up until a few years ago – tasking younger partners to service the business we already had through the impressive rainmaking skills of the founding partners; we did not task them with developing their own client base because we wanted to make sure our (founding leadership) clients were serviced by the most seasoned and technically proficient lawyers. The truth is that we’ve always brought in most of the business, but now we’re concerned about ‘legacy’ and the health of the firm after we begin winding down and retire. At the very least, we’ve got a significant leadership gap and client development skills gap among the non-founding partners, and thinking more pessimistically our firm may not survive our retirement. Can you help us?”

I’ve been presented with this fact pattern pretty chronically over the past few years. On further inspection it usually becomes clear that the founders’ definition of the firm’s “problem” is a bit too limited. Lawyers in the associate ranks lack confidence about where their firm is going and the longer-term opportunity afforded them. They know precious little about how the firm is managed and what kind of compensation the firm generates for equity partners in the longer term; as a result, younger lawyers become very short-term focused and find lots of reasons to become disaffected. Layered on top of all this is the perceptible tentativeness of the “next generation of leadership” – they would like to inspire ambition within the junior ranks, but they don’t feel very confident themselves. What’s a firm to do?

It goes without saying that each law firm situation along these lines is fact-specific. However, I’ve found that there are a number of reliable recommendations from which most firms could benefit that fit this profile, namely:

Transparency – leadership needs to trust that non-founding partners and associates will benefit from having more information rather than less information. Let the rest of the firm know how you lead the firm and how you do your job. Help others understand and let them appreciate how effectively the firm is being managed in this regard.

Earn the Right to Teach Patience – if your firm generates above-market compensation for equity partners but achieves it in part because of a very tightly managed associate compensation grid, then let associates know what could be in store for them as they climb the ranks. Associates and non-equity partners have a hard time deferring near-term compensation gratification if they don’t know how that model could redound to their benefit down the road.

Define and Communicate Partnership Criteria – associates and non-equity partners crave a GPS system. Let them know in meaningful parameters what kind of “points they’ll need to put on the board” over time to become a shareholder.

Define and Communicate Partner Compensation Criteria – founding partners tend to not be very formulaic about how they split up the profits among themselves because it’s an intimate group that has worked side by side for so many years. As more non-founding “arm’s length” partners are made, first generation firms would benefit from defining their compensation criteria more explicitly. New partners and leaders want to understand how their activities are being valued, and they want to be put to their highest and best use; a law firm’s set of objective equity partner compensation criteria can supply direction and reinforce managerial credibility.

The “Vision Thing” – founding leadership ought to have in mind a longer term destination for the firm, and it ought to be documented. Whether the firm has landed on the right longer-term view of what place it will occupy in the marketplace is less important for these purposes then just having a destination in mind – a destination that can be articulated and supported intellectually.

Partner Readiness: Client Development Skills Training – lawyers do not passively bump into the skills they’ll need to begin sourcing clients on their own; rather, first-generation firms should take an active role in outfitting partners and leaders-in-waiting with the necessary consultative selling skills so they can build up their practices, and be ready to lead the firm’s revenue efforts over time.

Founding Partner Wind-Down Compensation – first generation firms often allow founding partners to retire gradually so that there is a wind down period during which partners are not active at the same historical levels. At wind down, founding partners typically become non-equity partners of the firm. As non-equity partners they’ll get a salary and bonus, but their bonus plan can and should be very tailored to the particular non-equity founding partner, and should answer loud and clear the question “What is my highest and best use to the firm?”

Client Transition – founding partners are well advised to put in place a 12- to 36-month plan for involving one or two other partners in the management of key clients, so that at wind down and full retirement there is at least one equity partner ready to slide into the full relationship management role. The non-equity bonus plan of a wind down partner should motivate and reward that partner to accomplish the client transition seamlessly over time, and interim client-transition milestones should be defined along the way before full retirement.

Generational transitions are not easy, particularly when it is the founding generation that is cycling out. Let the next generation of leadership appreciate how and why the firm has been so successful, and put some scaffolding in place so new leadership can leverage what you have built.