Why you need to start succession planning before your partner retires
Retirement can feel like a long way off, particularly when you are focused on running a successful law firm and looking after your clients.
However, waiting until a partner is ready to retire before thinking about succession can leave a firm with difficult decisions to make and limited time to make them.
For law firms, succession planning should be viewed as a long-term business strategy rather than something that happens in the final few months of a partner’s career.
Why you should start succession planning early
Choosing a successor is one of the most important things to consider when you are considering an exit plan.
The right successor may already be working within the firm, but they will need time to develop their experience, build relationships with clients and understand the responsibilities that come with partnership.
It may also be necessary to attract new talent if there is no obvious internal successor.
Starting early allows the firm to identify potential future leaders and put appropriate development plans in place. It also helps to make the eventual transition feel much more natural for employees and clients.
What are the financial considerations when a partner retires?
There are important financial considerations when a partner retires. The value of their interest in the firm, capital accounts, profit-sharing arrangements and the funding of any buy-out will all need careful consideration.
A firm should also understand how the retirement could affect cash flow and the financial position of the remaining partners.
Planning several years gives you time to review these areas and make changes where necessary.
It can also provide an opportunity to consider the tax implications of different exit options and ensure the partnership agreement reflects the firm’s plans.
When considering succession planning, firms must think about the tax implications. The main tax implications are:
- Eligibility for Business Asset Disposal Relief (BDAR).
- Capital Gains Tax liabilities.
- Use of lifetime allowances and reliefs.
Leaving tax planning until the last minute can often result in wholly avoidable tax liabilities, which can be the difference between a successful succession plan and a failed succession plan.
It is always important to receive support from an accountant when you begin considering succession plans in your firm.
How can we help?
Partners should regularly review who could take on future leadership roles, how the firm will fund partner retirements and whether its financial performance supports its long-term plans.
Succession planning should also be reviewed alongside retirement planning, partnership agreements and the firm’s wider business strategy.
At Moore Thompson, we understand that planning for a partner’s retirement involves much more than deciding when they will leave. We can help legal firms assess the financial impact of succession, consider future structures and plan for a smooth transition.
For support with succession planning, get in touch with our team.