For small and solo firms, financial and succession planning takes commitment

At 41, Cumberland family law and estate attorney Jessica Lacy thinks a lot about her 10-month-old daughter’s future, but she’s also mindful of the years ahead for those who work with her.

When she opened the Law Office of Jessica S. Lacy nearly nine years ago, she said “the focus was on keeping the doors open.” But by setting goals for the firm and sticking to a plan, she’s now able to make financial contributions for her own retirement and for her four co-workers.

Lacy said when she was starting out with her practice, the importance of setting aside money each month to build a cash operating balance was stressed to her. “Treat that like any other bill,” she said. “That minimum is going to get set aside. … It might be $50. It might grow to $500 or to $5,000, and the goals can grow with the business as long as you set them and hold yourself accountable.”

Lacy said each month the firm sets minimum, primary and visionary savings goals. Planning like this allows her to now contribute to her own simplified employee pension (SEP) IRA plan and to her staff’s individual 401(k) plans. “Those of us who have staffs, I think we have some obligation to think about the staff’s future. I think that’s often overlooked,” she said.

Failing to plan?

Wanzer Financial owner Patrick Wanzer is a certified public accountant who said about 75 percent of his clients are solo and small law firms. He gets a fair amount of referrals in part because his wife, Holly, a founding attorney at Wanzer Edwards P.C. and 2017 president of the Indianapolis Bar Foundation. Patrick Wanzer also is a frequent CLE presenter and sponsor of programs on running the business of solo and small firms.

When it comes to long-term financial planning, Wanzer said firms are open to it “but it seems to always be the barrier of the cash flow at the firm” that keeps some from committing. “It’s difficult sometimes to move them into the long-term thinking of, put a little bit down now and you’re saving for the future.”

He said a good place to start is with a SEP IRA. A small firm or solo practitioner can put up to 20 percent of income into a SEP IRA up to a limit of $53,000 annually. And for the current tax year, if a firm files an extension, it will have until October to make a tax-deductible contribution. Wanzer said it’s wise for firm leaders to talk with a tax adviser as well as a certified financial planner who can help guide investing.

“When it comes to building a practice,” Wanzer said, “one very important thing to incorporate is developing a business plan each year at the beginning of the year to kind of get an idea where the business will go.” Doing so will also influence decisions about how much to set aside in SEP IRA plans, invest in 401(k)s and other tax shelters.

What’s a practice worth?

Certified financial planners Michael Meiners and Patrick Sullivan are also attorneys who operate Financial Plans & Strategies Inc. in Greenwood, which provides financial consulting services for scores of attorney firm clients and other businesses. They said attorneys who are thinking long-term shouldn’t put much stock in the perceived value of their firms.

“Part of what we do is give people a dose of reality,” said Meiners. With few exceptions among small and solo practices, he said, “There is minimal to no value to a law firm. … It’s rare that you can build that.” He and Sullivan both said the value of a small firm is in the goodwill and reputation of its attorneys — an intangible asset that’s nearly impossible to transfer. That’s why developing and sticking with a financial plan is critical.

“What you walk away with are the 401(k) plans” and other retirement assets and savings, Meiners said.

“You’ve got to live within your means in the early years,” Sullivan said, recalling his own formative years sharing an apartment with other young grads and living frugally. “You’ve got to build a war chest, and you’ve got to control your own expenses first. … Just because you have a law degree doesn’t mean you’re rich. You might be poor for a long time.”

McKinnon

Indianapolis solo attorney Patricia McKinnon, past president of the Indiana State Bar Association’s Solo and Small Firm Section, agreed. “Selling your law firm is the exception to the rule rather than the norm for most attorneys.” Nevertheless, she said financial planning “is a huge concern, and a source of anxiety for many solo and small firm attorneys, and we tend to push it off to the bottom of our to-do list even though we know it’s important.”

McKinnon said in her own planning, she’s not targeting a particular retirement date, but rather putting aside as much as she can so that when she decides to step away, she’ll be prepared. She said it’s critical that boomer attorneys like herself be thinking about their futures.

“This is a huge concern for the legal profession as a whole,” she said. “Half our solos are going to be gone in another 15 years.”

Changing business

New Albany attorney Derrick Wilson of Mattox & Wilson LLP, president of the ISBA Solo & Small Firm Section, worries about young attorneys coming out of law school with large sums of student loan debt. That can delay, for instance, starting a family, buying a home, building equity and being able to save for the future. “It really starts coming into play when you’re trying to bank as much as you can and work on your cash flow” in a practice, he said.

Wilson

In his practice dealing with small businesses, he said owners sometimes can’t tell if the company is profitable, and he suspects that may be the case for some law firms. “I think the minimum thing is getting an accounting package you understand, you can use, or have somebody help you understand it,” Wilson said. He stressed financial planning begins with data and using that data to know where the firm stands — and where it’s going.

Wilson has dealt with succession issues in his own firm since 2008, when one of three partners at the time died. Later, another partner went to of counsel status, and a new partner came aboard. The firm had partnership agreements in place to handle the transitions, and those, too, were based on data. “We had a mechanism that said ‘this is how we value your interest, this is how we move forward,’” he said. Just as attorneys must have surrogate arrangements in case of incapacity, partners should work out details among themselves about what happens if a firm member dies or is no longer able to practice. “It forces you to look at things,” he said.

Such partnership agreements may be tied to business originations, production, or other financial considerations. “If you don’t have the data, I don’t know how you crunch the numbers about what a buyout would look like,” Wilson said.

Retire?

Meiners and Sullivan said individuals have vastly different expectations of their own retirements, and they plan based on those expectations. The planners acknowledge many people distrust financial advisers — in some cases with good cause — and they suggest relying only on those who are certified financial planners. “You have to know what you’re not smart about,” Meiners said.

Denise Hayden, of counsel at Lacy Law, has a space-sharing arrangement with Lacy and has reduced her practice to mostly just mediation with an eye toward retirement. “For some reason, we just don’t retire well,” she said of solo and small-firm lawyers. A large part of that is because of relationships with clients. “They’ll find you anywhere. They’ll come looking for you,” she quipped.

Lacy imagines herself someday slowing down and stepping back from her practice. In addition to Hayden, she employs two full-time legal assistants and an office manager. She said having people to delegate to has been crucial to her firm’s success, and the firm is on the way to the goal of building cash reserves equal to six months of operating expenses.

Lacy is hopeful that as the years go by, her practice will go on after she decides to call it quits, but she also realizes what a challenge that might be.

“What I would really like to see happen is to bring on a younger attorney at some point who would be interested in being a solo practitioner,” she said. “Like many lawyers, I don’t know that you can just walk away. It’s really hard for most of us to let go entirely.”•