Essential legal documents in transitioning law firms

In my last article I gave some specific guidance about developing a succession plan for your law practice. In implementing your plan, you should be aware of essential legal documents you will need, depending on the option that works best for you.

Selling a law practice

If you plan to sell all or part of your law practice, you will need both a letter of intent (LOI) and a purchase agreement. A written LOI provides for the protection of confidential financial and client information. The LOI is sent by the seller, preferably on letterhead, to the prospective buyer. The LOI should be signed by the seller and a signature line and date line should be provided for the prospective buyer to accept and agree to its terms.

The LOI allows the seller and buyer to do due diligence under the protection of mutual confidentiality. The LOI will require the seller to provide to the prospective buyer financial information about the seller’s law practice. It will provide the buyer the opportunity to learn more about the selling attorney’s practice. The LOI will allow the seller to learn about the competence and credibility of the prospective buying attorney or law firm, as well as assessing their creditworthiness. Besides confidentiality, the LOI should also contain provisions holding that:

• The prospective buyer will not use any information they obtain to compete with the seller if the prospective buyer does not buy the law practice;

• The prospective buyer will not recruit or solicit employees of the seller;

• The seller will not solicit any other proposals from other prospective buyers until the parties have entered into an agreement to purchase the law practice or have terminated the LOI;

Any public announcements or press releases relating to the purchase will be agreed to and prepared jointly by the seller and purchaser, and;

The seller or prospective buyer may terminate the nonbinding provisions of the LOI at any time with a written termination delivered to the other party.

Rule 1.17 of the Rules of Professional Conduct precludes you from providing client-specific information and client files to a prospective purchaser without client consent. Last year I assisted an attorney who was trying to sell his practice. The prospective buyer told me in no uncertain terms, “Do you think that I’m going to buy this practice without knowing who his clients are? You’re crazy.” I told him that under Rule 1.17 we couldn’t disclose that information. While Rule 1.17 deterred that prospective purchaser, it did not deter others and we were able to find a purchaser for his law practice. The selling attorney signed three separate letters of intent with three prospective buying law firms before finding the best situation for his practice. Successful succession planning takes time and patience, but it’s worth it.

If the prospective buyer and seller agree to move forward with the sale of the law practice, you will also need a purchase agreement. The purchase agreement will include the purchase price, method of purchase (outright sale or financing) and the plan for the transfer of ownership of the law practice. The purchase price will be determined either through negotiations or an impartial law practice valuation. Generally, negotiations involve a “give and take” between the selling attorney and the buying attorney or law firm. In any negotiation of a sale, the purchase price would be agreed to by a willing and informed buyer and seller. The preferred method for determining the value of a law practice is an impartial valuation of the law practice by a qualified business valuation firm. An impartial valuation establishes a value that is fair to both the seller and the buyer.

Merging law practices

If you are considering merging your practice with another attorney or law firm as your succession plan, you will also sign a letter of intent with the prospective partner as you negotiate a possible merger. Likely, by merging two law practices, you will need to create a new entity – e.g. LLC, LLP or PC. If so, you and the attorney or law firm you are merging with will need to file an application with the State Board of Law Examiners for the new entity and obtain board approval for the creation of the new entity based on Rule 27 of the Rules of Admission and Discipline.

If you agree to merge your law practice with another attorney or law firm, you will need a merger agreement. The merger agreement could address areas such as:

• Fee arrangements;

• Possible payments;

• Management of the new entity;

• Professional liability coverage;

• Responsibility for payment of annual attorney registration fee and continuing legal education, and;

• Length of involvement of “retiring attorney”.

The new merged entity will also need a new operating agreement or partnership agreement.

Of counsel role

If your succession plan includes moving to an of counsel role at another law firm, you will need to provide a letter of intent to the prospective firm. If you and the law firm agree to your moving to an of counsel role, you will need an of counsel agreement. The agreement addresses these areas of the mutual relationship:

• Terms of employment of “retiring attorney” – employee or independent contractor;

• Fee arrangements;

• Possible payments;

• Time requirements;

• Duties of law firm;

• Duties of “retiring attorney”;

• Professional liability coverage;

• Responsibility for payment of annual attorney registration fee and continuing legal education;

• Termination or modification of agreement, and;

• Length of involvement of “retiring attorney”.

Whether you are planning to sell your law practice, merge with another attorney or law firm or move into an of counsel role, involve your professional liability carrier as you implement your plan. You should obtain professional liability “tail” coverage for services rendered to former clients.

In the next article, I will be co-authoring with Kam McQuay (CPA/ABV, CVA) of Blue & Co. on the topic of law practice valuations.•

Don Hopper is founder of Hopper Legal Consulting Services and a partner at Harrison & Moberly LLP. His focus is serving solo and small law firms in developing law practice succession plans that will continue their legal legacies in their Indiana communities. The opinions expressed are those of the author.