Succession Planning, Selling Your Firm, and Private Equity in Law with Ed Alexander

Succession Planning, Selling Your Firm, and Private Equity in Law

Most law firm owners avoid thinking about succession planning until it's already too late to do it well.

Business attorney Ed Alexander has worked on succession plans, partnership agreements, and law firm sales for well over a hundred firms. In a recent conversation on Your Profitable Law Firm, he walked through why waiting is the single biggest mistake owners make, and what actually needs to happen instead.

Why Succession Planning Matters Even If Retirement Feels Far Away

Many states have an ethical requirement that attorneys appoint an inventory attorney to protect client interests in the event of death or disability. But Ed points out that the bigger issue is what happens to everything an owner has built.

Without a succession plan, the value of a law firm can evaporate the moment an owner passes away or becomes unable to practice. The team loses their jobs. The firm disappears. And the owner's family is left to clean up the mess, often without any understanding of how the practice actually operated.

The Three Types of Law Firms and How Sellable Each One Is

Ed breaks law firms into three categories that determine how easy or difficult they are to sell:

Process Firms

High-volume practices where the client doesn't necessarily care which attorney handles their matter. Common in bankruptcy or certain types of family law. These firms are the easiest to sell because a buyer can step in and manage the existing system without disrupting client relationships.

Relationship Firms

Typical business-to-business practices where ongoing client relationships and trust matter. These take longer to sell because the goodwill has to transfer from the owner to the buyer, often requiring the seller to stay on for a period of time during the transition.

Brain Surgery Firms

Practices built entirely around the reputation and expertise of one specific attorney, similar to seeking out the best oncologist for a cancer diagnosis. These are the hardest firms to sell because the brand is the person. Unless a successor spends years building their own reputation under the founder's wing, the firm's value is difficult to transfer.

The Best Time to Set Up a Succession Plan: Right When Partners Join

One of the most direct points Ed made is that succession planning should happen at the formation of a partnership, not years later.

When partners first join together, the economic relationship between them is generally equal. Over time, that balance shifts. One partner brings in more business. Personal circumstances change. Trying to negotiate a succession or buyout agreement after those changes have occurred is far more difficult than addressing it at the outset, when everyone has equal incentive to agree on fair terms.

Ed shared an example of reviewing a partnership agreement for a multi-million dollar firm where the buyout value between two partners was set at $21,000. When asked how that number was determined, the answer was that it reflected what the partners had originally invested in the firm 25 years earlier. The number had simply never been updated, leaving both partners' families exposed to a wildly outdated buyout value in the event of an unexpected death.

What Buyers Actually Look For

When a law firm owner decides to sell, Ed says buyers immediately focus on documentation. At minimum, buyers want to see 3 to 5 years of clean financial statements and tax returns.

Inconsistent or unclear bookkeeping doesn't just slow down a sale. It actively damages buyer confidence. When a buyer encounters financial irregularities, their perception of risk increases sharply, often leading them to assume there are additional problems they haven't found yet.

Beyond financials, buyers also evaluate written contracts, signed engagement agreements, and lease terms. Each of these either builds buyer confidence or raises red flags.

What Increases Firm Value (and What Destroys It)

According to Ed, firm value increases when there is a consistent marketing system that reliably brings in clients, a clearly defined ideal client profile, and a trained team capable of doing the work without the owner being personally involved in every matter.

Firm value decreases when an owner is working 50 to 60 hour weeks just to keep the practice running. A buyer evaluating that situation has to account for the cost and risk of hiring additional staff immediately after the purchase, which makes the deal less attractive and the multiple lower.

Choosing Between an Internal Successor and an External Buyer

Many owners assume their existing associate is the natural successor. Ed cautions that being an excellent attorney and being an entrepreneurial firm owner are very different skill sets. An associate can be a phenomenal technician without having any interest in running a business.

Ed also notes that owners often assume their associates aren't interested in partnership without ever actually asking. He recommends having that conversation directly, ideally over coffee or lunch, rather than guessing at someone's career intentions.

For owners who do want to groom an internal successor, the path typically involves three measurable criteria: origination (bringing in new business), production (billable work), and management (overseeing people and operations). A potential partner should be evaluated against all three before being brought into ownership conversations.

Private Equity in Law: What's Actually Happening

Ed offered a clear, grounded perspective on private equity's role in the legal industry. For the vast majority of law firms, private equity simply isn't a realistic buyer. Private equity funds typically need to deploy capital in $10 million to $15 million transactions to make their investment model work. Firms valued at $750,000 or $1 million don't fit that structure, except in rare cases where a firm is acquired as a small geographic add-on to an existing platform.

The structure increasingly used in larger transactions is the Management Service Organization, or MSO. In this model, everything except the licensed attorneys themselves, including paralegals, marketing, and back office functions, is moved into a separate management company. The attorneys then pay the MSO out of the fees they generate. This structure exists specifically because non-lawyers are prohibited from owning law firms or sharing legal fees in most states.

Arizona currently allows an Alternative Business Structure that permits non-lawyer ownership, but Ed noted that other states, including Texas and California, have restricted firms with non-lawyer ownership from operating within their borders, limiting how far that model can expand.

Key Takeaway

A law firm's value isn't something that materializes the year before retirement. It is built over years through clean financial records, a documented succession plan, sustainable working hours, and a clear plan for who takes over if something happens to the owner.

As Ed put it, there is no perfect firm. But the firms with the strongest documentation, the clearest systems, and a succession plan already in place are the ones that retain their value when it matters most.

Free Resource from Ed Alexander

Ed has written a guide specifically for Florida law firm owners considering a sale: Guide to Selling Your Florida Law Practice.

Access it at: www.ExitMyLawPractice.com

Connect with Ed:

LinkedIn: https://www.linkedin.com/in/attorneyedalexander/

Free resource: Guide to Selling Your Florida Law Practice — www.ExitMyLawPractice.com

If you don't currently have a succession plan in place, this episode is the nudge to put it on your list this year, not the year you're ready to retire.

Frequently Asked Questions

When should a law firm owner start succession planning?

Ideally, the moment a partnership is formed. For solo owners, succession planning should begin well before retirement is on the horizon, since unexpected death or disability can happen at any age. Ed recommends starting the broader exit planning process 5 to 7 years before an intended sale or retirement date to address risk factors and improve firm value.

What financial records do buyers want to see before purchasing a law firm?

Most buyers expect 3 to 5 years of clean financial statements and tax returns. Inconsistent bookkeeping or unclear records significantly increase a buyer's perceived risk and can stall or kill a deal even when the underlying business is healthy.

Which type of law firm is hardest to sell?

Firms built entirely around one attorney's personal brand and reputation, what Ed calls "brain surgery" firms, are the most difficult to sell. Without years of transition time for a successor to build their own reputation, the firm's value is tied directly to a person rather than a transferable business.

Is private equity actually buying small law firms?

Generally, no. Private equity funds typically need to deploy capital in transactions of $10 million or more to make their investment model work, which puts most small and mid-sized law firms outside their target range. The exception is occasional smaller add-on acquisitions to an existing larger platform.

What is a Management Service Organization (MSO) in the legal industry?

An MSO is a structure where non-legal functions like marketing, paralegals, and back office operations are moved into a separate management company. Licensed attorneys then pay the MSO out of their fees. This structure allows outside investment to participate in a law firm's operations without violating rules against fee sharing or non-lawyer ownership.

Related Reading on Your Profitable Law Firm

If this episode connected with where your firm is right now, these posts go deeper on related topics:

• Your Law Firm’s Future Depends on One Decision You’re Avoiding

• Law Firm Branding That Converts with Christine Raniets: Why “Good Marketing” Still Fails Without Clear Positioning

• What a CFO Does and Why Law Firms of Any Size Benefit From CFO-Level Guidance