LAWBIZ COACHES CORNER: The perils of partnership withdrawal

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Process has key differences from selling a practice

As lateral hiring continues to grow exponentially, lawyers looking to leave their firms must understand their rights and options — and those of the firm — as they plan their exits.

Most importantly, they need to know whether there is a buy-in and/or buy-out provision for the firm’s partners.

Assuming that provision is appropriately documented, the next step for a departing attorney should be to announce his or her wishes to the remaining stakeholders and work with them to structure a time frame for departure and a mechanism to decide which lawyers in the firm will be primarily responsible for the lawyer’s clients.

Next, the firm must create a process for cross-selling the new responsible lawyer to the existing client. That transition is important for the firm’s health and a concern for the lawyer in terms of receiving future payments from the firm over time.

In the event there is no partnership agreement that controls the buy-out of interest, an attorney needs to broach the subject of how to value his or her interest, what that value actually is, and how to pay for the interest as it may be valued.

When comparing that process to a solo practitioner’s options, it sounds similar to selling a law practice. But there are major differences between the two processes:

• Solos who, short- or long-term, are unable to sell the practice, can continue to operate until a sale eventually occurs, or they can close the practice on their own terms and at their own pace. In a partnership, by contrast, if a lawyer can’t agree on the elements of a buy-out, including the value of interest, there may be no easy way to vacate the premises. An attorney may wind up in a stalemate until terms are negotiated.
• A sale agreement is prepared after the major terms of a transaction have been negotiated. In a buy-out, with no plan already in place, a negotiation must begin among partners who are still in a fiduciary relationship with one another — and who may have to walk on eggshells to create a workable resolution, while still together practicing law, representing clients and seeking to be as profitable as possible for the benefit of all involved. Emotionally, that can be very trying, depending on the relationship among the principals and their reaction to your desired departure.
• A sale will be negotiated and documented at the end of the practice’s life. A buy-out, if there is such an agreement in place, is set at the time of entry of each new partner. Assuming the partnership continues for years after such an agreement is created, a departing partner may have second thoughts about the low value of the interest in the partnership to which he or she may be entitled.

Conversely, the remaining partners may have second thoughts about how high the price is and how they will manage to run the ongoing operation while incurring the resultant cash-flow drain to pay the departing partner.

Since the typical partnership agreement rarely is drafted with the deftness of the U.S. Constitution, there must be a mechanism for periodic review and possible modification for the process if it is to be seen as fair to all parties over time.