Partial sales can make a big difference

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When the American Bar Association modified Model Rule of Professional Conduct 1.17 in 2002 to permit the sale of part of a practice, it was called the savior of sole and small firm practitioners.

The modification gave lawyers another way to reap the financial value of what they have built up over the years by their own hard work and creativity, converting the goodwill represented by their practices into a liquid asset.

I am proud to say that I was the catalyst for the ABA Commission on Ethics decision, affirmed by the House of Delegates, to modify Rule 1.17 to allow lawyers to sell a practice area and still remain in practice, although not in the area sold. These lawyers can continue to make valuable contributions. For example, a probate and estate planning lawyer may sell the estate planning segment, but retain the probate segment. This will allow the lawyer to work less but still serve clients. Any other course would require selling or closing the entire practice, or continuing the practice while serving clients with less vigor because of aging and loss of interest. With a partial practice sale, clients are better served, both those whose estate plans are handled by other lawyers interested in the segment they purchased, and those who are probating estates of decedents.

The practical focus of Rule 1.17 is the sole and small firm practitioner. Large firms don’t sell their practice. They can break up, they can merge, they can combine, they can move entire practice groups from one firm to another. But they don’t “sell” their practice; or, at least, they don’t call it that and thus they sidestep Rule 1.17.

Partial practice sale has been adopted by the states that follow the ABA Model rules and is slowly being adopted by others as well. But, the change has not been adopted uniformly. It was not until 2008 that the New Hampshire Bar adopted its own version of Rule 1.17, and in so doing asserted that the selling lawyer cannot continue to practice law in the state of New Hampshire, in effect imposing a covenant not to compete. This year the State Bar of California proposed four pages of changes to its rules on buying and selling a practice that, among other things, would require the selling lawyer to divest all of a practice or field of practice, and to cease engaging in the private practice of law once the sale is complete.

Another example – a managing partner in Illinois gave me his interpretation that the recently adopted Illinois model rule requires the sale of the entire practice without allowing for a transition to occur. In other words, when an escrow for the sale closes after notice is given to clients in accord with the rule, the lawyer must stop practicing, period. This permits no transition whereby the selling lawyer can continue to practice under the aegis of the buying lawyer to facilitate the likelihood the existing clients will stay with the buying lawyer, assuring the value of the practice purchased.

These developments violate the intent of modified Rule 1.17 and hurt only sole/small firm practitioners. The law in Wisconsin governing firm sales is similar to Illinois.

Interestingly, there has been no discussion in Illinois concerning the length of escrow. The only time discussion is the minimum notice of sale to be given to the clients. What if there were an extended escrow, for example, one year or some other time constraint desired by the buyer and agreeable to the seller?

Without the use of a somewhat unusual alternative that comes close to form over substance, and is not allowed on review, the choices for the seller are bleak under this stricter interpretation. Some alternatives might be:

• Merge with another firm, develop a buy-out agreement that will take effect in the future but allows the lawyer to both continue contributing both to the law and society (assuming the “buying” lawyer honors his commitment at the time of eventual retirement by the “seller”)
• Do not sell and remain in practice until either death or closing the office doors at some future date
• Sell and leave the practice of law, then pursue some other activity until death occurs; whether this activity is of minimal interest or is interesting and exciting to the selling lawyer, it frequently fails to address the psychological issues of the selling type “A” lawyer personality.

These are bleak choices and, in my opinion, contrary to the spirit of what the ABA General Practice Section originally advocated for Rule 1.17. The more reasonable interpretation should be that this rule was intended to assist retirement. And, yes, the sale is complete. But, the lawyer should be entitled to work for the buyer in order to assist in the transition of client relationships, remain vibrant and contributing to his own well-being, and contribute to the buyer’s interest in growing the practice. Remember, we’re talking about a sale and retirement, usually of an older lawyer. We’re not talking about the sale of a law practice by a younger lawyer who might (the great fear projected onto the strawman buyer) open a competing practice across the road and steal back his former clients.

Assuming the worst scenario and that the “warped” (no personal attack intended) Illinois interpretation of Rule 1.17 is valid, how might the parties deal with the desired sale and transfer of client relationships? One way might be the form versus substance approach followed by many who lived in states not allowing a sale (Illinois was in this camp until recently): merger, with a buy-sell agreement. Such a situation creates partners who can enforce an agreement of separation (sale of a partner interest). And, with the new provision in the rule allowing the sale of a practice area, it will be possible to sell part of the practice at an inflated price (to address the real worth of the full practice) with the idea of the balance of the practice being transferred at a later time when the lawyer wants to terminate his work regimen entirely, but at a lower price; the combination of the two would represent the actual full purchase price for the firm. Ultimately it is the clients who benefit when they are smoothly transitioned to receive competent representation from a qualified buyer.

Ed Poll J.D., M.B.A., CMC is the principal of LawBiz® Management, a national law firm practice management consultancy based in Venice, California. For more information, visit his Web site www.LawBiz.com or email him at [email protected].