The retirement game

For legal practitioners, the retirement event itself gives rise to a number of practical issues. Michael Ó Scathaill and Jonathan Ginnelly go fishing.

Retirement is a major milestone for all of us and one that can throw up a range of challenges in areas as diverse as financial, psychological, health, and lifestyle.

For solicitors, the retirement event itself gives rise to a number of practical issues, including how to exit or, in some cases, dispose of or close your practice; complying with various regulatory obligations that arise; and reassuring sometimes long-standing clients as you manage the process of transferring them to new practitioners.

It also gives rise to many tax issues – opportunities, as well as threats – but, while these are the focus of this series of articles, it is important that, when considering retirement, a ‘big-picture’ view should be taken with all issues considered in tandem.

At the outset, it is also important to appreciate the benefits of taking a long-term approach to retirement planning, and that early consideration of the issues is key.

From a tax perspective, many of the actions and structures that can be put in place to ensure a more tax-efficient retirement take a number of years to implement successfully.

Certain tax reliefs are also time-critical and, even if retirement is not imminent, it may be appropriate to take certain actions that will enable you to reap the benefits later; one example is CGT retirement relief and the importance of your 55th birthday – something we will discuss in part 2 of this series.

Early consideration and regular review of your retirement plans and any actions required is, therefore, important.

Retirement options

The options available to a practitioner on retirement will vary, depending on the nature of their business structure.

Largely, in the context of legal practices, the structure will either be that of a sole practitioner or a partnership (albeit that partnership structures have significant variances in organisation and scale).

In the case of a partnership, there is a somewhat preordained structure to facilitate a retirement, either through there being three or more partners in the practice (and, thus, the retirement of one partner will not bring about an automatic end to the partnership) or, in the case of a two-person partnership, there is a pre-existing structure into which a new partner can be introduced to carry on the partnership with the remaining partner.

In the case of a sole practitioner, the options in relation to retirement are broadly restricted to either a sale of the business/client list (if possible) or a gradual wind-down and closure.

If the sole practitioner wishes the business to continue, then consideration can be given to certain restructuring steps to ensure continuity, post-retirement.

The sole practitioner will need to take steps at an early enough stage before their retirement date to implement any such necessary restructuring.

Such restructuring could, perhaps, be the creation of a partnership structure, with either an internal appointment of a senior staff member to the partnership, entering into a partnership with another sole practitioner or a suitable pre-existing partnership (effectively a merger of two businesses), or bringing a partner into the existing business without any merger, with a view to that person taking over the business.

Any of these options will require a sufficiently long period to implement and bed in. As such, those planning their retirement should start looking at such options in the five-to-ten-year period before their anticipated retirement.

Ultimately, at a headline level, there are likely to be four options for a retiring practitioner:

• Succession: identifying a successor, internal or otherwise. Either way, this will likely involve this successor joining you in partnership for a number of years and being gradually eased in before you exit the practice.
• Merger: identifying another practice and effecting a successful merger. This is a more long-term process and can also be of relevance, even if retirement is not contemplated at this stage.
• Sale of practice: to another firm or practitioner.
• Close the practice: Simply ‘closing the doors’ and ceasing the firm. While this might seem like the most straightforward approach, it too requires some work.

Each approach gives rise to its own challenges, tax and otherwise.

Succession

The issue of identifying a successor is an issue for both sole practitioners and partnerships alike. However, it is somewhat more acute for a sole practitioner, given the fact that it will require some structural change.

In an ideal world, a successor might be drawn from the ranks of existing senior staff who already have a deep understanding of the business, have pre-established relationships with a lot of the client base of the firm, and also have a working relationship with other staff members.

Where such an individual exists within a firm, their appointment can be a somewhat easy fix to the issue of succession, albeit that various commercial considerations will need to be ironed out.

Where there are no suitable senior staff within the firm that might be appointed as a partner/successor – or perhaps there is such an individual, but they do not wish to take on the mantle of running the business (an issue many practices are facing) – then it may be necessary to go out to the market to bring someone in from another firm.

This is not an easy task to undertake, as it will require careful consideration of the suitability of the person to fit into the culture of the business, be able to develop working relationships with key clients of the firm, as well as with the employees working in the firm.

The search for such a person often takes considerable time, with several rounds of meetings and detailed assessment of their ability and suitability to ultimately take over the running of the business.

The period after such a person has been identified and brought into the firm is critical to ensure that the individual integrates successfully, and/or to identify any changes that may be needed to smooth the path for the change in ownership/control of the business.

Merger

Rather than seeking to identify an in-house successor or recruit such a person from a very competitive market, a sole practitioner or, indeed, a partnership may look to take a proactive step to merge their business with another like-minded firm, perhaps of similar scale or somewhat larger, thereby creating a mechanism for the business to continue, albeit within a new firm structure.

In the case of a merger with a like-minded firm of similar scale, the brand name/culture of both businesses might be retained in the new structure.

However, in the case of a merger of a smaller practice into a larger practice, it is often the case that the smaller business will be fully subsumed under the brand and structure of the larger firm.

A merger of two firms is a significant step for those businesses, with serious financial and commercial considerations.

The merger needs to be attractive for both parties. The imminent retirement of the principal of one of merging firms is not likely to be an attractive prospect. However, if the merger is undertaken with a sufficient lead-in time to the retirement, it can allow both businesses to integrate fully and take advantage of the opportunities the larger combined firm offers in terms of client base, depth-of-service offerings, as well as the possible higher earnings potential for the partners in those crucial years before retirement.

Early planning is vital in pursuing this option to ensure any prospective merger is attractive to potential target firms.

Sale of practice

For a sole practitioner, selling the practice can be a viable way of ensuring continuity of service to clients and of employment for existing employees, as well as potentially enhanced career opportunities under the new ownership, while enabling the practitioner to realise some value from their exit.

This, however, also brings its own challenges.

Much as a homeowner looking to sell would spruce up their house in advance, so the practitioner would aim to have their practice looking as well as possible before going to market.

Therefore, ensuring that working capital (work in progress [WIP], debtors/cash collection, payment of creditors) is well managed, that a steady and recurring pipeline of work can be shown, that all regulatory matters are attended to and up to date, and that there are no unsettled disputes with employees or clients would be important.

From a financial perspective, key issues include WIP valuation and whether a payment for goodwill can be obtained. Carefully structured, the sale can be effected tax-efficiently (tax issues are considered in more detail in our next article).

Where the practitioner owns the business premises, this gives rise to a range of issues.

A key determinant will be whether the purchaser wants to purchase them, which would give rise to a capital receipt for the retiring practitioner, which at CGT rates and with potential reliefs applying could also be tax-efficient.

Another alternative might be to lease the premises, which would produce an additional income stream in retirement.

Consideration should also be given as to whether the practitioner wishes to continue for a period of time as a consultant to the firm in the event that the purchaser is agreeable or, in some cases, requests them to do so. The terms of any such arrangement will have to be negotiated and structured carefully.

Finally, while in a continuing partnership, a sale of the practice might not appear to be a relevant consideration, it might, in some cases, be possible for the retiring practitioner to seek a capital payment in recognition of their share of goodwill, especially in cases where they were a founding partner whose name is still ‘over the door’. How this is structured is important from a commercial as well as a tax perspective.

Close the practice

In some cases, a sole practitioner might regard the simplest approach to be to wind-down their practice and then close it.

This approach is not without its challenges, however, as, notwithstanding that you may aim to have all files completed and closed, invariably some issues will arise at a later stage, and consideration must be given to who will deal with those.

There are also regulatory requirements to consider and a detailed process to be followed, which includes identifying another practice to whom your client files will be transferred and who will offer continuity of services to your clients, should they wish to avail of it.

From a financial and tax perspective, maximising earnings in the closing years and timing your cessation carefully can be key. These are considered in more detail in part 2.

Sensitive issue

Retirement can be a sensitive issue but, as outlined above, one that has to be broached in a timely manner, as there are myriad issues – financial and otherwise – to consider.

Early consideration should enhance the prospect of effecting a successful retirement. In the first instance, the commercial objectives should drive the process, with the tax issues then being considered.

This series follows this approach, and part 2 will delve into the key tax issues in some detail.

For further details on succession planning see: www.lawsociety.ie/succession-and-exit-planning/buy-sell

For information on supports and services available from the Law Society, contact Solicitor Services: solicitorservices@lawsociety.ie.

Michael Ó Scathaill is a director of the owner-managed business service in the tax department at Crowe. Jonathan Ginnelly, partner, leads the private clients’ service in the same department.