MOVING LATERALLY TO THE EXIT?

In our continuing discussion of the topic of succession and how to exit your law practice, one possibility is to make a lateral move to a larger firm.  As the owner and managing partner of my small law firm, I have been approached numerous times by both headhunters and larger firms (ranging from 10 person shops to Am Law 100 firms) about moving laterally to another firm. 

There are several enticements for moving laterally.  Being part of a larger firm would offer a former firm owner access to more associate attorneys.  A bigger firm, obviously, has significant advantages in its ability to recruit, train, retain, and manage staff.  Also, a larger firm would provide marketing resources and brand identity that would enable a lateral to expand their reach.

Even with those advantages, though, there are reasons to hesitate.   

First, clients may not follow their lawyer to a larger firm.  “[C]lients are completely free to choose which firm will best serve them.”  Gibbs v. Breed, Abbott Morgan, 271 A.D.2d 180, 710 N.Y.S.2d 578 (1st Dep’t 2000) citing Graubard Mollen v. Moskovitz, 86 N.Y.2d 112, 653 N.E.2d 1179, 629 N.Y.S.2d 1009 (1995). “As a matter of ethics, departing partners have been permitted to inform firm clients with whom they have a prior professional relationship about their impending withdrawal and new practice, and to remind the client of its freedom to retain counsel of its choice.”  New York City Bar Association, Formal Opinion 2023-1, Ethical Obligations of Lawyer and Law Firm Relating to Attorney Departures (June 30, 2023).  That means that, when making a lateral move, lawyers are required to notify their clients of the right to go with the moving lawyer or not.  Since clients have this freedom, moving to another firm raises the risk of losing clients, as for instance, the new firm may have higher billing rates, be geographically inconvenient, etc.

This risk of client loss looms large when viewing the likely compensation arrangement for a lateral move. Compensation for someone moving laterally ultimately could be an ‘eat what you kill’ formula, e.g., the lateral gets 20% collections for work that they bring in, 35% of collections for the work that they do for other clients of the firm, and 55% of collections of the work that they bring in and perform.  This compensation formula could mean that a lateral is doing the same amount of work for less money and still bears the risk of collection as they do as a law firm owner.  By some calculations, a lateral would have to grow their book of business by about 30% as a lateral partner just to get the same amount of pay that they have as a law firm owner.

So why would someone that owns their own firm make a lateral move?  This move makes sense for lawyers that no longer want the headaches of running their own firm.  They are willing to, essentially, pay the firm they are moving to, to handle all of the ownership chores, e.g., HR, marketing, IT, etc.  For someone who wants to eventually exit their firm, a lateral move might be a good interim step as part of a succession plan.