Can Accountants Help with Succession Planning for Law Firms?

At Towerstone Accountants we provide specialist accountancy services for solicitors and law firms operating under SRA regulation. This article has been written to explain Can accountants help with succession planning for law firms in clear practical terms so you understand how the rules apply in day to day practice. Our aim is to help you stay compliant protect client money and make informed financial decisions.

Succession planning is one of those topics that many law firms know they should address but quietly push into the future. I see it time and again in practice. Partners are busy. The firm is profitable. Clients are happy. Retirement feels a long way off. Yet the reality is that succession planning is not a single event tied to retirement. It is an ongoing financial and strategic process that underpins the long term stability of a law firm.

I am often asked whether accountants can really add value here or whether succession planning is purely a legal or HR exercise. My answer is always the same. Yes accountants can help and in many cases they are essential to getting it right.

Succession planning in a law firm sits at the intersection of finance regulation tax ownership and people. An accountant brings structure clarity and realism to decisions that are otherwise driven by assumptions or emotion. In this article I will explain how accountants support succession planning for law firms what that support looks like in practice and why firms that involve their accountant early tend to achieve better outcomes.

Why succession planning matters so much in law firms

Law firms are not like most other businesses. The value is heavily tied to people client relationships reputation and regulatory compliance. When a senior partner leaves whether through retirement illness or a sudden departure the impact can be immediate.

Without a succession plan firms can face:

• Loss of key clients who were personally attached to a departing partner

• Cashflow pressure if drawings continue without replacement fee income

• Disputes between remaining partners over value exit terms or control

• Regulatory risk if continuity plans are weak or unclear

• A forced sale or merger on unfavourable terms

From my experience succession planning works best when it is gradual deliberate and financially modelled. This is exactly where accountants add value.

What succession planning really involves

Before looking at the accountant’s role it is important to be clear about what succession planning actually means for a law firm.

It usually involves some combination of:

• Planned retirement or exit of one or more partners

• Admission of new partners or equity holders

• Internal handover of client relationships

• External sale or merger

• Restructuring of ownership profit share or funding

• Tax efficient extraction of value

Each of these elements has financial consequences. Ignoring them until the last minute almost always reduces choice.

The accountant’s role in succession planning

An accountant does not replace solicitors management consultants or compliance advisers. Instead they anchor the process in financial reality. I see my role as answering three core questions:

• What is the firm really worth

• What can the firm afford

• How can value be transferred with minimal tax and disruption

Let us look at how that plays out in practice.

Understanding the true financial position of the firm

Many law firms rely on management accounts that are good enough for day to day decisions but not detailed enough for succession planning. An accountant will usually start by stripping things back and rebuilding the financial picture.

This includes:

• Normalising partner drawings and salaries

• Identifying recurring versus one off income

• Reviewing lock up including debtors and work in progress

• Assessing cash reserves and funding arrangements

• Analysing practice area profitability

This process often reveals uncomfortable truths. Some partners are far more profitable than others. Some practice areas drain cash despite appearing busy. Some firms are far more dependent on one or two individuals than they realised.

Having this clarity early allows realistic planning rather than wishful thinking.

Valuing the law firm properly

Valuation is one of the most misunderstood aspects of succession planning. I regularly speak to partners who assume their firm is worth a multiple of turnover or profit without understanding the underlying drivers.

Accountants help establish a defensible valuation by looking at:

• Sustainable profits rather than headline figures

• Client concentration risk

• Fee earner dependency

• Quality of systems and processes

• Recurring versus transactional work

• Regulatory track record

Valuation is not just about selling the firm. It also affects:

• Partner retirement payouts

• Buy in terms for new partners

• Equity restructuring

• Negotiations with lenders

A credible valuation backed by financial evidence reduces disputes and keeps discussions grounded.

Modelling partner exits and retirements

One of the most valuable things an accountant does in succession planning is cashflow modelling. This is where theory meets reality.

I often build models showing:

• What happens if a partner retires over three five or seven years

• The impact of phased reduction in drawings

• The cost of retirement payouts

• The effect on remaining partners’ income

• The firm’s ability to fund buyouts internally

These models answer questions that firms often avoid asking:

• Can we actually afford this retirement package

• Will the firm remain profitable after the exit

• Do we need external funding

• Should the exit be staged differently

Without this modelling firms risk agreeing terms that look fair on paper but are unsustainable in practice.

Tax planning around partner exits

Tax is a major factor in succession planning and one that is often underestimated. Poor planning can result in partners paying far more tax than necessary or firms creating avoidable liabilities.

Accountants advise on areas such as:

• Capital gains tax versus income tax treatment

• Entrepreneurs’ relief where available

• Timing of disposals to use allowances efficiently

• Pension contributions as part of exit planning

• Use of trusts or family planning where appropriate

For example the way goodwill is treated on a partner’s exit can dramatically change the tax outcome. These decisions must be made with reference to current guidance from bodies such as HM Revenue & Customs and aligned with the firm’s structure.

Supporting internal succession and next generation partners

Not all succession involves selling or retiring. Many firms aim to pass ownership to the next generation. This can be one of the most challenging paths financially.

Accountants help design structures that allow:

• Gradual buy in by junior partners

• Fair valuation without crippling debt

• Retention of cash for working capital

• Alignment of incentives across generations

This often involves rethinking profit share models capital accounts and funding mechanisms. The goal is to avoid a situation where new partners are technically owners but financially overburdened from day one.

Dealing with funding and banking relationships

Succession often requires funding. Whether that is to buy out retiring partners or invest in growth ahead of a sale the firm’s relationship with lenders matters.

An accountant can:

• Prepare robust financial forecasts for banks

• Stress test scenarios

• Negotiate covenant terms

• Explain the firm’s story in financial language lenders understand

This is particularly important where firms operate as LLPs or have complex ownership structures. Clear credible numbers build confidence.

Regulatory considerations and financial resilience

Law firms operate under strict regulatory expectations. Financial instability can quickly become a regulatory issue. While accountants do not replace compliance officers they play a key supporting role.

Strong succession planning supports compliance with expectations from bodies such as the Solicitors Regulation Authority by demonstrating:

• Financial resilience

• Continuity planning

• Responsible management of client money

• Governance around partner exits

In my experience regulators take comfort from firms that can show structured planning backed by professional financial advice.

Preparing the firm for sale or merger

When succession involves an external sale or merger the accountant’s role expands further. Preparation often starts years in advance.

This includes:

• Cleaning up balance sheets

• Resolving historic tax issues

• Improving profitability metrics

• Documenting systems and processes

• Reducing reliance on individual partners

A well prepared firm commands better terms and avoids last minute surprises during due diligence. Buyers and merger partners will scrutinise financials closely and inconsistencies can weaken negotiating power.

Managing the emotional side through financial clarity

Succession planning is emotional. Partners have invested years of effort and identity into the firm. Disagreements are common.

One underrated benefit of involving an accountant is objectivity. Clear numbers remove some of the emotion from discussions. When everyone is working from the same financial reality conversations tend to be more constructive.

I often act as a neutral voice explaining what the numbers mean rather than taking sides. This can preserve relationships and keep the focus on outcomes.

When should law firms involve an accountant in succession planning

My honest answer is earlier than most firms think.

Ideally succession planning starts:

• Five to ten years before anticipated exits

• As soon as new partners are admitted

• When a firm reaches financial stability

• Before external opportunities arise

Early involvement creates options. Late involvement limits them.

Choosing the right accountant for succession planning

Not all accountants are suited to this work. Law firms should look for someone who:

• Understands professional partnerships and LLPs

• Has experience with partner exits and valuations

• Is comfortable with long term modelling not just compliance

• Can communicate clearly with non financial partners

Succession planning is advisory work not just number crunching. The relationship matters.

Final thoughts

So can accountants help with succession planning for law firms. Absolutely. In many cases they are the backbone of a successful plan.

Accountants bring financial clarity structure tax efficiency and realism to decisions that shape the future of the firm. They help turn good intentions into workable strategies and ensure that when change comes it strengthens rather than destabilises the business.

From my perspective the firms that thrive across generations are not the ones that avoid talking about succession. They are the ones that plan early involve the right advisers and use their numbers as a guide rather than a surprise.

If you are a partner in a law firm and succession feels distant I would encourage you to start the conversation now. The best time to plan is when you still have choices.

You may also find our guidance on How do partners in a law firm get paid for tax purposes and How can accountants help reduce a law firm’s tax bill useful when reviewing related SRA and accounting obligations. For a broader overview of solicitor accounting and compliance topics you can visit our solicitors accounts rules hub which brings all related guidance together.