Law Practice Management Asked and Answered Blog

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Nov 08, 2018


Selling an Owner’s Law Practice to an Associate Gradually

Question: 

I am the owner of an elder law firm in Phoenix, Arizona. I have one full time associate, one part-time associate, and three staff members. I am earning around $300,000 a year from the practice and my full time associate’s salary is $100,000 a year. I am sixty and would like to retire and be out of the practice in five years. I would like to begin phasing down and working part time in the next year or two. My full time associate has been with the firm for ten years and she is an excellent attorney and has an excellent relationship with our clients and referral sources. While she has not brought in many clients through her own referral sources she has done an excellent job signing up new clients from the firm’s referral sources, website, and seminars that she has conducted. I have talked with her in general terms about her buying my practice when I retire and she has expressed an interest.

I feel that I should be entitled to some sweat equity from the practice in the form of retirement compensation or buy-out. With this said I would prefer that my practice “stay in the family” and be sold to my associate rather than selling my practice to an outside buyer. I would appreciate your suggestions.

Response: 

One of the issues today with many associates is they have large student loan debt and have little in the way of capital and little or no borrowing capacity. As a result many firm owners in your situation have to get much of their payout from future earnings after their retirement if they wait too long. Your best bet is to start selling shares as soon as you can based upon a valuation method that you determine. You have five years remaining – ten years would have been better. In essence you determine the value of the firm, determine the price per share, determine how many shares that associate will acquire, and then calculate the price for the number of shares being acquired. For example, let say you practice is valued at $600,000. Divide by 100 = $6,000 per share or percentage point. For an initial twenty percent interest or twenty shares the buy-in price would be $60,000. Then over the next five years gradually sell the associate additional shares. Upon your retirement you would have sold all of your shares.

Typically the problem is the associate does not have any cash or ability to borrow on their own. You may be able to help the associate borrow the money from your bank. If you can – this would be the preferred approach. If the associate cannot raise the capital they you will have to finance the buyout. For a $600,000 buyout a five-year timeline will be impossible for you to have all your cash by retirement. How you structure your compensation as you begin working part time and your associate’s compensation as a partner will have a bearing on capital that your associate will have available. Be careful that you are not funding your own buyout. You will more than likely have to get a large portion of your payout after retirement via a secured promissory note with the associate for the balance.

The sooner you start the better your chances for a successful outcome.

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John W. Olmstead, MBA, Ph.D, CMC

Oct 31, 2018


What Law Firms Must Do to Remain Competitive in the Internet Age

Question: 

I am the managing partner of a twelve attorney family law firm in Kansas City, Missouri. We have been in practice going on thirty years. Over the last ten years we have shifted more of our advertising from print directories and advertising to the internet. Today virtually all of our work comes from the internet. While to some extent this has been a blessing it has also been a curse as we must continue to make investments in search engine optimization, update the website, pay to be included in online directories, etc. It is a vicious circle and we are losing business to new attorneys just starting out that are putting up first class websites and making online investments.  I would appreciate your thoughts.

Response: 

The internet as well as advances in information technology has and will continue to be the key driver forcing change in the legal marketplace as well as other segments and our daily lives as well. Shopping malls are disappearing from our communities and department stores are struggling for survival. Being the king of the hill or the biggest is not the strategic advantage that it once was. The internet is leveling the playing field in many industries as well as law firms.  There are new opportunities and new competitors. Consider the following:

  1. Everything is being commoditized. More practice areas are moving down the value curve and prices are becoming more price sensitive.
  2. Disintermediation of traditional delivery channels. The internet provides new access to information and is eliminating the middleman. It is impacting how we shop, bank, conduct business, and pay our credit cards and taxes. It is also impacting how clients locate and select lawyers and how legal services are delivered.
  3. Our society is becoming – more and more – a DIY (Do it Yourself) nation.
  4. Lawyers competitors are just a click away whether they be legal process outsourcing providers (LPO) in India, other lawyers in your state – but further away and servicing clients remotely, legal publishers, or online form providers.
  5. New client opportunities for your may also be just a click away.

Challenges and Questions to Think About

  1. How do you deal with commoditized transactions?
  2. How do you tie yourself to your client in an online world?
  3. How do you compete with new models and approaches to the delivery of legal services?
  4. How do you compete with virtual law firms?
  5. Would you consider adding a online delivery component to your traditional brick and mortar practice?
  6. Should you consider other practice areas?
  7. Should you consider expanding your geographical reach in areas where you are licensed and other areas by forming relationships with licensed attorneys in those areas.

Here are a few suggestions:

  1. For your practice area you should continue what you are doing and maximize your online and electronic marketing investments.
  2. Online reviews are becoming more and more important. Have a protocol in place that asks clients for reviews upon completion of their matter. Make it easy for them by providing them with appropriate online links.
  3. Your website does not do enough to demonstrate expertise. I do not see any evidence of attorneys publishing any articles, serving on law related committees, or chairing such committees pertaining to family law. There are no testimonials from past clients or others on the website. Get your attorneys writing articles, get them published where you can, and get them posted to your website. Get testimonials from past clients and referral sources and post them to your website. Also get your attorneys involved in bar and other law related associations. Do more to build the brand of the firm and the individual attorneys. Many of my family law firm clients still receive a bulk of their business from past client referrals and referrals from other attorneys.
  4. Consider satellite offices in some of the suburban communities in Missouri and Kansas. I have family law firm clients that have been quite successful with multiple offices – staffed and not staffed.

Even in the age of the internet expertise, professionalism, and reputation is important. Do all you can to convey this through your website and your initial communications with clients.

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John W. Olmstead, MBA, Ph.D, CMC

Oct 24, 2018


Law Firm Client Surveys – Developing a Client Service Improvement Plan

Question: 

Our firm is a twenty-four attorney litigation firm in Pittsburgh. We represent insurance companies and business firms. We recently conducted a client satisfaction survey of our top tier clients via telephone and face-to-face interviews. We have discovered that we have numerous issues regarding client satisfaction. Where do we go from here?

Response: 

Nothing is more important to your firm’s future than exceptional client service. An effective client service improvement program is one of the most important marketing initiatives that a firm can undertake. National studies demonstrate that approximately 70% of clients who stop using a particular attorney do so because they feel they were treated poorly or indifferently and 30% changed attorneys because their previous attorneys weren’t available. Clearly, from what law firms’ clients are telling us in our telephone interviews with them – attorneys and law firms need to improve client service by integrating a client-first service focus into everyday practice.

Frequently when we mention action plans and implementation to a group of attorneys we get the following reactions and responses:

Moving from debate to action planning and implementation is difficult for attorneys. However, unless a firm can move from debate and ideas to actual accountability and implementation it will remain anchored in the past in a field of dreams, obsolete practices, and unhappy clients.

Here is a road map to help you get started:

  1. Assemble the client service improvement team
  2. Review the issues discovered from the client survey
  3. Identify and write a client service mission statement and client service goals
  4. Brainstorm solutions you can and are willing to implement
  5. Put together the client service improvement plan
  6. Implement the plan
  7. Notify clients, especially the clients that were interviewed, of the changes that the firm will be implementing.

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John W. Olmstead, MBA, Ph.D, CMC

 

Oct 17, 2018


The Focused Law Firm

Question: 

I am a member of a three-member management committee. Our firm is a twenty-five attorney firm located in the greater Washington D.C. area. We specialize in governmental law. We are feeling that our committee and the firm spends a lot of time in meetings discussing management problems, strategies, etc. to no avail. Not much changes or gets implemented. I welcome your comments.

Response: 

One of the major problems facing law firms is focus. Research indicates that three of the biggest challenges facing professionals today are: time pressures, financial pressures, and the struggle to maintain a healthy balance between work and home. Billable time, non-billable time or the firm’s investment time, and personal time must be well managed, targeted and focused. Your time must be managed as well.

Today well-focused specialists are winning the marketplace wars. Trying to be all things to all people is not a good strategy. Such full-service strategies only lead to lack of identity and reputation. For most small firms it is not feasible to specialize in more than two or three core practice areas.

Based upon our experience from client engagements I have concluded that lack of focus and accountability is one of the major problems facing law firms. Often the problem is too many ideas, alternatives, and options. The result often is no action at all or actions that fail to distinguish firms from their competitors and provide them with a sustained competitive advantage. Ideas, recommendations, suggestions, etc. are of no value unless implemented.
Don’t hide behind strategy and planning. Attorneys love to postpone implementation. Find ways to focus the firm and foster accountability from all.

Go For Bottom Line Results

Attorneys respect facts. The quicker your committee can implement solutions that have a positive financial impact on the bottom line the quicker the committee will gain credibility and respect from the other partners.

Use The Consulting Process

Treat the problem or issues like a legal matter engagement or project. Conduct appropriate research and back up ideas and recommendations with hard data. Adequately prepare and rehearse presentations. Prepare like attorneys prepare a case for trial. The management committee’s credibility will only be enhanced if its ideas are accepted and implemented with positive results.

Use of Triads – Present Three Alternatives or Options

Time after time management committees have spent endless hours studying and researching a problem, brainstorming solutions, preparing and presenting their recommendations to the partners only to have their report tabled and asked to present additional alternatives. What happened? The management committee failed to present three options or alternatives. The partners had no basis of comparison.

Experience and research shows that the success rate improves dramatically when three options or alternatives are presented. The triad strengthens thinking abilities enormously and empowers people in making choices. It also trains the mind to see the relationships between alternatives and options. Management Consultants never present just one alternative or option.

Management Committees that use triads and present three alternatives or options will be more successful in selling their ideas to their partners.

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John W. Olmstead, MBA, Ph.D, CMC

 

Oct 10, 2018


Law Firm Merger as an Exit Strategy for Sole Owners

Question: 

I am the owner of a small general practice firm in Novato, California. I have three associates working in the firm, three legal assistants, and one office manager/bookkeeper. I started my practice thirty-five years ago right out of law school. I am sixty years old and wanting to retire within the next five years. None of my associates have the ability or the desire to take over the firm. I believe that my best option is to sell my practice to another practitioner or join another firm through merger or other arrangement. I would appreciate your ideas regarding merging with another firm and how I would be compensated and receive payment for the goodwill value of my firm.

Response: 

Merger or an of counsel arrangement are approaches that many sole owner firms are taking when there is no one on board that is capable or willing to buyout your interest. Often merger or of counsel arrangements look very similar in how they are structured. Typically, the owner joining another firm:

Employees that the new firm has accepted would join the new firm and receive compensation and benefits spelled out in the merger or Of Counsel agreement.

How the arrangement will be structured and how compensation/buy-out will be structured will depend upon the size of the other firm. I assume that you will be looking at a firm similar to your size or a little larger (1-20 attorneys). If this is the case and if the arrangement is structured as a merger you would more than likely be classified as a non-equity partner and not an equity partner. While the other firm could pay you in the same manner that other non-equity partners are paid, often a special compensation arrangement is developed where you are paid a percentage of your collections and if you are lucky a referral fee arrangement for your client origination’s for two or three years after your retirement – typically twenty percent. In many cases if will be difficult to get a goodwill value payment and impossible in mergers or Of Counsel arrangements with large firms.

Another option would be an outright sale to another sole owner or small firm for a fixed price for the goodwill value of your firm and any assets the firm desires to acquire. More than likely this would be with an initial down payment and payments over a three to five-year period. Typically, practice sale agreements have provisions whereby the purchase price can be reduced if revenues fall below a certain level.

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John W. Olmstead, MBA, Ph.D, CMC

Oct 03, 2018


Small Law Firm Financial Performance Indicators

Question: 

I am the owner of an estate planning firm in Milwaukee, Wisconsin. I have five associates and four paralegals working in the firm. More of my time is spent on managing the practice and marketing than on servicing clients. I am trying to develop financial goals for the firm but I am clueless as to what financial indicators or ratios I should be looking at and what constitutes good or bad performance. Anything that you are willing to share would be appreciated.

Response: 

Here are what I believe to be key financial indicators/ratios and performance for a firm of your size and type:

I like to see profit margin – owner compensation – salary if paid as w-2 wages plus profit in the range of 35% – 45%.

Performance can vary by type of practice.

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John W. Olmstead, MBA, Ph.D, CMC

Sep 26, 2018


Associate Attorney Compensation – Five Approaches

Question: 

I am the owner of a six-attorney firm in the western suburbs of Chicago. There are five full-time associate attorneys working with the firm. Two have been with the firm over fifteen years, two over ten years, and one seven years. All are being paid salaries in excess of $100,000 per year and none are even close to generating $300,000 or more in working attorney fee collections per year. Their billable hours are dismal as well. While I have a 1200 annual billable hour expectation none are meeting that expectation. My income is suffering as a result. In addition to salaries they sometimes receive a discretionary bonus. I am at my wits end. What are your thoughts?

Response: 

First of all I think that a 1200 annual billable hour expectation is too low and should be more like 1600 annual billable hours. For years the national average annual billable hours reported in surveys has been 1750 and this was the expectation for many firms for many years and still is for many firms. In the past few years, due to lack of work and other factors, some firms have lowered the annual expectation minimum to 1600. Litigation firms, especially insurance defense firms, currently have minimal expectations ranging from 1800 to 2000 hours. Firms that represent individual clients such as general practice firms, family law firms, and estate planning/administration firms currently have minimal expectations ranging from 1400-1600.

It looks like you are not enforcing the 1200 annual billable hour expectation that you have. However, you need to look into your situation and determine the reasons. It could be that they are not putting in the work because the firm does not have enough work for them to do. Look into the following possible causes of their low billable hours and take corrective action:

An approach that many firms are taking is to incorporate performance bonuses such as the following to motivate additional production. Usually these are on top of a base salary. Here are some examples:

  1. Base salary plus 5% of base salary if the billable hour expectation of 1600 is attained, discretionary bonus, and a 15% client origination bonus for bringing a client to the firm. The bonus is for the first year only.
  2. Base salary plus $50.00 per billable hour actually billed to clients that exceeds 1750 annual billable hours. 10% bonus on the collected revenue from other timekeepers that work is delegated to.
  3. Base salary plus 20% bonus for collected working attorney fees in excess of three times salary during the year. For example, an associate that is paid $100,000 would have an working attorney collection expectation of $300,000. If the associate had collections of $400,000 he or she would receive a bonus of $20,000. The associate also is entitled to receive a client origination bonus of 10% for business brought to the firm.
  4. Base salary, 1200 annual billable hour minimum expectation, quarterly production bonus of 40% of working attorney collected fees less salary paid for the quarter, and 20% client origination bonus for work done by others in the firm.
  5. Base salary plus 1/3 of hourly billing rate for hours billed to clients that exceed 1800 annual hours billed to clients.

Some firms have lowered base salaries when incorporating new performance bonus systems when the current expectation is far below expectation. Other firms are terminating under-performing associates.

Many firms are finding that many associates in small firms that have salaries of $100,000 or more are content and are not motivated by the bonuses available to put in the time to earn the bonuses. Work life balance is more important that earning additional income. The bonus systems work better for associates that are still hungry or have lower base salaries.

Firms that have had the most success in getting associates past the “entitlement mentality” are those that incorporate goal setting, accountability, and individual twice a month coaching meetings with associates in addition to the performance bonuses.

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John W. Olmstead, MBA, Ph.D, CMC

 

Sep 18, 2018


Law Firm Shareholder Admission Criteria

Question:

Our firm is a small firm of two shareholders and two associates based in Bakersfield, California. The firm was formed fifteen years ago by the two existing shareholders. We have never made any additional shareholders but we believe that we owe it to our associates to have some guidelines as to what we are looking for in future shareholders. A partner track program/document if you will. Do you have any suggestions?

Response:

I believe you should have at least a general set of guidelines laid out in writing. For example:

Associates that have been seven years in practice and two years or longer employment with the firm as an attorney and consistently performing as outlined below are eligible for Equity Shareholder level review based upon equity shareholder level openings, competencies attained, performance, and behavior.

  1. Seven Years in Practice and Two Years or Longer Employment with the Firm as an attorney.
  2. Individual Production Requirement
    1. Annual Billable Hour Expectation
      1. The firm has an annual billable expectation of 1800 billable hours.
    2. Origination Fees Collected
      1. The firm has an expectation of $100,000 or more per year for a minimum of three consecutive years.
    3. Generated (Working Attorney) Fees Collected
      1. The firm has an expectation of $300,000 or more per year for a minimum of three consecutive years.
    4. Responsible (Managed Revenue) Fees Collected
      1. The firm has an expectation of $400,000 or more per year for a minimum of three  consecutive years.
  3. Competency Level Attainment at Shareholder Level
    1. Knowledge
      1. The firm expects associate candidates to be performing at shareholder level.
    2. Skills & Abilities
      1. The firm expects associate candidates to be performing at shareholder level.
    3. Work Management
      1. The firm expects associate candidates to be performing at shareholder level.
  4. Character and Commitment 
    1. The firm expects associate candidates to have the commitment and character that the firm expects of shareholders. This includes a “firm-first” and teamwork attitude and behavior. Lone wolfs and mavericks will not be considered for equity shareholder status.
  5. Professionalism 
    1. The firm expect professionalism in the firm of dress, appearance, and behavior in dealing with personal in the firm, clients, prospective clients, referral sources, and colleagues and other professionals outside the firm.
  6. Client Service and Business Development 
    1. The firm expects associate candidates to be performing at shareholder level.
  7. Supervision and Mentoring 
    1. The firm expects associate candidates to be supervising and mentoring junior associates, paralegals, and staff.
  8. Client Satisfaction 
    1. The firm expects associate candidates to have a client satisfaction rating average over the last three years of 4.0 (maximum rating is 5.0) or higher as measured by the firm’s client satisfaction questionnaires that clients complete at the conclusion of a matter.
  9. Other Factors Considered – Associates should: 
    1. Be willing to share in the risk and reward of ownership and invest time and capital in the firm.
    2. Have a firm-first orientation and share the vision and core values of other equity owners in the firm.
    3. Add value to the firm and pay for themselves, cover their costs and share of the firm overhead, and generate enough work to keep other attorneys busy.
    4. Act like owners of small businesses.
    5. Contribute to the management and marketing of the firm.
    6. Mentor younger attorneys.
    7. Follow firm policies systems and procedures.
    8. Contribute capital, sign for the office lease, firm credit line, and share in other financial obligations of the firm.
    9. Be good marriage partners considering the other equity members in the firm.
    10. Exhibited the ability to supervise junior associate attorneys, paralegals, and staff.
    11. Successfully tried cases (litigation attorneys).
    12. Demonstrated the ability to either originate new client business or developed such a relationship with existing clients or referral sources that clients have sent business to the firm as a result of the relationship.

Associates selected for admission should be notified by the Executive Committee/Managing Shareholder and a meeting will be scheduled to discuss whether the Associate has a tentative interest in taking this step. If the Associate is interested in taking this step and after executing a non-disclosure agreement, the Executive Committee/managing shareholder should then prepare a detailed proposal outlining the mechanics and details required for admission. The proposal will include firm financial information, the buy-in or capital contribution requirement, and a copy of the firm’s shareholder agreement and equity shareholder compensation plan.

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John W. Olmstead, MBA, Ph.D, CMC

 

Sep 12, 2018


Lawyer Retention Incentives

Question: 

I am the administrator of a sixteen lawyer firm in South Florida. There are six equity partners, two non-equity partners, and eight associates. The firm was formed nine years ago and we have lost no attorneys during this period of time. We believe that we have a positive culture and have great lawyer retention. However, we would like to do more to ensure that lawyers stay with the firm and implement more incentives for them to stay. I would appreciate your thoughts.

Response: 

Interviews with associates and partners in law firms conducted by our firm as well as other consulting firms suggests the following key factors and best practices concerning attorney retention:

  1. Compensation. The firm must have a compensation system that is competitive, pays lawyers the market rate, and has the potential to pay above market rate.
  2. Benefits. The firm must offer competitive benefits especially medical insurance, life insurance, disability insurance, and a 401k plan.
  3. Work life balance. This involves flexibility and control over one’s practice, work hours, workplace – whether at the office or working remotely.
  4. Culture. Lawyers want to work in a culture that is supporting and encouraging. They want to work with peers and clients they respect. They want meaningful work.
  5. Individual marketing plan for lawyers. Lawyers need help focusing their time on business development. Firms need to help lawyers market their services in ways that benefit the firm and the lawyer alike but use non-billable time efficiently and effectively.
  6. Growth Opportunities. Lawyers need to perceive that the firm provides them with opportunities for growth in their work, type of clients, progression to partnership. They want to know if there is a partnership track and specific details if there is a track.
  7. Recognition. Lawyers join firms to receive prestige, opportunity, and clients. Junior lawyers want to maximize their options and get good training. Senior lawyers want profitable work. They want name recognition.
  8. Environment. Many lawyers are not interested in working in a rigid environment. Casual dress policies and informal policies concerning how to address lawyers and staff in the firm can go a long way in creating a relaxed atmosphere.
  9. Team spirit. Lawyers join firms to work cooperatively with others. Lawyers that want to work alone are solo practitioners.
  10. Quality Facilities. Don’t skimp on your facilities and systems. Invest in quality office facilities, furnishings,  and office systems.  Use state of the art technology. Many lawyers have left their firms and joined other firms because antiquated technology at the prior firm.
  11. Competent support staff. Failure to provide lawyers with competent support staff can be a major irritant and can cause lawyers to look at other firms.

For sure, ensure that your compensation and benefits for your lawyers are competitive. While compensation and monetary benefits play a key role in lawyer retention, many of the above factors plan an important role as well. Many of the lawyers that I see changing firms are for other reasons other than compensation and benefits. In fact, some leave for less money when they feel they are undervalued and see more opportunity for growth and development in another firm. Some leave when they see the opportunity for equity in another firm.

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John W. Olmstead, MBA, Ph.D, CMC

 

 

 

Sep 05, 2018


Law Firm Valuation – Factors that Effect Firm Value

Question: 

I am the owner of a small estate planning firm in Kansas City, Missouri. I have two associates and four staff members. I am considering acquiring a small (solo) practice in a nearby community. I have read some of your articles as well as your book on succession planning and valuation, and the multiple of gross revenue used to establish a goodwill value for a law firm. What are some of the factors that can impact whether the multiple is higher or lower – a firm’s potential value?

Response: 

While multiples of gross revenue is a common approach, a key ingredient should be the profitability picture before distribution to owners. In other words, what is the quality of earnings? A firm that nets fifty percent of gross revenue would generally command a higher price that a firm that nets twenty-five percent. Factors that should be considered in determining a firm’s potential value are:

  1. Quality of Partner Earnings
  2. Quality of Personnel
  3. Strategic Location
  4. Nature of Clientele
  5. Practice Areas
  6. Fee Structure
  7. Hours Managed by Partner
  8. Investment in Office Facilities
  9. Investment in Technology
  10. Quality of Services per Client Satisfaction Reviews
  11. Firm Stability

The average partner or owner earnings figure is the critical component. If the average partner/owner’s income is low, normally the practice is not worth much. A good business person will not pay for a business and pay a premium when it cannot be justified.

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John W. Olmstead, MBA, Ph.D, CMC

 

 

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