Law Practice Management Asked and Answered Blog

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July 2010

Jul 16, 2010

Law Firm Eat What You Kill Partner Compensation Systems

Question:

We are current using an “eat what you kill” compensation system in our firm. Is this appropriate method for our firm to use?

Response:

 It depends. You must ask yourself what kind of firm you want to be – team-based firm or group of space sharers or partnership of individual firms. Such systems are not appropriate for law firms that want to build a firm and create a team-based practice since such compensation systems typically reinforce “lone ranger” behavior resulting in a “me first vs firm first” orientation. It is hard to build a team-based firm with such an orientation. However, some firms do not want to practice as team-based firms – they want to practice as groups of individuals. For these firms such a system may be appropriate. The challenge will be to nail down a method of allocation revenue and overhead that is fair and equitable to all members concerned. Compensation systems should do more than simply allocate the pie – they should reinforce the behaviors and efforts that the firm seeks from its attorneys. Many firms are discovering that desired behaviors and results must go beyond short term fee production and must include contributions in areas such as marketing, mentoring, firm management, etc. to ensure the long term viability of the firm. Eat-what-you-kill systems discourage these behaviors.

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

Jul 15, 2010

Getting Control of the Financial Side of Your Law Practice

Question:

I am a partner in a 14 attorney firm. Our bookkeeper has been with us for 20 years. We have a time and billing system, a separate bookkeeping system, and a separate database for clients, and something else for trust accounting. The other partners and myself do not know the name of the software that we are using, don't know how to access the software, and we have to ask the bookkeeper for any financial information that we require. We feel like "hostages". She gets offended when we ask questions. When we do receive information we don't know how to read or interpret much of the information. How can we get control of our firm back?

Response:

It is imperative that owners and partners in a law firm have access to financial information on a timely basis, understand the information, and use the information in a proactive way to manage the practice. We suggest:

The owner (or an appointed partner(s) in larger firms) obtain detailed training on the accounting software system(s) along side the bookkeeper when the system is implemented. In addition to general operation of the software, special training should also be obtained on intepretation and use of the management reports.

In your current situation – this may be a good time to consider upgrading your system and at that time obtain training on the new system, review the roles of all parties, and current procedures.

Insure that you have accounting controls in place and appropriate segregation of accounting duties.

Outline your expectations and requirements of the bookkeeper, meet with her/him, and communicate appropriately.

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


 

    • Jul 15, 2010

    Valuation of My Law Practice For Merger or Acquisition

    Question:

    I have been thinking merging or selling my practice. How do I determine what my practice is worth?

    Response:

    You might want to consider retaining the services of outside advisors to help you with this process. There are a variety of methods used to value law practices including:

    1. Fair Market Value Methods
    2. Rule of Thumb Methods
    3. Price Earnings Ratio
    4. Discounted Cash Flow Models, etc.

    CPA practices are often valued using a rule of thumb method employing a multiplier of 1.0 to 1.5 times average gross revenues for the past five years. Thus, a practice with average billings of $400,000.00 per year might sell for $600,000 with 50% of the purchase price paid upon closing and the balance (50%) paid over a five year period based upon subsequent collections.

    Law practices are more difficult to value. CPA firms often have more repetitive work from ongoing clients and less risk in the practice – say compared to a personal injury law practice. CPA firms often have enforceable non-compete agreements which are non enforceable and therefore non existent in law firms. Law firms have much more fluctuation in practice valuation and no valuation model dominates. The rule of thumb model – when used – ranges from .5 to 3.0% – and will dependent upon the amount of repeat business, extent of institutional vs indivdiual clients, and the ability to sucessfully transfer clients to the acquiring practice.

    Look for ways to institutionalize your practice in a way that your practice is not "uniquely you."

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

    Jul 14, 2010

    Succession/Exit Planning Questions

    Question:

    I am sole owner of a 8 attorney firm in the Northwest. Two other attorneys are income partners – no equity – and the other five attorneys are associates. I am just turning 50 and am beginning to think about future retirement. What questions/issues should I be thinking about?

    Response:

    Fifty seems to be the point at which attorneys being thinking about their retirement and their future. Some even consider and in fact make complete career changes at this point in their lives. Here are a few questions to begin thinking about:

    1. Have you decided when you want to retire and leave your firm? Or do you want to work forever?
    2. What amount of cash or annual cash flow do you need when you exit?
    3. Do you presently have a retirement plan and how much income to you project that it will provide at different exit times?
    4. To whom do you want to transfer your interest? Family members in law school, other attorneys in the firm, another firm, etc?
    5. Based on future cash flow, do you know how much the firm is worth today?
    6. Do you know how to best maximize the income stream generated by the firm – in the years ahead while you are still with the firm and after you leave the firm?
    7. Have you been able to institutionalize the firm – or is it uniquely you?
    8. Is the firm even marketable?
    9. Do you have a succession/exit plan?
    10. Do you have a plan for your business if the unexpected happens to you?
    11. Have you taken steps to protect your family's wealth?

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

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