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February 2013

Feb 24, 2013

Mentoring Law Firm Associates: Getting the Basics Right

Question:

I am the chair of our three member executive committee. We are a 20 attorney firm in Atlanta. We have 5 partners and 15 associates. We have done a terrible job of mentoring our associates and we need to do better. Do you have any ideas?

Response:

A law firm's greatest asset is its people and your associates are your firm's future. Lack of mentoring is one of the biggest complaints that we hear from associates in on-site interviews.While you may be too small for a comprehensive formal mentoring program you should at least explore an informal program. Start with baby steps and go from there. 

The keys to successful mentoring relationships involve the mentor and mentee deciding on the logistics up front. Many potential mentoring pairs fail to form because the parties did not agree
on the little things up front. Below are tips designed to help both participants in formal and informal programs:

1. Meeting schedule:  Decide on an approximate meeting schedule. Suggest that meetings be scheduled at least once a month.

2. Means to schedule meetings: Share the best way to get on each other’s calendar.

3. Scheduled meetings: Don’t wait until the end of one meeting to schedule the next. Always have the next two or three meetings on the calendar.

4. Length of program/partnership: For formal programs; the firm may suggest a length of time to meet (usually a year). For informal mentoring, suggest having a date on the calendar to review goals and examine the relationship.

5. Confidentiality: Mentors and Mentees need to discuss what confidentiality means to them. It is the foundation of trust, which is the basic currency of mentoring.

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

Feb 20, 2013

Selling a Law Practice – How do I Value My Practice

Question:

I am the founder and owner of a law firm in downtown Cincinnati, Ohio. I have three other attorneys and 4 staff members. We represent primarily business and civic organizations. Our fee revenues are around $735,000 per year and I take home $175,000 to $200,000 from the practice. I am looking to sell the practice to either the associates in the firm or another law firm. Do you have any idea what my firm might be worth?

Response:

There is no one “right answer” when valuing a law practice. There are different types of valuations performed by different advisors for different reasons. Valuations can be extensive or ballpark estimates. 
 
While law firm owners and partners would like a simple “plug and play” approach to establishing a value for their firms, such an approach does not exist in the real world. There are too many variables that come into play. At the end of the day it comes down to what someone will pay you for your practice and the terms. Often the terms are as important as the price or value.

What a potential buyer is really the future cash flow (earnings from the practice) I suggest that you use the rule-of-thumb approach to get started. Multiply one year’s gross revenue by a factor of x. The result will be the stream of income’s value.

We usually suggest that you average the firm’s gross fee revenue over the past five years to even out any peculiar ups or downs in the revenue stream. Then multiply this average year’s gross fee revenue by a given factor. The factor varies with the industry and even with geographic location. Accounting firms, for example, are valued at 1.0 to 1.5 times (100 to 150 percent) annual gross fee receipts. A well established standard is still in its infancy in law firms. Some argue that the multiplier for the rule-of-thumb method for law practices should be between 0.5 to 3.0. However, based upon what we have seen in recent sales of law practices, the multiplier for the rule-of-thumb method for law practices is ranging between 0.6 to 1.0 (60%-100%) of annual year’s gross fee revenue. Another way to look at it would be 1.2 to 2.0 (120% to 200%) times net income. (Based upon partnership method of accounting and not including owner’s compensation as an expense) Whether the multiplier is in the lower or higher level of the range depends on the following:

  1. Quality of owner earnings
  2. Quality of personnel
  3. Location
  4. Practice area and types of services
  5. Financial performance
  6. Nature of clients
  7. Fee Structure (hourly rates charged)
  8. Repeat or one-time clients
  9. Referral sources.

Start with a multiple of one and adjust for the above factors.

Based upon the figures you provided I would think you would have a difficult time getting a multiple of one for your practice due to the low margin of 24%. Peer practices average 35-45% margins. You might ask for around $700,000 but due to the low earnings, etc. $350,000 – $400,000 might be the best that you can hope for and that may be subject to a five year earn-out. The key is often to find the right person to buy the practice. Finding the right person could take a lot of work and time – so start early.

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

Feb 12, 2013

Mitigating Law Firm Case Portfolio Risk With a Firm Contingency Fee Case Selection System

Question:

Our firm – St. Louis, Missouri – handles personal injury cases on a contingency fee basis. All 6 attorneys practice in this area and we do no work on any other type of fee or billing arrangement. During the last couple of years cash flow has been tough, we have lost some cases, and we are looking for ideas on what we should be doing differently. We would appreciate any ideas that you may have.

Response:

A balanced case portfolio is critical for contingency fee firms. You must carefully select your cases. Here are some ideas for an effective case selection system:

1. Develop an evaluation/case rating tool to be used to determine risk and feasibility of taking on contingency fee cases. The tool could be a form with an brief write-up and synopsis of the case, potential fee (high and low), probability of success or failure expressed as a probability percentage, specific risks, how long case might be in progress, hours that it may take to staff the case, client cost investments, and other resources that may be required.

2. Determine criteria that must be met to accept or reject a case.

3. Require more than one head or set of eyes on a case before committing to accept a new case. You might want to require all contingency fee cases to be reviewed and discussed at a weekly team meeting before a case can be accepted by anyone – including. This will help keep any  one attorney from getting too emotional and close to a case and base acceptance upon business and economic considerations rather than emotional considerations.  This is routinely done in lot of my PI firms to help access and mitigate case risk.

4. Write-up and document the case selection system.

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

Feb 06, 2013

Law Firm Expansion – Expanding Your Geographical Reach

Question:

Our firm is a 14 attorney firm in central Iowa. We have one office in Des Moines and have been considering opening an office in another city. We represent business organizations and very few individual clients. I would appreciate your thoughts and suggestions.

Response:

I hope this is part of an overall strategic planning process and not a random act. If it is then the first consideration should be the needs of your most important existing clients. The first questions you should address are:

  1. Where are your present clients located and how do they communicate with the firm?
  2. To what extent have the needs and demands of these clients changed due to advances in technology?
  3. Are your client relationships based upon direct contact and communication? To what extent are interpersonal relationships crucial to the maintenance of these clients?
  4. Are any of these key existing clients expanding into new geographical areas?

After giving some thought to the above questions determine whether the firm can meet the needs of key clients from existing geographical locations, or whether it must consider new venues. Then consider the following:

  1. It is necessary for the firm to be physically present where the client is located or is the firm better served utilizing existing resources to expand practically, while not physically?
  2. Is a physical presence required to practice in the new location?
  3. Would the firm be better served by utilizing technological resources instead of physical location expansion?
  4. Are there marketing disadvantages by not having a physical presence even if the firm can service the legal needs of the client with a local presence? Could the firm lose out of opportunities by being out of site out of mind?

A geographical strategy must carefully consider and weigh the importance of personal contact.

Think through the process strategically and as a part of your planning process – run the numbers on a few scenarios – and weight the pros and cons of moving into other areas.

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

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