Law Practice Management Asked and Answered Blog

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April 2014

Apr 29, 2014


Law Firm Associate Training and Mentoring – Ideas for Reducing Spin Time and Increasing Profitability

Question:

We are a three attorney personal injury plaintiff firm in Moline, Illinois. There are two partners and one associate in the firm. We handle a large volume of small PI files – currently we have 700+ open files handled by three attorneys and 5 assistants. We recently hired our fourth attorney – second associate – that came to us with 20 year's experience as an associate in several large firms (100 plus attorney firms). The attorney, who has been with us for about 8 weeks, has never handled personal injury cases and is having some problems getting organized. Do you have any suggestions?

Response:

I am a believer that time invested in orientation, training, and mentoring upfront can dramatically reduce a new associate's spin time, help them get online quicker, and improve overall profitability. Even though your associate has 20 year's experience in a large law firm – the work and the case management challenges are different. The associate may never have had overall management responsibility for cases or client relationships. The associate may have been assigned tasks to be completed with the partner having the case and client management responsibility. If the attorney did manage cases there is a major difference between managing say 25-50 large cases versus managing 150 small cases. There are new case management and client management skill sets and practices that will have to be developed and practiced in addition to the new area of law.

Invest time training and mentoring and share case and client management tools that can help your associate get off to a faster start.

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

 

Apr 22, 2014


Law Firm Financial Management – Higher Profit – Lower Partner Compensation

Question:

Our firm is a 7 attorney firm in Evansville, Indiana – four partners and three associates. I am one of the partners in the firm. Each month we are provided with a profit and loss statement, a billable hours report, fees received reports broken by lawyer, and accounts receiveable reports by lawyer. In 2014 our fee collections are up significantly over 2013 – our expenses are lower – profits are up – yet the money is not there for partner draws and we are having to draw less than we did in 2013? What do you think is happening?

Response:

A couple of reports that are missing from your list - a balance sheet and a statement of cash flows. Even if you are on cash-based accounting not all cash disbursements flow through the profit and loss statement which is the report that reports profit/loss. For the following types of cash disbursements flow through the balance sheet and are not considered expenses:

So while the profit and loss statement may be showing a higher level of profit there could have been other uses of cash that are not reflected on the profit and loss statement. Take a look at the balance sheet and the statement of cash flows reports.

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

Apr 15, 2014


Buying a Law Practice: What Should I Be Considering

Question:

I am an associate in a law firm in Akron, Ohio. The firm is an estate planning practice consisting of the owner/founder of the firm, myself, and two legal assistants. I have been with the firm for ten years and this is the only firm that I have worked with since law school. The owner is 67 and has announced that he wishes to retire. He has approached me and provided me with a proposal to buy his practice via an arrangement where I would initially pay him a down payment of 50% of his asking price and after two years the other 50% would be paid over a period of five years. The arrangement would be structured as a partnership and for the two year period we would be 50-50 partners. Compensation would be based upon these ownership percentages. The owner's asking price is two times his average net earnings ($125,000) – $250,000. Average revenues – $210,000. I would appreciate your thoughts and suggestions:

Response:

Buying a law practice is a major commitment and major investment. To a large extent you are buying a job as well as hopefully a book of business. Here are a few ideas that you may wish to consider:

  1. A general rule of thumb for establishing a value for when a law practice is being sold to an outside buyer is a multiple of 1.0 times average gross revenue or a multiple of 2.0 times average net earnings. Typically this is a best case scenario for an outside buyer. Buy-ins for associates that have invested "sweat equity" over the years is usually less. In addition you must consider the extent of repeat client business, talent of those that will remain with the firm, management skills and ability of the new owner, and management infrastructure. (IT, databases, case and document management systems, automated billing and accounting systems, etc.) Personally, I think the asking price/buy-in figure is high. Try to get the owner to do better for you.
  2. Review at least the last five years financial statements and insure that there are no surprises.
  3. Insure that all debt and potential malpractice claims are disclosed.
  4. Review the office and equipment leases.
  5. Create a demographic profile of the firm's clients and referral sources.
  6. Have you been able to generate a book of business? If no, why not? Do you believe you will be able to in the future?
  7. Create a business plan for the future practice and share with the bank when applying for any needed financing.
  8. Are you sure you want to own and manage a business?
  9. If you will be borrowing money from a bank determine all the interest that you will be paying as well as any interest on the five year payout to the owner. Determine the time it will take to receive a return on your investment – how many years. If you pay $250,000 for the practice plus interest – say $300,000 over five years – will you earn this amount in additional income over and above what you are presently earning and is there upside potential? Does the deal make sense?
  10. Insure that you develop a partnership agreement for the new partnership. Insure that is provides for retirement of the owner after two years – if not be careful of the compensation arrangement.
  11. Insure that the owner makes a commitment to timely transitioning client and referral source relationships.

Good luck!

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

 

 

 

 

Apr 08, 2014


Law Firm New Business Development – Finding New Startup Companies Before They Startup

Question:

I am the managing partner of a 17 attorney law firm located in Rockford, Illinois. While we have an active business law practice representing small companies we are planning on beginning to work more with entrepreneurial and startup companies. How can we go about finding and identifying these companies earlier in their development – possibly even before they have actually launched their businesses?

Response:

Many of the larger law firms are developing entrepreneurship and startup practice areas as a means of beefing up their business practices with new sources of business. So, I believe that your plan to reach out to entrepreneurs is a worthwhile strategy if you can learn to think like an innovator rather than being trapped by precedents of the past and become part of their network. Here are a few ideas:

  1. Learn to think like an innovator, embrace opportunity, and react quickly. Precedent can be the enemy of innovation.
  2. Go where entrepreneurs go – don't just hang out with lawyers.
  3. Join business/entrepreneurial trade associations.
  4. Speak and present at entrepreneuria trade conferences.
  5. Attend entrepreneuria trade conferences and go to the educational sessions.
  6. Write and publish in entrepreneuria trade association publications.
  7. Get a booth and exhibit at small business trade shows. For example – in St. Louis we have the Small Business Expo – http://www.stlouisbusinessexpo.com/
  8. Become involved with (possibly sponsor) startup incubators in your local community or universities.
  9. Scan public documents (i.e. Secretary State, etc.) concerning new business startup filings.
  10. Become active in your local chamber of commerce.

You will increase your odds if you can develop relationships with entrepreneurs before they have launched their businesses – this may be when they need a trusted advisor the most.

Good luck!

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

 

Apr 01, 2014


Law Firm Governance – Firm Administrator With Managing Partner or Management Committee

Question:

I am a partner in a 9 attorney firm in Topeka, Kansas. There are three active partners in the firm. For years day to day management has been the responsibility of a managing partner that we appoint from time to time. We have just hired our first firm administrator - starts in two weeks – who is experienced and has worked in other law firms. Should we continue to have a managing partner or consider a different structure?

Response:

Typically firms your size that have professional firm administrators empower the firm administrator to manage the business side of the law firm and have either a managing partner, management/executive committee, or all partners manage the client service side of the practice. The firm administrator typically reports to the managing partner, management/executive committee, or all partners. In essence there are three levels of management – the partnership which services like a board of directors, the managing partner or management/executive committee that oversees the professional side of the practice, and the firm administrator that manages the business side of the firm.

I find that in firms your size with firm administrators a three member management/executive committee is more common. Since your firm only has three partners – initially your management/executive committee would be all three partners. As you add more partners you would move toward electing your management/executive committee.

While either form would work in your situation – I suggest you consider eliminating the managing partner position and having the three partners serve as the management committee and have the firm administrator report to that group.

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

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