Law Practice Management Asked and Answered Blog

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August 2016

Aug 31, 2016


Law Firm Lateral Growth Strategy – One Plus One Equals Three

Question:

Our firm is a sixteen lawyer firm – eight partners and eight associates located in Memphis. We handle business transactional work and litigation for small to mid-size companies. However, for the past forty years our mainstay has been small community banks. With recent bank mergers and new banking regulations our banking business has dropped off significantly. We have reached a desperate stage and we must replace this business quickly or consider possible dissolution. We have talked with a possible lateral partner that has a $300,000 book of debtor bankruptcy business. Is adding a lateral partner a good strategy for us?

Response:

Lateral partner acquisition is a growth strategy being used by many firms today. However, many lateral hires are not successful as a growth strategy. In a recent survey conducted by Lexis-Nexis and ALM Legal Intelligence only 28 percent of the respondent law firms found lateral partner acquisition a "very effective" strategy for growth.

I suggest you start with the following two questions:

  1. Does the lateral candidate's book of business fit within your strategic plan? If you do not have a strategic plan develop one. A strategic plan can be a useful guide in keeping the firm focused on the right opportunities. It can help the firm clarify the type of work that it does not do.
  2. Does One Plus One Equal Three. This question should be asked when considering any lateral or merger candidate. In other words is there is business case? How will the addition of the lateral result in more business than either the firm or the lateral currently has separately? Does the lateral have enough business to keep himself or herself busy plus a couple of associates?

I would question whether debtor bankruptcy fits within the firm's overall business strategy. I also don't believe a $300,000 book of business satisfied the one plus one equals three rule.

A lateral strategy may be a good strategy for the firm. However, I believe you need to expand your search and it may be difficult to attract candidates given your present financial situation.

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

Aug 24, 2016


Law Firm Acquisition – Acquiring Another Practice

Question:

Our firm is a twelve lawyer firm in Austin, Texas. We have been approached by the owner of a three attorney firm in an adjacent city who has a complimentary practice consisting of institutional business clients. He is looking to retire within the next thirty days and he would like us to acquire his clients. We have reviewed his practice and we would be willing to take over his clients but not his personnel or other fixed assets. He has no interest in a merger or an lengthy relationship with us. It could add $800,000 per year to our practice. We would appreciate your thoughts.

Response:

It sounds like a great opportunity if there are no conflicts, the clients actually transition, and the billing rates are in line. Start with conflicts checks. Then ask for five year's of financial statements and tax returns, internal financial reports, schedule of billing rates, client lists, copy of building and equipment leases, and malpractice applications. Assess the stability of the revenue stream, repetitive ongoing clients, client dependency, etc. Prepare a letter of intent with terms for acquiring the practice. I would lead with a down payment of say $25,000 and then a percentage of collected revenue for say five years at 20% and see how he responds. He will want more certainty and a fixed price. If you have to go with a fixed price to seal the deal structure it with an initial down payment, payments over three to five years with provisions for reduction in the purchase price if the clients and revenues don't materialize. Make sure there are no pending malpractice claims or other liability issues.

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

Aug 17, 2016


Law Firm Financial Management – Monday Morning Report

Question:

I am the owner of a seven attorney firm in New York City. I have a bookkeeper that handles the accounting function. I receive monthly financial reports – but I believe I need a better tool to stay on top of my firm. I feel that I am lost, I don't want to take time to access different software modules such as our billing system, accounts payable system, general ledger system, etc. to get the information that I need to effectively manage the firm. We use Timeslips for billing and QuickBooks for bookkeeping. I would appreciate your thoughts.

Response:

I hear what you are saying. Most software program are good at giving you reams of paper in the form of reports but not so good at giving you the summary reports you need. Software companies are beginning to develop dashboards in their systems but the lower end systems do not give you what you need. You might consider tasking your bookkeeper with providing you with a Monday Morning Report (created in Excel) every Monday morning with the following summary information:

  1. Cash in bank balances for each account
  2. Bills due this week (vendors, payroll, taxes, draws)
  3. Anticipated payments from clients (new engagement retainers – flat fee and time bill)
  4. AR Balance
  5. Work in process balance
  6. Number of new retained matters for the month
  7. Total billable hours for each timekeeper (month and year to date)        
If after reviewing the Monday Morning Report you have questions ask for a more detailed report.
 

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

 

Aug 09, 2016


Law Firm Financial Management – What Reports Should I Give To the Attorneys in My Firm

Question:

I am the firm administrator of a sixteen attorney firm in San Diego, California. We have six equity members, four non-equity members, and six associates. We also have four paralegals and six staff members. We are managed by a three member executive committee. Each month I provide the equity members and the executive committee with the same reports from our software system. They are quite numerous. The equity members and the executive committee complain that they get too many reports and they don't look at them while the non-equity members and the associate complain that they don't get access to any financial information. Do you have any suggestions?

Response:

Less is often more. I would rather see partners receive less reports and read and use the reports they do receive. They can always request additional detail reports if they desire them. Think of a pyramid – at the top are equity members, then non-equity members, associates and then the executive committee and the firm administrator. At the top of the pyramid the information is more summarized and more detail is provided as you work you way down the pyramid. For example, do the equity members need to see journal registers, cash receipts registers, etc.?

I suggest you develop a report distribution guide that outlines who gets what and when and have it approved by the executive committee. Here is an example:

The objective of these guidelines are to provide timely, meaningful reports to firm management, equity and non-equity members, associates, and other timekeepers. Therefore, as few reports as possible should be distributed to reduce bulk and information overload. All other reports not listed for equity member distribution should be available to them on a per request basis.

Daily Reports

 Weekly Reports

 A detailed time report will be generated weekly (by Wednesday of each week for the conclusion of the preceding week) and will be distributed as follows:

Monthly Reports

        Monthly reports should be distributed no later than the 5th of each month according to the         following schedule:

        Equity Members             

        Non-Equity Members

        Executive Committee

        Director of Administration

        Associates

        Paralegals

        Staff (Timekeepers Only)

Quarterly Reports

Annual Reports

Annual reports are generated at the end of the year and maintained in a end of year section of the reports binder for the year (or computer system)

        Equity Members

        Same reports as received monthly.

        Managing Member/Executive Committee

         Same reports as received monthly

        Director of Administration

        Same reports as received monthly

        Note: At year end each of the above reports should be printed and saved to a file to the         reports folder that has been setup on the computer network. This should be done prior to         running the year end close.

        Associates

        Same report as received monthly.

        Paralegals

        Same reports as received monthly.

        Staff (Timekeepers Only)

        Same reports as received monthly.

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

 

Aug 02, 2016


Law Firm Acquisition Due Diligence – What Should I Ask For

Question:

I am the managing partner of a five lawyer firm in Denton, Texas. We have the opportunity of acquiring a sole owner practice in a nearby city with a complimentary practice area. We have had one meeting and our firm is interested. We want to initially do a quick and dirty due diligence so see whether this firm is really a qualified opportunity. What sort of information should we ask for?

Response:

I would initially ask for the following:

  1. Five years profit and loss statements and balance sheets and tax returns. (2011, 2012, 2013, 2014, 2015)
  2. Lawyer and staff headcount for each of those five years.
  3. Current hourly billing rates.
  4. Description of his mix of clients by dollars and by time expended – practice type and geography.
  5. Description of how the firm bills (hourly, flat rate, contingency)
  6. Copy of leases (space and equipment)
  7. Copy of malpractice insurance policy and last application.
  8. Salaries and benefits for attorneys and staff members.
This will give you a good idea of what you are dealing with and whether the opportunity is worth pursuing further. If you decide you want to pursue this opportunity you can ask for additional information as the discussions unfold.
 
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