Law Practice Management Asked and Answered Blog

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February 2018

Feb 28, 2018


Selling My Law Practice to My Associate

Question: 

I am the owner of a general practice firm in Chicago’s west suburbs. I have three associate attorneys in the firm and three staff members. I am sixty-four and contemplating my retirement and exit from the practice. I would like to start phasing back over the next three years and be out of the practice by December 31, 2021. There is one associate in the firm to whom I would like to sell the practice and he has expressed an interest as well. What are your thoughts as to how I approach this?

Response: 

Client, referral source, and management transition will be major concerns and will impact the value you can receive for your firm. You will need to use the next couple of years to effect a successful client, referral source, and management transition to your associate. Clients and referral sources will need to have a relationship with your associate and perceive him as a partner.

I have seen law firm owners approach this in the following ways:

  1. The associate is elevated and given the title of partner (non-equity) with the execution of practice sale agreement for the sale of the practice to occur in the future with a non-refundable deposit. The practice sale agreement outlines the sale price (which includes a goodwill value) and specific terms for the sale of the practice. Upon purchase of the practice  the associate would setup a new practice entity. This approach is often taken by firm’s that don’t want to “play partner.”
  2. A value is determine for the practice and price per share. Often this includes a goodwill value. The associate buys in and initially becomes a minority partner – say twenty to twenty-five percent. Over the next several years the minority partner buys additional shares based upon the valuation formula and the price per share determined at that future time. When the owner retires his or her remaining shares are acquired with the payment for these shares often paid over a period of three to five years.
  3. An associate becomes a minority partner and makes a capital contribution (usually based on cash-based-capital) that has no relationship to the value that the owner is seeking to receive from the practice. The partnership agreement has a “founder benefit” provision that provides that the founder receives a multiple (1.5 to 2) of the average of his or her last three year’s earnings upon retirement. For example, if the founders average annual earnings for the past three years was $350,000 – $525,000 (multiple 1.5) would be his founder benefit. Typically this would be paid out over three to five years. This would be in addition to a return of the founder’s capital account.

In each of the above scenarios it will be critical that you put in place an action plan with dates, timelines, and activities to ensure that activities that have to occur for a successful client, referral source, and management transition get accomplished. Your biggest challenge will be client and referral source transition. Both of you will need to ensure that clients and referral sources stay with the firm as that will effect the value of the arrangement for both of you.

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

 

Feb 21, 2018


Law Firm Staff Work Distribution Analysis

Question: 

I am a new firm administrator with a thirty-five attorney litigation firm in Los Angeles, California. In my accounting department I have seven staff members handling a variety of tasks. My partners are concerning that we are inefficient and over staffed. I am having a hard time finding where to start so to get a handle on  this issue. Please provide any information that you are willing to share.

Response: 

There are questions that you must ask yourself in order to analyze the work distribution of your accounting department. Such questions as the following will help you in knowing what to look for:

  1. What activities take the most time?
  2. Is there any misdirected effort?
  3. Are skills being used properly?
  4. Are you staff doing too many unrelated tasks?
  5. Are tasks spread too thinly?
  6. Is work distributed evenly?
  7. Are the right people on the bus?

Before you can analyze your accounting department you must be able to see clearly, in one place, all the activities of your accounting department and the contribution of each employee on each activity. A work distribution chart is the easiest and best way to arrange these facts in simple form. A properly made work distribution chart will help you determine if the largest time of your staff is devoted to the major function of your department. (Operations list down the left rows and staff names listed across the columns) It may indicate that more time is being devoted to other functions than is necessary. A function or task may require a more detailed study, as might be indicated where total hours seem unreasonable. You may discover that your accounting department is spending too much time on relatively unimportant or unnecessary work. Misdirected effort appears on the work distribution chart when staff are involved in tasks not contribution directly to the mission of the accounting department.

Here is an overview of the process:

  1. Have each staff member prepare a task list.
    1. List specific and clear activities for a specific time period with time listed for each activity.
    2. Task lists should cover a complete cycle of work. (Weekly, Monthly, etc.)
  2. Determine operations performed
    1. Prepare an operations list grouping related or same kind of tasks (operations).
    2. Check operations list against breakdown of department mission.
  3. Complete the work distribution chart
    1. Complete heading.
    2. List operations.
    3. Enter staff names in a column of the chart.
    4. Enter tasks, time, and work count for each operation.
    5. Total the columns and rows.
  4. Examine the present work distribution
    1. What operations take the most time?
    2. Are they essential?
    3. Is there misdirected effort?
    4. Are skills used properly?
    5. Are you staff doing too many unrelated tasks?
    6. Are tasks spread too thinly?
    7. Is work distributed equitably?
    8. Is the department overstaffed?
    9. Are the right people on the bus?
  5. Improve work distribution
    1. Consider eliminations, additions, and rearrangement of tasks and operations.
    2. Prepare a proposed work distribution chart.
    3. Discuss proposed changes with your partners.
    4. Put proposed changes into effect.

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

 

 

Feb 14, 2018


Compensation Ideas for Law Firm Staff – Goal Bonuses

Question: 

I am the firm administrator with a ten attorney firm in Long Beach, California. I really enjoyed reading your blog – Law Firm Compensation – Bonuses for Staff, dated December 27, 2016.  

I really like your approach of tying bonuses to measurable outcomes. Have you used other approaches other than percentage of salary? Can you give additional examples of specific goals that would be appropriate for a bookkeeper, office manager, or firm administrator?

Response: 

Research and experience tells us that employment expect the following five things from management:

  1. Mutual agreement as to what is expected.
  2. The opportunity to exercise his or her ability.
  3. Feedback on his or her performance.
  4. Direction when needed.
  5. Reward – compensation in equal measure to his or her contribution to the firm.

The problem with staff employee is quantifying and measuring performance so that bonuses are not “Santa Clause” bonuses. A bonus system tied to measurable goals/objectives can, as outlined in my earlier blog, eliminate the problem of bonuses being considered by employees as an entitlement.

Other approaches that some of my law firm clients have used is to develop a limited laundry list of goals with a specific dollar amount tied to each goal for specific positions such a bookkeeper, firm administrator, etc. Typically, there is a cap on how much can be earned per year – 5% – 10% of salary. At the beginning of each year the employee selects the goals that they plan on working on for the upcoming year, obtains approval from his or her supervisor, and both parties sign off on a goal plan for the year. The goals must be SMART goals. Bonuses are paid as goals are completed.

Here are some additional examples:

Bookkeeper 

  1. Reduce accounts receivable over 90 days by 25%
  2. Write and implement an accounting manual by December 31 of this year.

Firm Administrator 

  1. Manage the firm within the approved expense budget for the year.
  2. Reduce staff turnover during the year by 25% below an average of the past three years turnover history.
  3. Reduce headhunting fees for staff by 40% below an average of the past three years.
  4. Write and implement an Employee Handbook by December 31 of this year.
  5. Implement a new time and billing system by December 31 of this year within time and cost budget.

The key to the goals is that they are important to the firm and are measurable.

Click here for our blog on compensation

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

Feb 06, 2018


Partner Withdrawal from a Law Firm

Question: 

I am a partner in a law firm in Walnut Creek, California with four other partners and three associates. We are a general practice firm and our clients are primarily individual clients. I have a good relationship with my other partners. I have decided to leave the firm and join a larger firm in San Francisco. I have notified my partners in writing of my intention to leave and they are supportive of my decision. Therefore, I anticipate a amicable withdrawal. Since this is the first time that a partner has left the firm for any reason we are not sure what the next step is. Please share with us any thoughts that you have.

Response: 

It sounds like you will be fortunate enough to have an uncontested withdrawal. Leaving a partnership takes planning and foresight. If your firm has a partnership, shareholder, or operating agreement your have a starting point. However, even if you have such an agreement, I have found that in most cases there are still a myriad of issues and details that still have to be resolved. You and your partners will still need to negotiate the terms for your withdrawal and ultimately sign a withdrawal or separation agreement. Your partners may be unhappy about certain issues, or in you leaving, but in the end, will do the right thing either because they have to or because they want to.

While there are a lot of moving parts and details to tend to the major issues that have to be resolved when a partner withdraws from a partnership involve:

I suggested you start by developing a project plan outlining all the tasks and sub-tasks with start dates, target completion dates, dates competed, and to whom is assigned to each of the tasks that are going to have to be accomplished. At the top of the list will be to negotiate a withdrawal or separation agreement that addresses the above issues and minimizes your risks and future liability. Here is a checklist you can use to get started:

  1. Review the firm’s current partnership, operating, or shareholder agreement to ensure that you follow any and all withdrawal requirements.
  2. Identify all assets and liabilities, on and off balance sheet, and come to an agreement with your partners on the status of those assets and liabilities and any ongoing responsibility that you may have.
  3. Identify all contracts, liens, mortgages and other obligatory documents that name you personally or where you otherwise act as a personal guarantee or surety.
  4. Based on the above information, negotiate withdrawal terms.
  5. Have yourself removed from all obligatory documents and/or where you a personal guarantee or surety.
  6. Draft a withdrawal agreement that documents everything, and have it executed properly by each of your partners.
  7. If there is a long-term commitment by the firm to you to pay you money over time, or retire some form of debt, consider mechanisms to enforce those commitments, including the right to audit or security interests.
  8. Make sure your name is removed from all firm formation documents, including to the Operating Agreement (for an LLC), Partnership Agreement, Shareholder Agreement or Bylaws, Corporate Register (if a C-Corp or S-Corp, Articles, and with the IRS, if your name was used as the responsible party when your FEIN was obtained.

Once you have a withdrawal agreement in place you can begin to address some of the other tasks that will have to be addressed. Review your state’s rules of professional responsibility concerning withdrawal – particularly those pertaining to client notification, conflicts of interest, etc.

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

 

 

 

 

 

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