Law Practice Management Asked and Answered Blog

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October 2018

Oct 10, 2018


Law Firm Merger as an Exit Strategy for Sole Owners

Question: 

I am the owner of a small general practice firm in Novato, California. I have three associates working in the firm, three legal assistants, and one office manager/bookkeeper. I started my practice thirty-five years ago right out of law school. I am sixty years old and wanting to retire within the next five years. None of my associates have the ability or the desire to take over the firm. I believe that my best option is to sell my practice to another practitioner or join another firm through merger or other arrangement. I would appreciate your ideas regarding merging with another firm and how I would be compensated and receive payment for the goodwill value of my firm.

Response: 

Merger or an of counsel arrangement are approaches that many sole owner firms are taking when there is no one on board that is capable or willing to buyout your interest. Often merger or of counsel arrangements look very similar in how they are structured. Typically, the owner joining another firm:

Employees that the new firm has accepted would join the new firm and receive compensation and benefits spelled out in the merger or Of Counsel agreement.

How the arrangement will be structured and how compensation/buy-out will be structured will depend upon the size of the other firm. I assume that you will be looking at a firm similar to your size or a little larger (1-20 attorneys). If this is the case and if the arrangement is structured as a merger you would more than likely be classified as a non-equity partner and not an equity partner. While the other firm could pay you in the same manner that other non-equity partners are paid, often a special compensation arrangement is developed where you are paid a percentage of your collections and if you are lucky a referral fee arrangement for your client origination’s for two or three years after your retirement – typically twenty percent. In many cases if will be difficult to get a goodwill value payment and impossible in mergers or Of Counsel arrangements with large firms.

Another option would be an outright sale to another sole owner or small firm for a fixed price for the goodwill value of your firm and any assets the firm desires to acquire. More than likely this would be with an initial down payment and payments over a three to five-year period. Typically, practice sale agreements have provisions whereby the purchase price can be reduced if revenues fall below a certain level.

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

Oct 03, 2018


Small Law Firm Financial Performance Indicators

Question: 

I am the owner of an estate planning firm in Milwaukee, Wisconsin. I have five associates and four paralegals working in the firm. More of my time is spent on managing the practice and marketing than on servicing clients. I am trying to develop financial goals for the firm but I am clueless as to what financial indicators or ratios I should be looking at and what constitutes good or bad performance. Anything that you are willing to share would be appreciated.

Response: 

Here are what I believe to be key financial indicators/ratios and performance for a firm of your size and type:

I like to see profit margin – owner compensation – salary if paid as w-2 wages plus profit in the range of 35% – 45%.

Performance can vary by type of practice.

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

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