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June 2019

Jun 26, 2019


Law Firm Succession Strategy When Candidate Associate Attorney Says No to Your Proposal

Question: 

I am the owner of a law firm in Mesa, Arizona. I started the firm twenty-five years ago. Our focus is exclusively on estate planning and we serve clients throughout the Phoenix metropolitan area. There are three other associate attorneys working in the firm as well as staff. One of the associates has been with the firm for ten years and the other two are right out of law school – one was hired this year and the other one year ago. I am sixty-three years old and I would like to retire and exit the practice within the next three years – the sooner the better as I have other interests that I would like to pursue.

For several years it has been my goal to transition my practice to my senior associate and he and I have discussed this vaguely over the years – just the idea in general – no specifics. Recently, I made a proposal to him where he would gradually buy my shares over the next three years and have all my shares paid for by the time of my retirement which would be three years from now. To my surprise he refused. Where do I go from here?

Response: 

Getting a “no” is not unusual. We are experiencing this quite frequently in our succession planning projects. Often this results in the firm exploring external succession strategies and having to merge with another firm or selling the practice. First of there is not the hunger for “equity” that there was thirty years ago. This is due in part to the fact that in many firms – large and small – there is now a non-equity partner status with the recognition of partner status, additional compensation and perks, and none of the risks of equity partnership. In addition, work life balance is important to many attorneys and many are unwilling to give up work life balance in exchange for the stress of equity partnership. Finally, many candidate associate attorneys either don’t have the capital/financial resources often required to obtain equity or don’t see the payback or return on their investment should they buy-in.

Here are a few thoughts concerning your situation:

  1. Reevaluate your proposal. Is the price you are asking for your shares reasonable and affordable for the candidate based upon the actual profits (your earnings) generated by the firm? If the price is not reasonable or affordable for the candidate consider providing an alternative proposal.
  2. Even if the price is reasonable and affordable, three years may not be a long enough period. You may have to settle with getting some of the value say three to five years after your retirement. Consider this as an alternative.
  3. Your associate may be reluctant not because of the terms but because he does not really want to own a law firm – he just wants a job as a lawyer. If this is the case it does not make any difference what you propose and you need to examine other options such as bringing in a lateral that is willing to take over your practice or a merger or sale of the practice.

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

Jun 19, 2019


Burning Issues for a New Law Firm Owner Starting Firm After Leaving BigLaw

Question: 

I have recently started a law firm in the suburbs of New Orleans after leaving a large law firm in the city. I was a non-equity partner in the firm and had worked for the firm for fifteen years. I worked in the estate planning group and handled complex estate planning matters for wealthy individual clients. Much of the business was referred to the firm by large bank trust departments. I have been promised referrals from some of these banks. I had other referral sources as well that will be sending business. The focus of my practice will be exclusively on complex estate planning for wealthy clients. A paralegal and an associate from the firm will be coming with me. During my career my focus has been on practicing law and not running a business. What are some of the challenges and burning issues that I will face?

Response: 

You are starting with the advantage of probably having grown up with excellent training and mentoring that larger firms are capable of providing. As a result you probably have an excellent skill set and it sounds like you have learned how to get business and have developed referral relationships. However, you also have been accustomed to firm management and other resources that will not be available to you in a smaller firm. You will have to get your hands dirty and handle much more of the firm management and administrative functions than you had to do in the larger firm.

Some of the challenges and burning issues that will keep you awake at night will probably include:

  1. Hiring, training, motivating, compensating, and retaining attorneys and staff – both those that initially join you and future hires. Small firms often cannot afford to provide the level of compensation and benefits that larger law firms and other businesses provide. You must creative and use other carrots such as flexibility, work-life balance, etc. to be competitive.
  2. Additional sources of business. Even though you have promises from past referral sources to send you business the business may not materialize from these sources for various reasons. You must be prepared to proactively marketing your practice. A content-rich website, client seminars, and additional referral source development should be at the top of your list.
  3. Cash flow will be a challenge and issue, at least initially. Insure that your have sufficient working capital to start your firm and access to adequate credit lines if you need them. Obtain retainers from clients upfront, stay ahead on retainer replenishment, and bill promptly. Watch your spending but focus on revenue generation.
  4. Balancing your time between servicing clients and managing the practice. In your prior firm your primary mission was to practice law and serve clients. Now, as the sole owner of a law firm, you will also have management and administrative responsibilities. Your time between these two areas will require careful balance – neither can be neglected. While you can eventually hire some help you can never relinquish total responsibility for running the business.
  5. Development of systems. Processes and procedures will need to be documented in office policy and procedures manuals. Computer hardware and software will need to be acquired and implemented. There will need to be oversight over these systems. You should at least have a “top level” understanding of these systems.
  6. Client demands. Client demands and workloads can often take a toll on new owners. There will a time will your will be so busy you would like to hire additional help but not so busy that you are ready to or can justify doing so.

These are just a few of the challenges and burning issues that others from BigLaw starting their own practice have discussed with us.

Good luck with the launch of your practice.

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

Jun 05, 2019


Law Firm Partnership Tiers – Different Qualifications For Equity and Non-Equity Partners

Question: 

I am the managing partner of a six lawyer firm in Nashville, Tennessee. There are two partners in the firm, myself and another partner, and we have four associate attorneys. Two of our associates have been with firm for over ten years. We are trying to put in place a career progression policy for them and we are thinking about having a non-equity and equity tier which would serve as a prerequisite to equity partnership. What are the differences between the expectations and requirements for non-equity and equity partner?

Response: 

The main difference between an equity partner and non-equity or income partner is that the equity partners assumes a higher degree of capability in a lot of areas, not just good lawyering. Equity partners are expected to develop business, to manage large client relationships, and to have a level of commitment that allows them to do all of that and maintain a very full practice load at the same time. Non-equity or income partners are generally lawyers that are excellent lawyers in his or her field but doesn’t satisfy the other requirements required of equity partners. In addition, equity partners usually invest capital in the firm and assume the risks of the office lease, credit line, and other liabilities. Non-equity partners usually have guaranteed salaries and equity partners do not.

Here are a few of the typical hurdles that are required to move up to equity partner:

The primary difference is non-equity partners focus is on lawyering and the focus of equity partners is on lawyering and being a businessperson as well – practicing law and managing a business.

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

 

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