Law Practice Management Asked and Answered Blog

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May 29, 2024


Law Firm Structure and Governance

Question: 

We are a group of six partners that are in the process of leaving a well established firm in Los Angeles, California and will be starting our own firm. In our early planning we have been discussing how we will structure and manage the firm. You advise and suggestions would be most welcomed.

Response: 

Most smaller to medium sized law firms choose one of three fundamental varieties of management structure. These systems may be characterized as management by:

  1. Democracy
  2. A managing partner
  3. An executive or management committee.

Full PartnershipFull Partnership or All Partners –  Under a full partnership each member of the firm has an equal voice in management and is “just as needed” as others to act. Any decision must be concurred upon by all partners, and various administrative tasks may be assigned or rotated among partners. Notwithstanding the perceived benefits accruing to partners as the result of participating in firm management and “controlling their own destinies,” democratic firms traditionally progress more slowly and at a less profitable rate than firms governed under one of the other structural concepts.

Managing Partner – This approach is probably the most efficient form of managing a law firm. A strong managing partner is oftentimes referred to as a “benevolent dictator.” Authority and accountability for all firm matters may be controlled by one partner or a tightly knit group of dominant partners. Typically, a managing partner is the person who opens the office in the morning and closes it in the evening. He or she may be responsible for originating and retaining the firm’s major clients. The managing partner frequently receives all work assignments from clients and parcels work out to other partners and associates. The managing partner typically determines the partners’ and associates’ compensation and perquisites.

Executive or Management Committee – The executive or management committee structural concept is a representative form of governance typified by a committee of partners having defined authority, accountability and responsibility. In most smaller firms this committee, frequently consisting of three partners, may be responsible for recommending and implementing policy for the firm, planning for the future, appraising results and recommending corrective action, as required.
A three partner executive or management committee is frequently recommended to avoid deadlocks or inaction and to spread the burden of administration among appropriate partners. One of the partners should be designated to chair the committee. Each of the other members may be assigned authority, responsibility and accountability for coordinating and/or performing specific functions. For example, one partner may serve as the financial partner. This would involve responsibility for insuring the preparation and analysis of income and expense budgets and financial reporting. This partner would oversee attorney production, fees, collections, etc. A second partner may be responsible for the personnel functions including associate career development, i.e., employment, training, evaluation, etc., and implementation of policy for the administrative staff. A third partner may serve as the general administrative partner, and oversee the implementation of administrative policy, systems, automation, etc. These partners may be assisted by an office manager, bookkeeper, etc.

To preserve continuity in the management function, it is recommended that tenure of partners on the executive or management committee be staggered over a two or three year period. The executive committee should communicate with the partners regularly or as issues arise. The executive committee should meet weekly, or if that isn’t convenient, as frequently as required. To keep all of the partners apprised of issues before the executive committee meeting is held, it is recommended that the meeting agenda be distributed to all partners within 48 hours prior to the scheduled meeting. Partners should be encouraged to discuss, with members of the executive committee, any items listed on the agenda or recommend subjects for discussion. Following this meeting, minutes should be prepared and distributed to all of the partners for information purposes.

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

 

Mar 06, 2024


Law Practice Succession Planning for a Sole Owner – A Question of Value

Question: 

I am a sole owner of a three attorney firm in Chicago suburbs. I am sixty-five and have two associates in the firm. We do estate planning, elder law, and estate administration exclusively. While I want to continue working for the next five years I want to begin succession planning and gain some understanding of how to value the firm and what it might be worth, if anything. Your thoughts on this topic would be most appreciated.

Response: 

Prospective buyers whether they be attorneys in your firm or another firm must be willing to pay the price you are asking and they will, when determining what they are willing to pay for your practice, estimate the extent to which they are likely to make more money and improve their position economically by purchasing your ownership interest or practice. If they can do as well in salaried practice or within a short time by starting a new practice, they will be unwilling to pay more than a token amount for the goodwill of the your practice. Likewise, depending upon the individual personal and professional qualifications of a prospective buyer, the same practice may have a greater or lesser value.

Internal Strategy – Selling Your Interest to Other Attorneys in Your Firm 

This is the option that we like to see a firm start with. Determining and receiving a fair price depends largely upon obtaining the right buyer. They must have the ability to keep your practice intact and have the financial resources and inclination to take on the risk of owning a law practice. The right buyer must possess not only adequate professional qualifications, but also favorable personal characteristics which are just as important in determining whether a young lawyer will be able to take over an established practitioner’s practice. Most practices are not sold outright for cash. Usually, payments will be spread over a period of two or three, or more, years. If the buyer is unable to handle the practice successfully, he or she may be unable to continue your practice.

The plans for valuing a withdrawing, deceased, or otherwise terminating partner’s interest in an organized law firm are many. Law firms will generally turn to one or a combination of the formulas listed below:

  1. A dollar figure set for each percent of the share of interest or for each share of stock in a professional corporation (This can be reset each year or on agreement or formula).
  2. A valuation placed on the goodwill or contribution of those who originated the firm.
  1. A valuation placed on the contribution of a partner other than originators of the firm.
  1. Capital attributed to the partner whether contributed in the form of cash, library or other assets.
  1. A calculation to include unbilled work inventory and accounts receivable.
  1. A figure or formula related to annual earnings.
  1. Provision for a gradual reduction in earnings over a period of years.
  1. Provision for some participation for the rest of the life of the partner.
  1. Participation in earnings or other value based proportionately on the number of years of service with the firm.
  2. Funded pension arrangements under the partnership or professional corporation form of practice.

External Strategy – Merging Your Practice with Another Firm

While you have a couple of associates working in the firm don’t assume that they will have an interest in ownership. If not you may have to consider merging with another firm. This is a common approach taken in such situations. More often, the lawyer or law firm will first assess the compatibility and economic feasibility of the merger. After determining that it is appropriate to proceed to join forces, favorable billing and other economic arrangements can be concluded with further considerations including a plan for ongoing income distribution arrangements among the partner and salary arrangements for employed lawyers and others who become part of the merged organization.

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

Feb 14, 2024


Law Firm Succession – Transition of Senior Partners Leadership and Management Roles

Question: 

I am one of three founding partners in a 17 lawyer insurance defense firm in Houston. We have a total of 18 lawyers in the firm – 3 founding equity partners, 4 other equity partners, 5 non-equity partners, and 6 associates. The three of us founding partners are in our 60s and approaching requirement and are concerned about succession planning and transition. We feel that we are in good shape concerning transition of clients but not so concerning management roles and responsibilities. The firm is managed by the three of us and we have kept tight reigns on the administrative/management side of the house. We would appreciate your thoughts.

Response: 

A successful transition strategy involves three components.

  1. Legal Skills (lawyering skills)
  2. Client and Referral Source Relationships
  3. Firm Management and Leadership Roles

While it sounds like you are in good shape concerning legal skills of your other partners and client and referral source relationships, work needs to be done in the areas of firm management and leadership.

Law schools do not train or develop managing partners or lawyer managers, nor does doing excellent and complicated work for demanding clients. Highly competent attorneys do not necessarily make good managing partners or lawyer managers. Some of the best lawyers are the worst managers. The better lawyer managers have a second sense for people and management, in addition to being good lawyers and possibly outstanding rainmakers. Many firms develop successors to management by delegating to selected mid-level and junior partners short term management assignments and by rotating these partners through various management areas to develop their general management skills rather than developing particular lawyers as specialists in specific management areas. These firms begin to train mid-level and junior partners by assigning short term, low risk management activities before entrusting them with key management jobs.

Management Skills

The following are recommended areas in which the management skills of mid-level and junior partners can and should be developed:

  1. Client relations, including origination, development and retention;
  2. Acceptance of new clients and matters and the management of performance of legal work in substantive practice areas and sub-specialties;
  3. Associate recruitment, training and development of a personal and professional nature, promotion, evaluation and compensation and termination;
  4. Administrative staff organization, relationships and utilization;
  5. Budgeting for revenue, expenses, capital expenditures; billings and collections; financial and variance reporting and utilization of resultant financial data and management information;
  6. Technology including computers, software, other equipment and technical support from non-lawyer specialists;
  7. Leases, space utilization, negotiations and construction.

Techniques for Developing Skills

On-the-job-training is the most effective technique for developing and refining the management skills of mid-level and junior partners. Three of the most frequently used approaches for teaching management skills include being assigned to a committee, being elected or appointed to a management or leadership position and serving as a member of a special team.

  1. Committee Membership: Mid-level and junior partners may be appointed or elected to serve on the management or other committees. Depending upon the form of firm governance, partners may be appointed or elected to represent various age groups and/or regional offices in multi-office firms. They may be chosen to serve on other committees such as marketing, associates, recruiting, lateral hires, administrative staff, financial, ethics or the management committee, etc.
  2. Appointed positions: Partners may be appointed to manage functional areas of administrative or substantive firm activity. For example, a partner may be appointed to chair a practice area or one of its sub-specialties. Another one may chair the marketing committee. A third may serve as the firm’s ethics partners, etc.
  3. Special Team: A partner may lead a special team to address a specific issue or function. For example, a partner may be requested to recommend new or emerging practice areas. Another may explore the feasibility of establishing a new regional office. A third partner who has an interest or background in technology may direct the firm’s automation effort, etc.

The mid-level or junior partner selected for training should receive administrative assignments and his or her performance should be evaluated accordingly. Each lawyer manager should be requested to develop a plan for the year, including goals and proposed action plans for accomplishing their objectives. They should be required to review these plans with the head of the committee or the partner to whom they are accountable. Partners who are appointed or elected to specific positions should be accountable to a partner or committee responsible for their actions and be evaluated on their performance. Many law firms consider the success or failure of partners in planning and implementing administrative assignments when recommending or setting their compensation levels. This is done to encourage the firm’s “best and brightest” partners to accept administrative assignments and not feel uncomfortable because they may record fewer billable hours. Also, it would be wise for the managing partner or executive committee to identify and provide other non-monetary forms of recognition to successful lawyer managers.

Planning for the transition of law firm leadership and management calls for the ability of the current managing partner or members of the management committee to spot leadership and management potential among the partner complement. Once this potential has been identified the current management must nurture and develop this potential so as to provide the future leaders of the firm.

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

Feb 07, 2024


Law Firm Practice Group Management – Practice Group Leader Roles and Responsibilities

Question:

Our firm is a 17 attorney insurance defense firm in Cincinnati, Ohio. We are in first generation and we have 9 equity partners, 3 non-equity partners, and 5 associates. We are managed by a three member  executive committee and a firm administrator. We have been discussing the need to create a few practice groups and appointing practice group leaders for these groups. We are wondering what the roles of these leaders should be and what should be expected of them. Your advise is appreciated.

Response:

The overall purpose and role of practice groups as well as their leaders should be to create structure and accountability within their respective practice groups  to maximize the economic potential of the firm while institutionalizing the principles of leadership and teamwork. The practice group leaders should have discretion as to how to implement these responsibilities within their groups. Recognizing that practice leaders have many priorities, it is expected that they may delegate certain functions to one or more partners within their group, i.e., training associates, reviewing and following-up on marketing initiatives established by the group and individual members, etc. It is also anticipated that the practice leaders may call upon the members of the executive committee to assist in the implementation of these initiatives. However, practice leaders must retain responsibility for working with timekeepers within their practice group – partners, associates and paralegals – on their individual productivity, billing, collection and marketing efforts.

Here is a list of typical practice group leader responsibilities:

1. Productivity

On a regular basis, monthly at the outset and at least as the end of each quarter after target levels have been achieved, practice leaders should review the billable hours of each timekeeper in their practice groups. Are partners pushing work down and is there sufficient billable work to keep all timekeepers fully occupied to meet target performance levels, and distribution of work among practice group associates.

2. Economic Performance

Equally important to the success of a law firm is the need to improve the effectiveness of its attorneys’ billing and collection practices. Practice group leaders should review monthly accounts receivable reports for the practice partners and to work with each partner to take prompt and appropriate actions to cure delinquencies.

3. New Client/ New Matter Intake Procedure

Except for the conflicts checks, partners in a great many law firms make individual decisions committing their firm to a particular client representation.
Since practice leaders are expected to be responsible for setting the course, and profitability, of their respective practices, i.e., implementing the practice area strategic plan, it follows that they should play a significant role in the decision on what work the practice should pursue through client development initiatives and what work it should accept.

4. Associate Mentoring, Compensation Adjustments and Growth

Practice group leaders should take the lead to implement the firm’s mentoring program for each practice group associate and periodically evaluate the each associate’s growth, ensure preparation of annual written reviews of all associates by partners supervising their assignments and assume responsibility for prompt implementation of performance improvement directives or outplacement.

5. Partner Compensation Recommendations

Practice leaders should assume an important role in the compensation evaluation of partners in their practice group. Practice leaders should prepare annual qualitative evaluations of each partner in the practice, and, where applicable, coordinate evaluations for partners associated with more than one practice group. In addition, they should review annual performance statistics for each partner and make recommendations to the Compensation Committee.

6. Strategic Planning and Practice Development

Partners in a great many law firms focus their attention on the development of their individual practices and to commit their firm’s resources to support these efforts. While I endorse these individual efforts, many of the more financially and professionally successful law firms have determined that it makes sense to create some structure to ensure that the individual efforts fit within the overall strategic plan for their practice area and their firm.

7. Lateral Candidate Opportunities

Whether as a result of strategic planning or unanticipated circumstances, it is anticipated that all of the firm’s practice areas will be opportunistic to the possibility of considering lateral acquisitions with profitable books of desirable business to enhance the firm’s practices. Because this process may be time consuming for the firm’s lawyer management, it will be important for the practice leaders to identify resource needs, conduct initial screening of lateral candidates, and when a viable candidate is found that satisfies the firm’s screening criteria and the practice group’s strategic plan, make recommendations to the Executive Committee.

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

Jan 31, 2024


Law Firm Equity Partnership – Buy-Ins and Buyouts

Question:

I am the sole owner of a personal injury practice in Orlando, Florida. I am in my mid-sixties and am looking to transition out of the firm and retire in the next five to seven years. I have three associates in the firm. I would like to sell my equity to one of the associates that has expressed an interest and has been with me for many years. I would like to receive some value for founding the firm and my contributions over the past thirty years. I would like to see him a twenty percent interest initially and more over the next few years. I am trying to determine a firm value for calculating his buy-in. I would appreciate any thoughts that you may have regarding how buy-ins for partners are determined.

Response: 

Approaches to buy-ins and buyouts are all over the place in law firms. Here are a few of the common approaches:

  1. Naked in and naked out – given shares or percentage interest.
    No buy-in at all. A new equity partner is given a percentage interest or shares with no buy-in whatsoever. When the partner leaves the firm
    for whatever reason he or she is paid their share of earnings to date and that is it. No buyout for their interest.
  2. Naked in and naked out with cash-based capital contribution.
    A new equity partner is given a percentage interest or shares with a capital contribution in alignment with their percentage interest.
    When the partner leaves the firm for whatever reason he or she is paid their share of earnings to date and their capital account.
  3. Naked in and naked out with cash-based plus WIP and AR buy-in.A new equity partner is given a percentage interest or shares with a capital contribution and a buy-in the unbilled work in process and accounts
    receivable in alignment with their percentage interest. When the partner leaves the firm for whatever reason he or she is paid their share of earnings
    to date and their cash-based capital account plus their interest in accounts receivable and unbilled work in process.
  4. Purchased shares based on a valuation at the time the shares are purchased and sold.
    A new equity partner is sold a percentage interest or shares based on a valuation at the time of purchase. When a partner or shareholder leaves the firm for whatever reason he or she is paid their share of earnings to date and their shares are purchased based upon a valuation of the firm at that time. These valuations often include a goodwill value. Sometimes the purchase price is discounted for sweat equity – time that an equity partner candidate has been with the firm, etc.
  5. Founder Benefit.
    New equity partners are given a percentage interest or shares with no buy-in or a cash-based capital contribution in alignment with their percentage interest and paid their share of earnings to date and their cash-based capital account, if any, when they leave the firm. However, original founders, in addition to being paid their share of earnings to date and their capital account, are also paid a founder benefit often in the form of a multiple of their average individual earnings (compensation) for the past three years.
  6. Buyout based on firm cash-based valuation, plus accounts receivable and work in progress plus percentage of future collections from new business after the termination date for three to five years. This approach used in practice sale situations, particularly contingency fee firms, when a goodwill value is difficult to ascertain. The percentage of future revenue on future business after the termination date serves as a proxy for the goodwill value. This approach is seldom used in multi-partner/shareholder firms. In fact, many multi-partner/shareholder firms specifically exclude goodwill from any valuation.
  7. Buyout based on mandatory retirement and winddown.
    An approach used by some second-generation firms is a mandatory retirement program that can begin as early as age 60 and no later than 65. The program requires a five-year winddown program in which a retiring equity partner reduces his or her work schedule twenty percent per year and compensation draw, distribution, or salary. During this period the partner is paid their cash-based capital account and their ownership percentage times the collectable accounts receivable and billable and collectable unbilled work in process as of the date the winddown program commences. During the winddown the retiring partner is expected to transition clients and management responsibilities.

In the final analysis the value of the practice is what an outside buyer or an attorney working for the firm will pay for (or invest) the practice. A balance often has to be struck between valuation, affordability, and willingness to pay. The valuation process is simply a tool to use to help you begin discussions and get to this point.

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

Oct 25, 2023


Equity Partners – Valuation of Shares and Affordability

Question:

I am one of three founding partners in a 12 lawyer general litigation firm in San Francisco. All three of us are in are sixties and are looking to begin admitting others as equity partners. We have three non-equity partners and five associates in the firm. The three of believe that we should receive some value for founding the firm and our contributions over the past twenty years. We would like to sell each of them a ten percent interest and we are trying to determine a firm value for calculating their buy-ins.

Response: 

In the final analysis the value of the practice is what an outside buyer or an attorney working for the firm will pay for (or invest) the practice. A balance often has to be struck between valuation,  affordability, and willingness to pay. The valuation process is simply a tool to use to help you begin discussions and get to this point.

I believe that firm value has to be balanced with affordability and a prospective equity member’s willingness and ability to pay for the shares. It all comes down to compensation. Generally, I find that a prospective equity member or partner must be able to see a significant compensation increase with a breakeven/payback period of around three years – no more than five. I also believe that when shares are seller financed the period should be no longer than five years. Many firms do not sell shares based on formal valuation – other methods are used.

Questions that equity member candidates usually raise:

  1. Is the breakeven/payback from the investment in say three years as a result of the compensation gap?
  2. How much more will he or she earn as equity shareholder?
  3. Can he or she earn enough more as an equity member to justify the investment?
  4. Can he or she earn more as a partner somewhere else with as an large investment, a smaller investment, or even with no buy-in at all?
  5. Can he or she earn more somewhere else as an associate or non-equity partner?

In many law firms’ compensation is based upon performance and contribution and ownership shares have little or no bearing on member or partner compensation. Their primary goal is to acquire and retain talent.

Use a valuation methodology as a starting point – such as a multiple of firm past five year’s average revenue and adjust for the affordability factor. Keep in mind that many of your competitors are offering equity partnership with no buy-ins at all.

Click here for our blog on succession

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

Feb 02, 2023


Law Firm Compensation – Compensating New Equity Partners

Question:

Our firm is a seventeen lawyer insurance defense firm in Austin, Texas. The firm was founded by the two existing partners twenty-five years ago. In addition to the three founding equity partners we have five non-equity partners and ten associates. Non-equity partners and associates are paid a salary and a discretionary bonus. The two equity partners are paid their profit share based upon their partnership percentage which is fifty percent each in the form of distributions dependent upon cash flow. The two of us are considering offering partnership to two non-equity partners with a buy-in based on selling both a five percent interest based on a designed price per share. We would to maintain our same method of equity partner compensation based on percentage interest. We would appreciate any ideas that you have.

Response: 

This approach would be fine if the compensation numbers work. I  often find that at the lower end of partnership equity shares the compensation model that you have been using no longer works. The new partner simply does not have enough of an equity share interest to compensate him or her fairly and or be competitive with other law firms. He or she may ending up making less than they were making as non-equity partners. It may be time to at least shift to a compensation model for all of you where each of you are paid a base salary based upon your years of experience, billings, and overall performance and contribution to the firm, a bonus pool for exceptional performance or contribution to the firm, and the remainder distributed based on partnership ownership shares. Take a look at the non-equity partner candidates, their present compensation, what other law firms are paying that you are competing with for talent, and go from there. Also consider the buy-in that you are asking for and whether it is affordable and reasonable and how many years it will take your candidates to breakeven on the investment. Today we are finding that more and more non-equity partners and associates are saying “no thanks” to equity offers.

Of course there are many other approaches that you could take concerning compensation but this recommendation seems the easiest and closest to your present approach.

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

Aug 24, 2022


Law Firm Succession – Incentives for Partners to Transition Clients

Question:

I am the managing partner of a twelve lawyer firm in Dayton, Ohio. We are a first generation business litigation boutique. We represent mid-size companies and handle multiple matters for these clients. We  have seven equity partners and five associates in the firm. Three equity partners were the original founders and the other four were made partners later on. All seven partners originate client business and have significant books of business. Three founding partners are in their early 60s. We have had little success in succession planning and it seems that the three partners are reluctant to let loose of their clients and even begin any sort of client transition. Our compensation system does not encourage transitioning clients. I would appreciate any thoughts that you may have.

Response: 

I believe that succession planning and client transition, especially for institutional clients, needs to start early – in many cases five years prior to retirement. Retiring partners need to be motivated to:

Here are a few ideas:

1. Retirement Date Notification

Each each partner has the obligation to notify the managing partner, or the executive committee, of his or her
intended retirement date, at least three to five years before their actual retirement from the firm. This notification will begin the transition period which will end upon the partner’s retirement, during which time certain steps will be taken to transition the retiring partner’s clients.

2.  Identification of Transition Clients 

Suggest that the retiring partner and the managing partner, or executive committee, schedule a meeting to review those clients the retiring partner originated or serves as the key client relationship partner. They should also review the types of work and fees generated by these clients.

3.  Client Transition Duties 

The retiring partner and the managing partner, or executive committee, should agree upon those tasks and transitioning activities that will be performed by the retiring partner during his or her transition period. These may include regular visits to the client by the retiring partner and the partner to whom the client will be transitioned.

4. Determining Success of Transitioning Efforts 

Annually, during the transition period and in connection with the firm’s annual compensation review process, an evaluation will be made by the managing partner, or executive/compensation committee, with the transitioning partners, about the retiring partner’s efforts in performing the transitioning activities performed by the latter during the previous year. The managing partner or executive/compensation committee will determine whether the retiring partner is performing the transitioning duties in a satisfactory manner.

5.  Determining Retiring Partner’s Compensation 

Generally, the compensation of those partners who are transitioning towards retirement will be determined in the same manner as compensation for all other partners. However, with respect to the retiring partner, the managing partner and members of the management/compensation committee will pay particular attention to the former’s performance of the transitioning duties assigned. If it is determined that the retiring partner is satisfactorily performing the transitioning activities, the retiring partner will continue to receive full credit for those fee collections from clients being transitioned, in the various categories considered by the managing partner and members of the management/compensation committee in setting compensation. However if it is determined that the retiring partner is not satisfactorily performing the transitioning activities, or if the fees generated from these clients increase or decline, those factors will also be considered by the managing partner and the management/compensation committee in setting the retiring partner’s compensation, and the compensation may be increased or reduced appropriately.

6.  Fee Credit Allocations 

In order to provide incentive to those partners to whom clients are being transitioned, and to insure that those attorneys are fairly compensated for their efforts in transitioning and maintaining these client relationships, the partners designated to be the transitioning partners for the client to be transitioned will also receive credit under the categories as may be applicable, for the fees generated by these clients during the transition period, provided that the managing partner and the members of the management/compensation committee determines that the transitioning partners are making satisfactory efforts to  accomplish the transitioning of clients.

Assignment of credit to the transitioning partner will not reduce the amount of credit allocated to the retiring partner, unless the retiring partner is not satisfactorily performing the transition activities, as described above.

7.  Billable Hours 

To allow reductions in billable hours while also providing time to perform the transitioning activities, without penalizing the retiring partner from a compensation standpoint, a retiring partner will be allowed to reduce his or her billable hours during the transition period without an adverse effect on his or her compensation, so long as the retiring partner is satisfactorily performing the assigned transition activities. Any reduction to the retiring shareholder’s billable hours in excess of the percentage reduction allowed may result in reductions of the retiring partner’s compensation.

8.  Other Incentives 

Some firms have used post retirement client retention incentives in which a percentage of collected fee revenue for clients that stay with the firm are paid for a few years to retired partners as an incentive to effectively transition clients to other lawyers in the firm.

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

 

May 25, 2022


Law Firm Succession – Equity Partnership – Process for Admitting Equity Partners

Question:

I and another partner are the owners of a seven lawyer family law practice in Chicago suburbs. We started the firm twenty years ago after leaving behind a partnership in another firm. Of the other five attorneys there are three non-equity partners and the rest are associates. I am sixty three years old and my other partner is sixty. Both of us are beginning to think about retirement and how we are going to transition out of the practice. Two of the non-equity partners are well seasoned attorneys, have major case responsibility, and bring in client business. We have discussed equity partnership vaguely with two non-equity partners but they have been non-committal. I would appreciate your thoughts and advice on what our next steps should be.

Response:

I believe that you have been two vague in your discussions. Your non-equity partners need to know what the deal is, what financial investment will be required, and what their expected return will be based upon the historical financial performance of the firm. It is hard for non-equity partners or associates to commit to equity and taking on the risk of ownership when they don’t know what the deal is. This is a scary proposition for them and they need detailed information so they can evaluate and make an informed decision. A vague discussion doesn’t cut it. I suggest that you put together an equity partnership proposal that includes:

  1. Profit and loss statements for past the five years.
  2. Balances sheets for the past five years.
  3. A current accounts receivable and unbilled work in process report.
  4. Tax returns for the past five years.
  5. Malpractice insurance application.
  6. Building and other leases.
  7. Proposed Partnership Agreement
  8. Proposed Equity Partner Compensation Plan
  9. Planned date of admission
  10. Governance and management plan
  11. Ownership percentage being offered
  12. Capital contribution or buy-in requirement
Meet and discuss the proposal with your candidates, allow sufficient time for candidates to discuss with their families and advisors, and set a timeline for their decisions. I think you will see a different reaction. If they still are unable to commit your may have to begin thinking about an external strategy and looking around for merger candidates.

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

Feb 09, 2022


Law Firm Succession – Management Training for Future Firm Leaders

Question: 

Our firm is a sixteen lawyer firm in Cleveland, Ohio. There are six equity partners, three non-equity partners, and seven associates in the firm. Our firm is a litigation boutique that represents small to mid-size companies. Three of the six equity partners are initial founders and three became equity partners later. All six are in their sixties and plan on retiring at different times over the next three to six years. The firm is managed by the six equity partners. The non-equity partners have no involvement in firm management. The six of us have concerns as we approach retirement that there will be a leadership vacuum and no one will have the management skills to manage the firm. What are your thoughts regarding this issue?

Response: 

Failure to train younger lawyers as managers in both the business of law and the practice of law aspects of a firm can result in a disaster either from a “internal revolution”, because the firm is unwilling to address the question and provide the opportunity, or from a decline in earnings and the exodus of key partners because the firm waits too long and ends up using untrained lawyers to undertake key management positions.

Law schools do not train or develop managing partners or lawyer managers, nor does doing excellent and complicated work for demanding clients. Highly competent attorneys do not necessarily make good managing partners or lawyer managers. Some of the best lawyers are the worst managers.

The better lawyer managers have a second sense for people and management, in addition to being good lawyers and possibly outstanding rainmakers.

I assume that you will be offering equity partnership to some of the non-equity partners in the near future to ensure that there are equity partners in place committed to carrying on the firm in the future after the six of you retire.

Many firms develop successors to management by delegating to selected junior partners short term management assignments and by rotating these partners through various management areas to develop their general management skills rather than developing particular lawyers as specialists in specific management areas. These firms begin to train junior partners by assigning short term, low risk management activities before entrusting them with key management jobs.

Management Skills

The following are suggested areas in which the management skills of non-equity partners can and should be developed:

  1. Financial Management
  2. Facilities Management
  3. Technology
  4. Business Development and Marketing
  5. Human Resources

Also keep in mind that transition of clients and referral source relationships will need to be considered and planned as well and this can take some time.

Based upon your retirement timelines I would start this process as soon as your can.

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

 

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