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Category: Partnership

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Jul 14, 2021


Law Firm Succession Planning – Will Your Non-Equity Partners or Associates Simply Wait Your Out?

Question: 

I am one of three founding partners in a fourteen lawyer firm in Cleveland, Ohio. We are an insurance defense firm with three founding partners, five  non-equity partners, and six associates. We have three primary insurance companies that refer a majority of cases to the firm. All three of us founding partners are in our early to mid sixties and contemplating our retirement and departure from the firm in the next five to eight years. Our lease runs out in eight years and none of us want to sign another lease. Three of our non-equity partners are in their mid to late fifties and two are in their forties. All of our associates have less than five years experience. When and how should we begin planning for our retirements and exits from the firm?

Response: 

I suggest that you start now, especially if you are planning on an internal succession strategy. I believe that an internal succession should be your first step if you have the right people in place. When a firm has institutional clients such as you do with many different relationships within each client organization it can take time to transition relationships to the next generation of attorneys in the firm to ensure that clients stay with the firm when you retire. Transition to the next generation of attorneys usually involves legal skill development, management skill development, and client transition. We often recommend five years.

If you are looking for a buy-in for new equity partners you need sufficient time so new equity partners can pay for their initial ownership interests over time and acquire additional interests as they can afford to acquire more. Waiting too long can also create a situation where non-equity partners in the firm feel they can simply wait your out and inherit the clients without paying anything, or very little, for their ownership interests or buy-in/buyouts. Consider making a few folks minority equity partners as soon as you can.

This assume that any of your non-equity partners even want to be equity partners in the firm which is often the case these days. Three of your non-equity partners may also be close to retirement themselves and have no interest in stepping up to equity. If this is the case you will have to focus on the other two non-equity partners. I would begin a dialog with all of your non-equity partners to determine their interest level. At some point you will not really know until you present them will a proposal and appropriate financial information – initial buy-in if there is to be one and founding buy-outs if there is to be such.

If it looks like the interest or commitment level is not there in your non-equity partners you may have to consider an external option such as a merger. The timeline often can be much shorter in such situations.

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

 

Jun 16, 2021


Implementing a Non-Equity or Income Partner Tier in a Small Law Firm

Question:

I am the sole owner of a five lawyer firm in Indianapolis, Indiana. The other lawyers are associates. Our firm focuses entirely on estate planning and probate and trust administration as well as elder law. I am 60 and do not plan on retiring for another ten years. Two of my associates have been with me for 8-10 years and are vital to my practice as well as my eventual succession and exit strategy. I do not want to lose them so I am considering making them non-equity partners and giving them the title of partner. I am not ready to have any equity partners at this time. I have a production bonus system in place for the associates so I don’t plan on changing their compensation or the system under which they are compensated. How can I make their promotion to partner meaningful?

Response: 

Here are some things you might consider:

  1. Really build up their promotion to partner.
    1. Press releases announcing their promotion to partner to the local media.
    2. Mail out announcements announcing their promotion to partner to clients, past clients, other lawyers and law firms, judges, referral sources, and family and friends of the new partners.
    3. List them as partners on the firm’s website, letterhead, and other promotional materials. (Some firms have even listed them in the firm name – I don’t agree with this)
  2. Include them in firm management and at least begin sharing some, even if limited, financial information with them.
  3. Consider providing them with additional perks.
    1. If your present bonus system is based on working attorney collections, provide a delegation component for fee collections/receipts from other attorneys or paralegals on matters that the partner is responsible for and is managing.
    2. Additional life insurance.
    3. Country or other club membership.
    4. Firm paid automobile.
    5. Gas card.
    6. Firm credit card.

The title of partner in itself is more important than you might think but it requires that a big a buildup. If you only do one thing – do the buildup announcement and secondly include them more in firm management.

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

 

May 26, 2021


How/When to Admit a New Law Firm Partner

Question: 

Our firm is a six lawyer family law firm located in the Chicago suburbs. There are two equity partners and four associates in the firm. Approximately five years ago the founder of the firm decided to retire and he sold the practice to myself and another associate in the firm. We just finished making our last payment the end of last year. We have an associate that we do not want to lose and he has inquired about his future with the firm and partnership. He has been with the firm for two years. My partner and I are considering offering him a partnership interest but do not know where to start. Any suggestions that you have would be appreciated.

Response: 

The two of you should start by asking yourselves the following questions:

The majority of firms that I work with regardless of size have a non-equity/income partner tier that an associate advances to prior to being considered for equity partnership. This gives associates the feeling of career progression, the title of partner which helps with client and peer recognition, additional responsibility in the firm, and additional compensation. Your associate may not even be expecting or be ready to become an equity partner – they simply want to know what the next step is in their career advancement and whether equity partnership is even possible in your firm down the road. Last week I interviews ten associates in a firm and six out of ten advised me that they had no interest at all in equity partnership. So, don’t assume that your associate is even interest in equity partnership.

I suggest that you give these issues serious thought before jumping off the cliff and prematurely admitting another partner. Adding another equity partner is a serious step and should be give appropriate due diligence.

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

Feb 10, 2021


Law Firm Partnership – Non Performing Partners

Question: 

Our firm is a litigation defense firm in the Chicago suburbs.  Four of us started the firm twenty years ago and we have since grown to a sixteen attorney firm consisting of eight equity partners and eight associates. The other four partners were initially associates and later admitted after they had been here for five to seven years. The other four partners bring in very little business and their production is dismal compared to the four founders. Our associates working attorney receipts are larger than a couple of our equity partners. Our compensation is a equal salary for all partners with remaining profits allocated to each partner based upon their ownership percentage which are 15% for each of the four founding equity partners and 10% for each of the other equity partners. They was no buy-in for the newer partners. Profits have been flat for several years and partner compensation as well. We would like to hear any thoughts that you may have.

Response: 

It sounds like partners are left to their own and are not accountable to other partners in the firm. Successful firms your size have performance expectations and guidelines for all attorneys in the firm with consequences for non compliance.

Many firms your size use a compensation committee to determine partner compensation and performance peer reviews – – both written and face to face interviews are conducted with each partner in the firm. Partner performance reviews are often avoided like the plague by many firms. They are time consuming and it is hard to give candid feedback to colleagues. However, without partner performance reviews neither the partners nor the firm will reach full potential. When partner performance reviews are used not only to review performance but to set measurable goals this data can be incorporated into the compensation system and provide additional hard data for providing a true measure of partner contribution and value.

You may have to consider changing your partner compensation system or changing nonperforming partners status to non-equity partners or associates.

You must muster up the courage to confront underperforming partners but before you do that you have to determine what the baseline performance expectations are for the firm, communicate them, and put in place consequences for non-compliance.

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

 

 

Dec 16, 2020


Law Firm Equity Partner Buy-ins and Buy-outs – Pros and Cons

Question: 

Our firm is an insurance defense firm based in Denver, Colorado. The firm was founded in 2015 by two founding partners and we have grown to a firm of twelve attorneys – two founding equity partners, three non-equity partners and seven associates. Non-equity partners are included in firm management and the non-equity partners serve as members on the management committee. Non-equity members are compensated in the same manner as are equity partners – salary and bonuses determined by three year moving average ratios of weighted working attorney and originating attorney collections. Partner ownership interest does not factor into equity partner compensation. The firm does not have a partnership agreement. The firm is currently considering admitting qualified non-equity partners as equity partners. We are considering having a requirement that new equity partners purchase their shares via a buy-in tied to a firm valuation that includes a goodwill value.  Our initial discussion with the equity partner candidates that we are considering has not been positive. They feel there should be no buy-in and they don’t see any benefit to being an equity partner. We would like you thoughts and opinions on this matter.

Response: 

I can see where there is little distinction in your firm between equity and non-equity partners. I encourage firms when creating a non-equity tier to resist the temptation of giving away the farm and not retaining some incentives for non-equity partners to want to become equity partners. Typically, I suggest that there be a different compensation structure for equity partners than non-equity partners so that there is a compensation component for bearing the risk of ownership for equity partners. Often I suggest that non-equity partners come under a different compensation structure than associates, be given a few additional perks, and be included in partner meetings to a degree but not having a vote.

Approaches to buy-ins and buy-outs 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 buy-out 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 what ever reason he or she is paid their shares 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 a equity partner candidate that 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 the average earnings for the past three years.

The spectrum of law firm valuation and withdrawal entitlement theory can be characterized by two polar positions. The first considers the firm as a means to generate income (i.e., compensation), with modest, if any, value beyond the cash basis capital account. This is the dominant view currently in the profession and has resulted in the vast majority of firms valuing only the cash basis balance sheet for internal withdrawal rights. The second considers the firm as an investment, much like most other commercial endeavors.

I have many firm clients that are in their firm generation with original founders that have been in practice for twenty years and these firms have substantial institutional goodwill. Some of these firms sell shares to equity partner candidates based upon a firm valuation including a goodwill value. Other such firms take one of the other approaches. Often the problem with this approach is affordability.

Personally, I believe there should be some skin in the game for a non-equity partner to become an equity partner or shareholder. In your situation you are a young firm and acquiring and retaining lawyer talent should be your primary objective. Therefore, rather than selling shares I believe that you might want to  consider approach number two – naked in – naked out with a cash-based capital contribution that is affordable. If cash is a problem for the candidate have them pay what they can with the remainder payable on a capital (promissory) note paid over a one to three year period. Then have the partnership agreement provide for a founder benefit for the two founders as discussed above (say 1.5 multiple) upon retirement.

Do all that you can to fund partner retirements through 401k plans and other vehicles.

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

 

Aug 27, 2020


Law Firm Partnership – How to Admit Associates to Equity Partnership

Question: 

I am the owner of a six-lawyer law firm in San Diego, California. Our firm is a business litigation boutique firm. I founded and formed the firm nineteen years ago. The other attorneys are all associates of which one has been with me for over ten years, one over five years, and the other three less than two years. I am 56 and still plan on working another ten to fifteen years. However, I don’t want to lose my senior associates and I want them to be around in ten to fifteen years to take over the firm, I also believe that they should be partners. The firm is presently a sole proprietorship. I would like to extend an offer to the senior associate now and possibly to the other senior associate in a a couple of years. How do I get started? What are some of the issues that I should be thinking about?

Response: 

If you have never had a partner in this firm or another firm in the past this will be a new experience for you. Law partnerships are like marriages and choosing the right partner is essential. Not only should the lawyer be an exceptional lawyer as far as legal skills, client satisfaction, fee production, and client origination, he or she should have similar values and goals for the firm that you do. Will you mesh well? At least the associate is somewhat of a known quantity since you know the associate and have worked with the associate for several years. However, the experience will be different. Being a partner with someone is different than a boss-employee relationship.

Here are a few ideas you might consider:

  1. Outline you goals and expectations for the relationship.
  2. Meet with your associate and identify his/her goals and expectations for the relationship.
  3. Determine how much control over the practice and decision-making are you willing to give up? Share?
  4. Determine how much and for how long you are willing to make less?
  5. Determine if the associate will be expected to bring in business? When/Timeline?
  6. Think about the firm you want to build – firm-first or lone ranger (team based or individual practices)?
  7. Decide on firm name – will it change? Should it? Impact on image, clients, etc.
  8. Decision as to capital contribution or buy-in? Yes or No? How much? Timeline for payment?
  9. Ownership percentages
  10. Voting
  11. Compensation
  12. Withdrawal arrangements

I suggest you think about your succession and eventual exit from the firm and what, if anything, you are looking to receive (goodwill value) in monetary terms when you leave the practice. Rather than having a large buyout upon your retirement/exit from the firm tie this to the value per share or unit of ownership interest and establish this is the purchase price as ownership shares are acquired.

Since you are a proprietorship you will need to change the structure of the firm to a multi-owner structure such as PC, APLC, or LLP. (LLC’s are not permitted in California for law firms).

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

 

 

Jan 08, 2020


Law Firm Partner Compensation and Performance Reviews

Question: 

Our firm is a fourteen partner firm in the northern suburbs of Chicago with ten partners and four associates. We are a general practice firm with different partners focusing on specific practice areas. Our partner’s compensation is determined by a three member compensation committee.  The compensation committee uses a combination of quantitative data based upon working attorney fee collections and client fee originations and makes a subjective determination regarding other contributions that a partner has made to the firm. The problem that we have is the compensation committee does not have a way to effectively measure the other contributions that are being considered subjectively. We would appreciate your thoughts.

Response: 

Your problem is a common problem. While it is easy to measure working attorney, responsible attorney, and originating attorney fee collections, billable hours, realization rates, and other hard measures of short-term financial performance, (it is hard to capture the subtler aspects of partners’ contributions such as mentoring new lawyers, firm management, idea development) and its virtually impossible to measure the long-term present value of each partner’s work and contribution.

The key is to make the subjective considerations more measurable. Many firms are supplementing the easily measured economic contributions per partner with additional measurements to determine the actual value per partner and incorporating into their compensation systems. Some firms:

Partner performance reviews are often avoided like the plague by many firms. They are time consuming and it is hard to give candid feedback to colleagues. However, without partner performance reviews neither the partners nor the firm will reach full potential. When partner performance reviews are used not only to review performance but to set measurable goals this data can be incorporated into the compensation system and provide additional hard data for providing a true measure of partner contribution and value.

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

Sep 18, 2018


Law Firm Shareholder Admission Criteria

Question:

Our firm is a small firm of two shareholders and two associates based in Bakersfield, California. The firm was formed fifteen years ago by the two existing shareholders. We have never made any additional shareholders but we believe that we owe it to our associates to have some guidelines as to what we are looking for in future shareholders. A partner track program/document if you will. Do you have any suggestions?

Response:

I believe you should have at least a general set of guidelines laid out in writing. For example:

Associates that have been seven years in practice and two years or longer employment with the firm as an attorney and consistently performing as outlined below are eligible for Equity Shareholder level review based upon equity shareholder level openings, competencies attained, performance, and behavior.

  1. Seven Years in Practice and Two Years or Longer Employment with the Firm as an attorney.
  2. Individual Production Requirement
    1. Annual Billable Hour Expectation
      1. The firm has an annual billable expectation of 1800 billable hours.
    2. Origination Fees Collected
      1. The firm has an expectation of $100,000 or more per year for a minimum of three consecutive years.
    3. Generated (Working Attorney) Fees Collected
      1. The firm has an expectation of $300,000 or more per year for a minimum of three consecutive years.
    4. Responsible (Managed Revenue) Fees Collected
      1. The firm has an expectation of $400,000 or more per year for a minimum of three  consecutive years.
  3. Competency Level Attainment at Shareholder Level
    1. Knowledge
      1. The firm expects associate candidates to be performing at shareholder level.
    2. Skills & Abilities
      1. The firm expects associate candidates to be performing at shareholder level.
    3. Work Management
      1. The firm expects associate candidates to be performing at shareholder level.
  4. Character and Commitment 
    1. The firm expects associate candidates to have the commitment and character that the firm expects of shareholders. This includes a “firm-first” and teamwork attitude and behavior. Lone wolfs and mavericks will not be considered for equity shareholder status.
  5. Professionalism 
    1. The firm expect professionalism in the firm of dress, appearance, and behavior in dealing with personal in the firm, clients, prospective clients, referral sources, and colleagues and other professionals outside the firm.
  6. Client Service and Business Development 
    1. The firm expects associate candidates to be performing at shareholder level.
  7. Supervision and Mentoring 
    1. The firm expects associate candidates to be supervising and mentoring junior associates, paralegals, and staff.
  8. Client Satisfaction 
    1. The firm expects associate candidates to have a client satisfaction rating average over the last three years of 4.0 (maximum rating is 5.0) or higher as measured by the firm’s client satisfaction questionnaires that clients complete at the conclusion of a matter.
  9. Other Factors Considered – Associates should: 
    1. Be willing to share in the risk and reward of ownership and invest time and capital in the firm.
    2. Have a firm-first orientation and share the vision and core values of other equity owners in the firm.
    3. Add value to the firm and pay for themselves, cover their costs and share of the firm overhead, and generate enough work to keep other attorneys busy.
    4. Act like owners of small businesses.
    5. Contribute to the management and marketing of the firm.
    6. Mentor younger attorneys.
    7. Follow firm policies systems and procedures.
    8. Contribute capital, sign for the office lease, firm credit line, and share in other financial obligations of the firm.
    9. Be good marriage partners considering the other equity members in the firm.
    10. Exhibited the ability to supervise junior associate attorneys, paralegals, and staff.
    11. Successfully tried cases (litigation attorneys).
    12. Demonstrated the ability to either originate new client business or developed such a relationship with existing clients or referral sources that clients have sent business to the firm as a result of the relationship.

Associates selected for admission should be notified by the Executive Committee/Managing Shareholder and a meeting will be scheduled to discuss whether the Associate has a tentative interest in taking this step. If the Associate is interested in taking this step and after executing a non-disclosure agreement, the Executive Committee/managing shareholder should then prepare a detailed proposal outlining the mechanics and details required for admission. The proposal will include firm financial information, the buy-in or capital contribution requirement, and a copy of the firm’s shareholder agreement and equity shareholder compensation plan.

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

 

Jul 19, 2018


Law Firm Structure and Elevating Associates to Partnership

Question: 

I started my firm as a solo nine years ago in New Orleans. My practice focuses on maritime defense litigation. Over the years I have added associates and currently I have six associates working for me. I am overwhelmed with work – from the legal work that I am doing in addition to the business development and firm administration. My thought is that I should consider restructuring the firm by making some of my associates partners so I can offload and share some of the administrative responsibilities. I would like your thoughts. What are other firms in my situation doing.

Response: 

Years ago when I started in this business there were solo practitioners and there were multi-attorney firms that were partnerships. There were not many multi-attorney firms that were what I call sole owner firms – firms will many attorneys and just one owner. This has changed. More and more attorneys don’t want to be in partnerships with other attorneys. Sometimes this is a result of bad experiences in other partnerships. In other cases they simply want to go it alone. Also, more and more associates don’t want to take on the stress and financial obligations of partnership – they simply want a job that provides them with a decent income with work life balance. I have law firm clients with sole owners, fifteen to twenty attorneys, and fifty to seventy staff employees. These firm owners have hired firm administrators, marketing managers, and other such talent to offload the administration. While these firm owners have been enjoying the fruits of sole ownership eventually they will have to reevaluate their situation when they begin planning their succession and exit strategies.

I think you have to ask yourself the following questions:

  1. Is adding partners the best way to offload your administrative responsibilities? Should you hire a firm administrator?
  2. Are  you ready for partners?
  3. Do you have associates that meet your requirements for partner admission? Have you thought about these requirements?
  4. Do the associates that you would consider for partnership have an interest in being partners?

Give this some more thought – don’t just make partners to have partners or to have someone to handle administration.

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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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