Law Practice Management Asked and Answered Blog

Category: Partnership

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Jul 08, 2014


Law Firm Partnership – Client Origination Expectations for New Associate Attorney

Question:

I am the sole owner of a four attorney general practice firm in Rockford, Illinois. I am 58 and realize that in the next few years I will need to begin implementing a succession and exit strategy by probably bringing in a partner. Two of the associates have no interest in partnership. However, the newest associate hired, who had his own practice for several years, does have such an interest even though he was recently hired. He is off to a good start as far as his production. However, I believe that he must be able to originate and bring in client business as well. So far his energy and focus has been totally on performing legal work. I want to get him started on the right track in order that I can make him a partner in a few years. Please provide any thoughts that you may have.

Response:

I agree that in a practice such as yours that client origination is important. I suggest that you start by laying out and discussing with him your expectations. In other words what will it take for him to become a partner – production, quality of legal work, billings, client satisfaction, and origination of new client business? Be specific and set specific goals for him and your expectations for him but also your timeline for partnership consideration. I would suggest five years. Personally, I believe his client origination goal at the five year point should be between $300,000 and $500,000 or higher. Establish baby step goals for origination – say $50,000 after year one, $100,000 after year two, $200,000 after year three, $300,000 after year four, $400,000 after year five. This will require that you track origination fee dollars in your billing/accounting system. Specific guidelines and rules regarding the attribution of origination credit should be developed. In other words an attorney should not receive origination because a client calls as a result of the firm's brand, advertising, etc. and he is passed the call because he is the only attorney in the office to take the call.

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

Jun 23, 2014


Law Firm Decision-Making and Governance – Two Partner Firm

Question:

Another attorney and I are planning on starting a law practice together. He has a larger book of business and he has ten years more experience that I have. Initially he will have a 60% ownership interest and I will have 40%. Compensation will be determined based upon these ownership percentages. How do you suggested that we structure our decision-making and governance?

Response:

I would not recommend using ownership percentages for decision-making and governance. I suggest that you be equal partners in this regard – one head – one vote. Of course this would mean that if you actually took a formal vote you could be deadlocked. Hopefully, the two of you have similar goals and a common desired sense of direction for the firm. If so, you should be able to come together most of the time using a consensus approach. When you can't – some give and take will be required. If you can't the firm may not last.

Click here for our blog on governance

Click here for my article on leadership

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

Apr 15, 2014


Buying a Law Practice: What Should I Be Considering

Question:

I am an associate in a law firm in Akron, Ohio. The firm is an estate planning practice consisting of the owner/founder of the firm, myself, and two legal assistants. I have been with the firm for ten years and this is the only firm that I have worked with since law school. The owner is 67 and has announced that he wishes to retire. He has approached me and provided me with a proposal to buy his practice via an arrangement where I would initially pay him a down payment of 50% of his asking price and after two years the other 50% would be paid over a period of five years. The arrangement would be structured as a partnership and for the two year period we would be 50-50 partners. Compensation would be based upon these ownership percentages. The owner's asking price is two times his average net earnings ($125,000) – $250,000. Average revenues – $210,000. I would appreciate your thoughts and suggestions:

Response:

Buying a law practice is a major commitment and major investment. To a large extent you are buying a job as well as hopefully a book of business. Here are a few ideas that you may wish to consider:

  1. A general rule of thumb for establishing a value for when a law practice is being sold to an outside buyer is a multiple of 1.0 times average gross revenue or a multiple of 2.0 times average net earnings. Typically this is a best case scenario for an outside buyer. Buy-ins for associates that have invested "sweat equity" over the years is usually less. In addition you must consider the extent of repeat client business, talent of those that will remain with the firm, management skills and ability of the new owner, and management infrastructure. (IT, databases, case and document management systems, automated billing and accounting systems, etc.) Personally, I think the asking price/buy-in figure is high. Try to get the owner to do better for you.
  2. Review at least the last five years financial statements and insure that there are no surprises.
  3. Insure that all debt and potential malpractice claims are disclosed.
  4. Review the office and equipment leases.
  5. Create a demographic profile of the firm's clients and referral sources.
  6. Have you been able to generate a book of business? If no, why not? Do you believe you will be able to in the future?
  7. Create a business plan for the future practice and share with the bank when applying for any needed financing.
  8. Are you sure you want to own and manage a business?
  9. If you will be borrowing money from a bank determine all the interest that you will be paying as well as any interest on the five year payout to the owner. Determine the time it will take to receive a return on your investment – how many years. If you pay $250,000 for the practice plus interest – say $300,000 over five years – will you earn this amount in additional income over and above what you are presently earning and is there upside potential? Does the deal make sense?
  10. Insure that you develop a partnership agreement for the new partnership. Insure that is provides for retirement of the owner after two years – if not be careful of the compensation arrangement.
  11. Insure that the owner makes a commitment to timely transitioning client and referral source relationships.

Good luck!

Click here for our blog on succession

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

 

 

 

 

Feb 25, 2014


Law Firm Partners That Won’t Embrace Technology

Question:

I am the managing partner of an 8 attorney general practice firm located in Charleston, South Carolina. We have done a pretty good job of investing in technology. I am having problems getting our older partners to personally use the technology and this has resulted is our attorney staff ratios and resulting overhead to be higher than it should be. They seem to think that doing their own work is beneath them and want to have their own personal assistants. I would appreciate any thoughts that you have on the matter.


Response:

Few firms can afford the luxury of each attorney having their own secretary/assistant. The economics no longer support such staffing. Many firms today are operating with much leaner attorney/staff ratios – typically two to three attorneys for each secretary/assistant – some firms have four attorneys to each secretary/assistant. I suggest you build the economic case, encourage, train, and motivate these partners to learn how to use and to actually use the technology and if all else fails offset the economic impact as a direct charge against their compensation.

Click here for our blog on financial management

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

 

Oct 22, 2013


Law Firm Partnership – The Importance of Compatibility and Good Fit

Question:

I am the sole owner of a estate planning firm in Evansville, Indiana. I have three associates that work for me and four staff members. I am 64 and wanting to get started on a succession program – either by forming a partnership with one or more of the associates or with another attorney or attorneys that I might bring into the firm via merger. I have always been on my own so I am a little cautious. I do want to work another eight years or so. What pitfalls should I be looking out for?

Response:

Creating and maintaining a successful partnership takes a lot of work. Partnerships fail for numerous reasons but the number one reason for failure is "poor fit." Poor fit can destroy a partnership before it even gets started. Fit isn't as much about "the money" (financial goals) as it is about personal and professional goals.

As you consider future partners give some thought to the following:

  1. Compatible work ethic – Determine whether each of you envision working long, hard hours to accomplish firm goals. Are each of you willing to do whatever it takes to get the job done?
  2. Shared vision – Do each of you see a similar outcome? If everything were working perfectly what would that look like?
  3. Alignment of values – Do you share consistent and similar values? Each of you list your top five and compare.
  4. Integrity – Do each of you have the same views and principles?
  5. Dealing with conflict – How do each of you deal with and manage conflict?
  6. Trust – Do you trust each other?
  7. Sense of humor – Can each of you laugh, be lighthearted and have fun?

Before you decide to partner with someone it is critical that you determine where you agree and where you disagree on key issues.

Invest the time in getting to know your future partners at a deep interpersonal level and make sure that your personal and professional goals mesh.

If you do a good job insuring that you have a good fit you will go a long way toward insuring a successful partnership.

Click here for our partnership blog

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

 

 

Oct 08, 2013


Managing Law Firm Partners – How to Herd the Cats

Questions:

I have just been elected as the firm's first managing partner. We are a 9 attorney firm in El Paso, Texas. After a month I am already frustrated and wish I had declined the role. I have two partners that are simply not producing, do as they please, and I am powerless. I would appreciate your thoughts.

Response:

Non-productive partners always pose a challenge. They are usually the “nice – easy to get along with folks” which makes it difficult to confront and deal with them as well. However, the longer that you let such problems fester the harder these situations will be to deal with in the long term. Layout performance expectations and deal with them in real time.

Consider:

You will need to sit down with your other partners and get their support and commitment to stand behind you and support you before you embark on this journey.

Click here for our partnership blog

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

 

Sep 17, 2013


Law Firm Non-Equity Partnership Tiers

Question:

Our firm is a 12 attorney firm in Houston. Currently we have three equity partners and nine associates. Several of our associates have been with the firm for over ten years. My partners and I are all in our early 60s and are beginning to think about succession and retirement. If possible, we would like to keep the firm within the family and not go the merger route. What are your thoughts concerning two tier partnership structures (equity and non-equity partnership)? Should we consider bringing associates in first into a non-equity tier?

Response:

I believe that a non-equity tier gives a firm a way to give associates the professional recognition and status of being a partner without conveying actual ownership and diluting ownership and control. Often a key differentiating factor between equity and non-equity partnership is client origination. Partners that don't originate a sizeable book of business often don't make it to the equity tier. For very small firms a non-equity often does not make sense - for others it often does. If you believe, as I do, that equity partners should be client originators and if you currently have a mix of client originator and non client originator associates with ten years or more time with the firm you may want to consider a two tier structure. You should carefully define, and put in writing, admission criteria for each tier.

Click here for our partnership blog

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

 

Jun 11, 2013


Law Firm Buyout Arrangements in a Contingency Fee Practice

Question:

I am a partner in a four partner law firm in Cleveland, Ohio. Our firm does class action contingency fee cases and all of our fees are contingency fee. We do keep time of our time expended on these cases even though we don't bill by time. One of our partners has announced that he will be withdrawing from the firm. We each have 25% ownership interests. How do we value the firm and determine his buy-out. Our partnership agreement does not address this nor do we have any precedent. Do you have any suggestions?

Response:

The real value component is the value of your unsettled cases and it will be difficult – if not impossible – to determine the value of these cases until they are concluded in the future. Some firms payout the capital account and the value of the hard assets upon departure or over a relatively short payout period and they have a future payout formula for the cases in progress as the cases are concluded.

Click here for our blog on partnership matters

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

 

Jun 04, 2013


Problem Law Partners

Question:

Our firm has been discussing how to handle one of our partners. We are are 12 attorney firm in Houston. One of our partners who is one of our highest fee producers and best business getter's simply won't follow firm policy or play by the rules. He won't turn in time-sheets in a timely manner, he is argumentative with others in the office, and not a team player. He is "me first" while the rest of the partners in the firm are mostly "firm first". We are trying to build a team based practice and this one partner is holding up our progress. Do you have any thoughts or suggestions on how we should handle this?

Response:

Dealing with "maverick partners" is always a challenge. Of course they seem to always be the heavy hitters and this makes it that much more difficult as often there are major clients and large sums of money at stake – at least in the short term. This can also be major issues and large sums of money at stake in the long term if you don't deal with the maverick partner as well. In addition you won't be able to achieve the vision and goals the firm is trying to achieve.

Many firms have had to deal with the problem of a maverick "huge business generator" who just wouldn’t cooperate with firm policies and caused conflict and tension in the firm.  It is an unplesant task – but in the end – worth the investment. In the end he or she either conforms or leaves the firm. We have been advised by our clients that even though they may have struggled in the short term as the result of the loss of a major fee producer – in the long run the firm was better off and should have done it earlier.

Click here for our blog on partnership matters

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

 

Mar 12, 2013


Partner Compensation – Two Attorney Start-up Firm

Question:

I am a solo practitioner in Chicago. I've been offered by another solo to join him as a partner, and was wondering if you could suggest any articles or books I could look at to think about how to structure the partnership.  We bill about the same number of hours, but his rate is 50% higher than mine (300 v 200) and he has 20 years on me in age and experience.

Response:

I am a believer in true partnerships as they seem to work best and the compensation system that seems to work the best is where the partners share and share alike the profits based upon their ownership percentage. Initially a percentage is agreed upon based upon the revenue/profit
history and experience that each brings to the firm. If the level of contribution changes over time you talk about it and the percentages are adjusted. You may want to start by looking at your fees and profits over the last five years and compare them to his and use this as a starting point. Consideration should also be given to his experience. Hours don t matter as much as dollars. Then determine that ratio. Often in an arrangement such as this, depending on the ratio, it might be a 60%/40% split. If this is what you agree to then establish your capital accounts in accordance with that ratio (initial firm investment in the form of cash or other assets) and then split profits according to this split. Over the years adjust as needed. If you have a healthy partnership you will be comfortable discussing this subject.

Other approach if you want to be lone rangers would be a formula eat-what-you kill approach.

Here are my blogs on this topics generally:

https://www.olmsteadassoc.com/blog/category/compensation/ 

Here are a couple specific blogs:

 https://www.olmsteadassoc.com/blog/2009/05/  

https://www.olmsteadassoc.com/blog/law-firm-eat-what-you-kill-partner-compensation-systems

Click here for articles on other topics

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

 

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