Law Practice Management Asked and Answered Blog

Category: Partnership

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Feb 23, 2016

Law Firm Partner Capital Contributions – How Much?

Question:

Our firm is an 18 attorney firm in Chicago that was formed by the existing four equity partners ten years ago. We have four equity partners (founders), eight income (non-equity partners), and six associates. The income partners are not required to contribute capital. We are considering admitting a couple of the income partners as equity partners and also approaching possible laterals. What should we require in the form of buy-in or capital contribution?

Response:

While capital contributions are all over the board ranging from zero to $100,000 in firm's your size I often see capital contributions ranging from $25,000 to $50,000. All depends upon the number of ownership shares being offered. I am seeing firm's requiring more as many firms are resisting the temptation to take on bank debt to finance their short-term working capital requirements. Citibank's Private Law Firm Group reports that between 2004 and 2007 capital contributions averaged 20 to 25 percent of a partner's income. Citibank's recent survey reports that partners are now contributing an average of 30 to 35 percent of their earnings. Thus, a newly admitted partner that will be earning $150,000 upon admission would be expected to contribute $45,000. Contributed capital is returned when a partner leaves the firm in full upon withdrawal or more commonly according to an incremental installment payment schedule.

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

Jan 06, 2016

Law Firm Managment – Do Your Non-Equity Partners and Associates Really Want to be Equity Partners?

Question:

I am a member of our firm's executive committee. We are an 18 attorney firm in Baltimore with four equity partners, five non equity partners, and nine associates. Recently we asked one of our non-equity partners to join the equity ranks and he said no. We were shocked and taken by surprise. Is this a common occurrence? We would like to hear your thoughts.

Response:

This is becoming a more common occurrence and this is causing havoc with growth, succession and transition plans. Many law firms are seeing a growing sense of disillusionment from young lawyers that may not want to be an equity partner. While they want to be lawyers they do not want to take the financial and other business risks nor make the other work commitments such as working nights, weekends, and the 24-hour commitment that has historically been the requirements for equity partners in law firms. Work-life balance has become a priority for more younger lawyers.

I believe that you should through performance reviews, survey questionnaires, and other tools gather information sooner than later to get a feel for where your non-equity partners and associates stand as far as attitudes toward business and financial risk, desirability of being an equity owner, and willingness to invest capital and time in the firm. This will give you a feel for your mix. If it looks like you have too many worker bees – revamp your recruiting strategy – new attorneys or laterals – accordingly and look for attorneys that have an interest and the mindset that it takes to be an equity owner.

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

 

 

 

Jul 22, 2015

Law Firm Dissolution – New Firm Startup – Steps to Be Taken

Last week a firm advised that their law firm was splitting up via a dissolution and forming two new law firms. I outlined some of the steps that would need to be taken to dissolve the firm.

This week I will discuss some of the typical steps that will need to be taken to start the new law firms. Some of these steps include:

ESTABLISH NEW LEGAL ENTITY 

  1. File articles or other documents for entity formation. (LLC, LLP, PC, etc.) 
  2. Obtain FEIN Number
  3. Open new bank accounts
  4. Establish line of credit with bank
  5. Draft operating agreement/partnership/shareholder agreement
  6. Agree on approach to partner compensation
  7. Draft a business and marketing plan for the firm.
  8. Obtain any required business permits.
  9. Obtain office space, if moving, and negotiate lease – or negotiate new lease with landlord of present space.

IT & SYSTEMS 

  1. Decide on equipment and software being retained
  2. Decide on billing and accounting system data conversion strategy.
  3. Decide on MS Exchange Server conversion strategy.
  4. Decide of document management system conversion strategy.
  5. Purchase new software that may be required as a result of licensing.
  6. Install, configure, and populate billing and accounting software.
  7. Obtain new internet domain name and e-mail addresses

NOTIFICATIONS 

  1. Notify courts
  2. Notify bar associations
  3. Notify all vendors
  4. Notify post office
  5. Notify insurance carriers
  6. Obtain malpractice insurance with tail coverage
  7. Notify Yellow Pages and other directories
  8. Notify phone company. 
  9. Obtain new phone number if needed
  10. Notify tax authorities
  11. Notify Westlaw/Lexis, etc.

HUMAN RESOURCES 

  1. Employee meetings
  2. Setup payroll system – in house or outsourced
  3. Deal with medical insurance transfer
  4. Deal with 401k and other benefit plan transfer
  5. Update employee handbook
  6. Update administrative policies and procedures manual

FACILITIES 

  1. Decide on whether the firm if staying in current space or moving. If staying, decide on how much space is excess
  2. If staying, decide on what space the firm will occupy and what space will be sub-leased or turned back to the landlord if possible
  3. Negotiate lease with the landlord
  4. Office signage
  5. Decide whether any space improvements are needed.
  6. Decide on internal move date and who will be in what locations (if staying)

CLIENT RELATIONS AND DEVELOPMENT

  1. Notify clients of dissolution – joint letter – both firms – in accordance with rules of professional responsibility
  2. Meet with clients
  3. Develop new sources of clients

PUBLIC RELATIONS AND MARKETING 

  1. Public relations campaign
  2. Business identity plan (branding, logo development, etc.)
  3. Create marketing collateral materials (letterhead, brochures, business cards, etc.)
  4. Create and launch new website
  5. Open house or some event

The tasks involved in launching a new firm are numerous, specific to each individual firm, and this is just a starting list. You can use this list as a starting point to develop your own project plan. Suggest that you create a central project plan to get everyone handling various tasks on the same page. The plan should include tasks, specific responsibilities and start and target completion dates.

Good luck with your new firm!

 

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

 

 

Jul 14, 2015

Law Firm Dissolution – Steps To Be Taken

Question:

I am the managing partner in a 14 attorney firm in Seattle. Our partnership has voted to dissolve the firm effective the September 1,2015. Two new firms will be formed. Eight attorneys will be going to one firm and six to another firm. What steps do we need to think about in managing this project?

Response:

You actually have two projects to manage. The dissolution project and the new firm start-up project for the firm that you will be joining. The other firm will also have a new firm start-up project as well. I will address in this blog some of the dissolution steps and I will address some of the new firm start-up steps in next week's post.

Dissolution Steps

  1. Create a master project plan.
  2. Identify who will be in control of the wind down. Firm or representatives from both sides.
  3. Contact the firm's accounting firm.
  4. Identify a spokesperson to address associates and staff.
  5. Identify a spokesperson to handle the press and other outside sources.
  6. Notify associates and staff.
  7. Create a checklist of ongoing obligations and responsibilities.
  8. Create a list of memberships and special arrangements.
  9. Notify insurance carriers.
  10. Notify clients by letter of the dissolution.
  11. Determine compensation for those that manage the wind down.
  12. Follow-up on outstanding delinquent accounts receivable.
  13. Develop a dissolution agreement and have signed by all partners.
  14. Identify who will have control of the files – paper and electronic.
  15. Determine last day of operations.
  16. Determine how and when the final work in process will be billed and by who.
  17. Address the office lease obligation.
  18. Address the equipment and other lease obligations.
  19. Determine the value of all firm assets as of the last day of firm operations.
  20. Identify contingency fee matters and negotiate a separate agreement regarding how to pay all involved when the cases are settled.

These are just a few of the many steps that are involved. Next week I will post Part I – Steps to be Taken to start-up your new firm.

Click here for our blog on succession

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

 

 

Jul 01, 2015

Law Firm Ownership – Acquiring a Founding Partner’s Interest

Question:

I am a senior associate in a eight attorney elder law firm in Miami. There is one owner (founder) and seven associates including myself. The owner has approached me with a proposal to over time buy out his interests. I am the only senior associate in the firm and the only associate that he has approached concerning selling his interests. Specifically his proposal is as follows:

  1. Pay him $825.00 for the practice over five years.
  2. After five years I will own 100% of the shares.
  3. My compensation arrangement will remain the same (salary plus formula percentage incentive bonus based upon my responsible attorney collections) until I have acquired 100 percent interest of the firm.
  4. The owner wants to work in the firm indefinitely after his interest are acquired as an employee or Of Counsel.

I don't know how to respond to this proposal and would appreciate your thoughts? Is it fair? Does it make sense?

Response:

It makes sense for him. Seriously, you are going to need much more information that this proposal. To get started you need to ask for and review the following:

  1. Profit and Loss statements and Balance Sheets for the past five years.
  2. Tax returns or Schedule C for the past five years.
  3. A report showing the current accrual based assets – mainly unbilled work in process and accounts receivable. There are often the largest assets that a firm has and it is not on a typical cash-based profit and loss statement.
  4. A list showing any off-balance sheet liabilities.
  5. Copies of the office lease and other leases to determine lease liabilities.

From these documents you can get a feel for the cash-based net equity, the accrual-based net equity after considering work in process and accounts receivable and unrecorded liabilities.

Two numbers that may be even more important is the average fee revenue generated over the past five years and the average compensation (net profit plus compensation – W2 and K1 earnings) that the owner has been earning over the past five years.

Here are a few thoughts:

  1. One to one and a half times the owner's average earnings for the past five years is typical. So from this guideline you can evaluate the appropriateness of the $825,000.
  2. What assets are included? Will he exclude any assets?
  3. Will you be able to acquire minority interests over the five years as you pay towards the payout? I will insist on such.
  4. If you do acquire minority interests as you go will there be a profit pie for you to share in or will the owner increase his compensation, personal perks he passes through the firm, cut down on his working time, etc.? You should get a handle on compensation as well.
  5. I would not have the owner's employment open ended after you acquire 100% interest. Have some protection in case he fails to produce or has physical or mental problems that affects his performance. Suggest an Of Counsel agreement that gets reviewed and renewed annually.
  6. Consider whether there is a transition that insures that the clients and referral sources stay with you after he retires. If he has not groomed you, involved you in relationships with clients and referral sources, had you giving seminars, and plugged you into referral sources future business could drop off dramatically. This should be factored into the value.
  7. Weigh the cost-benefit of starting your practice v.s. purchasing his practice. 

Good luck!

Click here for our blog on succession

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

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

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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.

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

 

 

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