Law Practice Management Asked and Answered Blog

Category: Partnership

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Aug 22, 2012

Admitting New Law Firm Partners

Question:

Our law firm is located in San Antonio, Texas. We have a total of eighteen attorneys which includes me and two other equity owners that founded the firm and contributed capital, three equity partners that were made partner that did not contribute any capital, two non-equity partners, and ten associates. The original three partners control the firm and make all of the decisions with little involvement or input from the others. They are not provided with financial statements or reports. The original three partners bring in virtually all of the business. We are faced with some hard decisions concerning partnership admission – non-equity to equity, associates to non equity, etc. Our compensation cost for attorneys is eating away at our earnings for attorneys that are worker bees and don't bring in any business. Your thoughts?

Response:

You may want to ask yourselves whether you want employees or partners. It sounds like the other three equity partners are not part of the inner circle and are not really functioning as part of the partnership. What is the criteria for becoming an equity partner? Is client development part of that criteria? Should they contribute capital? If they are not adding value to the firm – growth – you are diluting the earnings pool and reducing the size of the pie for yourselves. Personally, I think in a firm your size criteria for becoming an equity partner should, among other things, include client development and a capital contribution. They should have some skin in the game, contribute capital, and signup for their share of the liabilities. I also believe they should then be included in the inner circle.

I would start here by addressing these issues with the three equity partners. They I would develop non-equity and associate career progression plans – associate to non-equity partner and non-equity partner to equity partner – outlining timeline for consideration, the consideration process, the criteria, and the respective and expectations for each. (What it means)

Make the criteria tough and resist the temptation to make everyone a partner.

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

Jul 17, 2012

Structuring and Running Your Law Firm Like a Business

Question:

Our firm is a 34 lawyer litigation boutique based in San Antonio, Texas. We have 20 partners and 14 associates. I serve as managing partner at the will of the partnership and spend 35% of my time on firm management matters and the remainder of my time practicing law. A legal administrator and accounting manager assist me with managing the firm. While I have the general support of the partnership, maybe because no one else wants the job, I serve more as a filter and still find that I have to run most of the firm's management decisions before the full partnership. Often I feel that my staff and I are second guessed, management decisions take too long to make and are diluted and watered down, and the firm has missed out on opportunities due to our structure or lack of structure. Other law firms that we have competed against for years have passed us by and have grown while we have stagnated. Do you have any suggestions concerning our approach to managing the firm?

Response:

You firms has reached a size where more structure is usually required. The democratic system of all partners being involved in virtually every management decision might have worked when you were five or six attorneys but has now outgrown this structure. Think about how some of your business clients are organized and structured. Ask around and talk with other law firms and accounting firms your size. I think that you will find that they have put in place more structure to support their business models.

I suggest that you:

  1. Put in place a structure consisting of the full partnership that weighs in on matters pertaining to firm policy/strategic direction, size of firm, partner admission/termination, merger, dissolution, etc.
  2. Appoint a three to five member executive committee that serves as a board of directors that is charged with planning the firm's future and submitting plans to the partnership, budget approval, general oversight of the CEO or managing partner.
  3. CEO or managing partner that implements firm plans, oversees the budget, oversees practice group chairs, and supervises the firm administrator. CEO or managing partner reports to the board of directors.
  4. Firm adminstrator and practice group chairs.
  5. Put in writing a management or governance plan. Start by adopting a list of decisions
    which require a vote of the partners. Charters and job descriptions should be established
    to clarify roles, authority and expectations for the partners, board of directors or executive committee, managing partner(s), the firm administrator, and practice groups heads. Mechanisms should be put in place to insure conformity and accountability.
  6. The partners should delegate full authority for decision making to the board of directors, except for those decisions specifically reserved to the partners, the board should delegate
    appropriate authority to the CEO/Managing Partner and he/she should delegate appropriate authority to the firm administrator.
  7. Partnership, board of director, staff, and practice group meetings should be chaired by the appropriate officials. Agendas should be prepared in advance and permanent minutes should be
    typed up and maintained. Unfinished business should be reviewed at each meeting. Follow-up and implementation mechanisms should be developed.

You should start with general partnership discussion on how the members would like to work together and the kind of firm they want going forward. Are the partners willing to be managed and willing to be accountable to each other and to what extent? Then go from there.

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

 

Jun 19, 2012

Law Firm Dissolution/Winddown

Question:

Our firm has recently gone through a series of partner defections – we were a 40 attorney firm – now we are 10.  In our last partnership meeting we had some discussions about the possibility of dissolving the firm. If this comes to pass – do you have any tips or suggestions regarding winding down the firm?

Response:

Winding down a firm is like starting a firm but in reverse, harder, and has more steps. Sort of like building a house and then later tearing it down. You will have to deal with:

  1. Clients (notification, termination of representation, and disposition of case files)
  2. Retired partners
  3. Current partners
  4. Employees (associates and staff) – job placement, severance, etc.

Unlike other businesses – the major asset of a law firm are its clients, employees, and partners – many of which may have already defected or walked out the door. You may be left with only the liabilities.

One of your priorities will be to decide who will manage the winddown and who will manage internal and external communications.  Then you will need to develop a project management plan and dissolution/winddown plan/checklist. Major priorities will include:

  1. Bank Loans
  2. Building Lease
  3. Retainer Obligations to Clients
  4. Equipment Leases
  5. Retirement and Other Payouts to Former Partners

Firm should consider if it will retain a caretaker or trustee to manage the winddown.

You should insure that you review the ethical requrements with your state bar association concerning:

  1. Clients right to choose legal counsel.
  2. Notice to clients
  3. Proper and continuous handling of a client's matters
  4. Protecting a client's interest
  5. Disposition of client files
  6. Conflict of interest due to any new affiliations

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John W. Olmstead, MBA, Ph.D, CMC 

 

 

 

 

 

 

May 01, 2012

Problem Partners – Do You Have the Right Folks on the Bus?

Question:

I am managing partner for a 16 attorney firm in Minneapolis. We have been having problems with one of our senior partners. He is our highest fee generator – both origination and generation. He operates as a "lone ranger" and refuses to work as a team member with others. He won't follow firm policy or play by the rules. 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?

Response:

Getting and keeping the right people on the bus is a key challenge for law firm management and 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 unpleasant 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.

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

Mar 27, 2012

Capital Accounts For New Law Firm Partners

Question:

Our firm was started 20 years ago by four partners. We how have the original four partners as well as six associate attorneys. Originally each of the four partners contributed $25,000 each to their capital accounts. We are considering extending partnership to a couple of the associates. We have talked with other law firms and some require buy-ins (capital contributions) and others do not. What are your thoughts?

Response:

My first question is whether you are planning on creating a non-equity partnership tier. If so, then the associates would initially be brought into that tier first.

Typically a buy-in or capital contribution is not required for non-equity partners nor do I recommend such. Typically non-equity partners are salaried and may participate in some form of an incentive bonus system tied to individual, team, or firm financial performance. They are also not required to assume any responsibility for any of the firm's financial liabilities or debts.

If you intend on bringing in the associates as equity partners that is another matter. I believe that all new partners should be expected to contribute capital and have some "skin in the game." Whenever a firm admits a new partner, the firm should require the new partner to contribute capital. Increasingly, a partner's capital requirement should bear a relationship to the partner's share of profits. You may want to allow new partners a reasonable period of time to fund their capital accounts – say five years or help them arrange favorable terms at your bank to finance their capital accounts.

Some firms have a buy-in tied to either the cash-based book value of the firm or the accrual-based book value (includes accounts receivable and work in process). This is not the typical practice although I do run into it. Usually capital accounts are tied to working capital needed to operate the firm and the percentage of ownership/income that each partner will have.

There are only three ways to increase a firm's working capital to cover cash flow requirements and fund growth:

1. Have partners put more money in
2. Have partners take less money out
3. Borrow

Many firms use bank credit lines instead of capital contributions to pay routine firm expenses and partner draws during periods when cash flow is tight. It has been my experience that firms that follow this practice have ongoing financial challenges and problems.

The reality is that many firms are under-capitalized – don't become one of them!

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

Feb 07, 2012

Law Firm Compensation Committee

Question:

For years our14 attorney firm has operated under a formula based eat-what-you kill system. We are moving toward a more subjective-based system. We have been advised that we will need a compensation committee. What are your thoughts regarding compensation committees?

Response:

The components of your compensation plan and partner buy-in will be important to the success of your program. However, how you setup and constitute your compensation committee will be crucial. In a subjective system trust is paramount. How the members are selected, who serves on the committee, how the committee operates, and other matters must be spelled out and communicated to all partners. Here are a few ideas:

  1. Consider a three member compensation committee.
  2. Elect members to staggered three year terms. On the initial election elect the individual with the most votes to a three year term, the individual with the second most votes to a two year term, and the individual with the least votes to a one year term.
  3. Hold elections annually to fill vacancies for the upcoming year.
  4. Consider adopting a policy of requiring a partner whose term has expired to remain off the committee for one year before being able to run for another term.
  5. Incorporate procedures for removal of members by majority vote of the partners. Specify the voting requirements.
  6. Outline the general flow of the compensation review process, how it will work, specifically what performance factors will be considered, etc.
  7. Outline the approval procedure of the partnership. Suggested that the partnership only be able to disapprove the recommendation in total – not pick apart and change. If the proposal is disapproved by a majority vote – the compensation committee starts all over.
  8. Specify appeal rights and procedures.

The key ingredient of a successful subjective compensation system is that partners perceive the system as fair and have faith and trust in the compensation committee. The process is as important as the outcome.

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

Nov 01, 2011

Law Firm Partnership: Pros and Cons

Question:

I am a solo owner of a small law firm in Southern Illinois and have been solo for ten years. I have two staff members in the firm. Recently I have been contemplating either bringing in a partner or joining another firm? What are the advantages and disadvantages?

Response:

Partnership can offer its lawyers a measure of value independent of the skills, talents, and contributions of its individual partners?

Pros

The advantages that the best law firms have over sole practitioners or groups of lawyers who share overhead include:

 Cons

Like anything else in life nothing is free and there are tradeoffs. There can be conflict and interpersonal struggles, large capital contributions, requirements for you to be guarantor on huge firm debt balances, missed paychecks, and loss of independence.

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

Jul 26, 2011

Law Firm Succession and Retirement Options

Question:

I am the senior partner in a six attorney firm in Los Angeles. I am 68 years old and thought that it was  about time I begin thinking about retirement and begin discussions with my other partners. We have no partnership agreement and no plans in place to effect the transition of partners. What are some of the methods being used by law firms effect the retirement of partners?

Response:

There are almost as many approaches as there are law firms – ranging from partners that just leave and give their practices to the others partners to various methods for buying out the departing partner's interest in the partnership. In the final analysis the optimal approach is what makes everyone happy and a solution that everyone can live with. Here are a few illustrations:

Fully Funded Retirement

50 Percent Wind Down Option – Then Retirement Payments For Live 

Pension For Life

Mandatory Wind Down

Five Year Retirement Benefit Payout Based On Earnings

More and more firms are avoiding payouts for life and even moving toward funded buyouts.

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

Apr 06, 2011

Law Firm Succession – Transitioning and Grooming the Next Generation

Question:

I have a general practice firm in Southern Missouri. I am the sole owner and I am 64 years old. There are three associates in the firm and four staff members. I have recently been giving some thought to my future, what to do with the practice, and how to salvage any sweat equity or value from the practice when I am ready to retire. The problem is that I love my work and really want to work forever. Suggestions?

Response:

Succession and exit questions are a hot topic in law firms of all sizes today. I find that in small firms it is not unusual for partners and owners to want to work as long as they can. In fact, in approximately 75%-80% of the firms that I am working with this is the case. Many attorneys enjoy their work and obtain great fulfillment from the work that they do.

The key is to start early and develop a transition strategy and plan. In your situation since you, health permitting, want to practice as long as you can, a sale of your practice is not really your best option. I would think that you need to focus on grooming your associates and gradually, over a phased basis, transitioning interests to them. Get a feel for the value of the practice, put together a firm financial profile and a quality proposal, dress up your financials, and sit down with you associates and discuss your ideas and plans with them. Determine their state of readiness. If they are not interested – keep your succession plans in mind when hiring others and screen for new hires that have an interest in owning a law firm.

As you look toward grooming the next generation keep in mind that you must find ways to get your associates invested in ownership both financially and emotionally. They need to believe that they are part of the firm and that down the road that it is in their best interest to someday own your firm rather than start their own. This will mean gradually giving up some control. You can't have it both ways.

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

Mar 22, 2011

Considering Merging or Joining Another Law Firm: What Should I Look For?

Question:

I am a solo practioner in Southern Missouri. I have been in practice for 20 years. I have a very successful practice with an excellent client base. I have three paralegals that I am able to keep busy. I have recently been thinking about whether I should consider joining another law firm. What should I be thinking about and what should I be looking for?

Response:

I believe that the key question is – can a law firm offer its lawyers a measure of value independent of the skills, talents, and contributions of its partners? The answer can only be answered by recalling the advantages that the best law firms have over sole practitioners or groups of lawyers who share overhead and nothing more. These advantages include the following:

Just because a law firm holds itself out to be a firm does not mean that the advantages listed above exist in that specific law firm. If not – you might be better off staying solo.

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

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