Law Practice Management Asked and Answered Blog

Category: Succession/Exit Strategies

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Mar 03, 2015


Sale of Law Practice and Alternative Approaches

Question:

I am the owner of a solo practice located in the western Boston suburbs. I have been considering selling my practice. Do you see many practitioners selling their practices?

Response:

Yes, I am seeing many solo practitioners selling their practices. However, I also see many lawyers looking to exit their practice start by thinking that they will sell their practice. However, when all is said and done the arrangements often take one of the following arrangements:

  1. Admitting an existing associate to partnership and then having the associate buy out the owners partnership interest in a retirement payout.
  2. Bringing in an associate and mentoring and grooming them, admitting the associate to partnership when he or she is ready, and then having the associate buy out your partnership interest in a retirement payout. Sometimes partnership interests are sold gradually over time.
  3. Merger with another law firm.
  4. A wind-down of the practice and then Of Counsel relationship with another firm with a client transition/payout arrangement.

Many solo practitioners are often taken back by the inflexibility of some of the various state rules of professional conduct concerning sale of law practices and find the above approaches more flexible.

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

Feb 24, 2015


Law Firm Succession Planning & Mid-Career Partner Roles

Question:

I am a partner and a member of the Executive Committee of a 250 attorney firm in the mid-west. We have had a succession plan in place for several years for our senior partners. Several have completed their phasedowns successfully and others are struggling. One of our challenges is many of our mid-career partners are simply not ready. I would appreciate your thoughts.

Response:

This is a common problem that many larger firms face as their senior partners phasedown to retirement and try to transition client relationships and firm managerial and leadership roles to the next generation. Often the focus of non-founders is on billable hours and working attorney fee collections as opposed to non-billable longer-term investment activities such as client development,  firm leadership, and management.

Unlike smaller law firms most large law firms do invest time and effort in developing mid-career partners in these areas. However, often more can be done. Here are a few thoughts:

  1. Profile and Personal Brand Building. While developing new clients and new sources of business is always a goal – another questions is – is the mid-level partner, who is planned as the future responsible partner, bio/brand strong enough to entice the client to stay with the firm after the senior partner retires? Often it is not. All mid-level partners should have active personal development plans that requires profile enhancement and personal brand development. These plans should include steps to be taken and tasks to be completed as well as a timeline including milestones and deadlines.
  2. Go Deep with Client Relationship Development. Clients hire lawyers – not just law firms. In fact, the law firm brand is what gets the firm on the client's short list – the lawyer and his or her personal brand is what lands the client – the lawyer's relationship with the client is what keeps the client. Clients work with lawyers they like and trust – transitioning this to another lawyer in the firm will take time and nurturing – more than one or two meetings.
  3. Encourage Mid-Level Partners to Invest the Time to Understand Their Client Business as Well as Their Industries. Clients of law firms are always telling us that their law firms do not understand their business.
  4. Encourage Mid-Level Partners to Raise Their Hands, Volunteer, and Take Baby Steps Toward Leadership and Management Roles in the Firm. Such steps will cause senior partners in the firm to take notice and eventually lead to appointments to various committees and possibly eventually to an appointment on the Executive Committee.
  5. Work at Producing Excellent Work Product. In addition to the above excellent work product and hard legal skills, client service, and personality are all critical as well.  

I would encourage mid-level partners to try to budget 70% of their worked time for billable client production and 30% for non-billable investment activities.      

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

       

 

 

Feb 11, 2015


Law Firm Succession – Client Transition Plan

Question:

I am a founding partner in a 17 attorney firm with nine partners and eight associates located in Chicago west suburbs. We represent business firms and other institutional clients. I am the primary rainmaker in the firm. I am 60 and am planning on retiring when I am 65. My concern is how to effectively transition clients. I would appreciate your thoughts.

Response:

Successful client transition – moving clients from one generation to the next – is a major challenge for all law firms. Shifting clients is not an individual responsibility but a firm responsibility. To effectively transition clients the individual lawyer, with clients, must work together with the firm to insure the clients receive quality legal services throughout the transition process. Both the individual lawyer and the firm must be committed to keeping clients in the firm when the senior attorneys retire. Potential obstacles include:

Transitioning client relationships effectively can and where possible should take a number of years – preferably five years – typically not less than three years. 

The following client transition plan might be an approach you could take to transition clients over a three to five year period:

  1. Review your Top Client List and develop and implement a detailed action and milestone plan for each significant client.  
  2. In consultation with the Firm Executive Committee, designate one or more Co-Responsible Attorney(s) for each existing client, and each new client as to which you are the Responsible (Primary) Attorney. You, in consultation with the Firm Executive Committee, may for cause adjust or amend the Co-Responsible Attorney(s) designation as to any Transitioning Client. The stated goal in designating one or more Co-Responsible Attorneys for each client is to facilitate the transition and retention of your clients upon your retirement and phase-out from the practice of law. You will agree to introduce the Co-Responsible Attorney(s) to the client when you are reasonably available, and work with the Co-Responsible Attorney(s) to transition the client and client matters to the Co-Responsible Attorney(s). You and the Co-Responsible Attorney(s) shall meet to discuss and evaluate the timing for the transition of each client. However, notice to clients shall be solely at your discretion. The Co-Responsible Attorney(s) may, at your discretion, prepare all invoices for legal services rendered. You will review and approve all invoices unless you agree to the contrary in writing. The client’s wishes shall be paramount in the designation or selection of any Co-Responsible Attorney(s) and client satisfaction shall at any time allow for change of the designation of same.    
  3. You will perform such duties as the Firm Executive Committee of the Firm may from time to time determine to be in the best interest of the Firm and which are agreeable to you. You will  agree that your professional procedures will be in accordance with the rules and regulations promulgated by the Firm Executive Committee. You will also maintain the records as reasonably required by the Firm Executive Committee. 
  4. Of Counsel. After the conclusion of the final transition year, the firm may enter into an “Of Counsel” relationship with you. In that event, you would be listed as “Of Counsel”. The relationship would be subject to both parties agreeing on the terms and conditions of the “Of Counsel” relationship.

Effective client transition takes time so start early. Clients hire lawyers not law firms.

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

 

 

 

 

Jan 28, 2015


Law Firm Succession – Succession Plan for the Solo Practitioner

Question:

I came across your firm while researching law partnerships. The short story is as follows: I am a sole practitioner and have been practicing for over 35 years. I have a high volume practice and I employ 7-8 people. Business is good and actually on the rise. I have a great office manager and outstanding loyal staff. The practice is on semi- autopilot for me. I have a young associate lawyer in my office that shares space and is  learning my practice but actually seems to be making his own way in a different practice area. He wants to buy into my practice. We have had some serious talks. He's capable and I think the right person to transition with. I have asked myself why sell/partner/transition when I don't have to? I am not ready to retire. With that said a 3-5 year plan may make sense. Let me know your thoughts.

Response:

The real value for most practitioners is the cash flow from working in the practice. Exit value is secondary and only makes sense when you are ready to quit or retire.

Eventually, however you will retire (retirement, death, etc.) as the clock runs. The biggest problem that I am finding is that practitioners that are ready to exit the practice is finding attorneys willing to buy the practice or buy out partnership shares in the event of a partnership. I am working with practices where is has taken a couple of years to find the right WHO and this often dictates the WHAT – merger, partnership, Of Counsel, sale, etc. The approach that works best is an internal transition via bringing an associate into partnership. So, I would take a serious look at the attorney that you are speaking about, maybe have him become a partner (member in a LLC) with minority interest initially, and incorporate into your agreements how compensation will be handled, him acquiring additional interests down the road, and the arrangement for your retirement payout upon your actual retirement.

Don't wait until you are ready to retire – take some baby steps now.

Good luck with it.

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

Dec 17, 2014


Law Firm Valuation – Establishing a Value for a Family Law Practice

Question:

John, where do you begin to get a value on a family law practice? It seems that one times gross revenue is unfair since it is usually one time business. I saw you speak at an ISBA event and this question was not addressed.

Response:

Regarding your question – it sort of depends on whether you are buying or selling and where you want to start. In general I agree with you that a multiple of one times gross for a family law practice is probably high. It depends on whether the practice has built up more of a firm brand vs. an individual brand. In other words institutionalized the practice. Also on where and how the firm gets business – advertising, referral sources, etc. A firm that has practice (institutional) goodwill might very well start at a multiple of one whereas a practice where the goodwill is personal goodwill the multiple might be .75 or less – in some cases even zero. I know of a few family law practices in the Chicago area that have been sold for .33 of gross revenue. 

Often the initial asking price has little to do with regard to where you end up. Often, due to the concern that the clients and business might not materialize for the new buyer many firms are sold on various forms of an "earn-out" or a small payment at closing with the remainder paid and based on a percentage of revenues collected over a period of time – 3 to 5 years.

I have seen PI and other one shot matter firms sell for one times gross revenues but this is a best case scenario. CPA firms fare much better.

If you are the seller and your practice is a personal practice you probably will have to start with an asking price around .75 or less – if you have branded the practice and have others besides yourself – you might ask for more.

If you are the buyer I would balk at 1 times gross and would want to discuss provisions for reduction in purchase price if revenues fall below a certain level over a certain time period. Better yet – no payment at closing with the payout totally based and paid as revenues are collected in the future.

Getting to "the number" will involve balancing the seller's concern that the buyer will let the practice die on the vine versus the buyer's concern that the clients and referrals with not materialize.

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

 

 

 

 

 

 

 

Oct 08, 2014


Law Firm Succession – Consequences of Waiting Too Long

Question:

I am a solo practitioner in an estate planning firm in Carbondale, Illinois. I am the only attorney in the firm. I have one legal assistant that has worked for me for ten years. I am 72 years old. I suppose it has always been my goal to practice forever as I have been in denial about my age. I have done nothing concerning the eventual transition of my practice and I don't even have anything in place in the event that I would become ill and out of the office due to illness. I am beginning to have more and more health problems and as a result I am coming to the realization that I must address the transition of my practice. Please share your thoughts.

Response:

Age denial is a common problem that I see with senior attorneys that are continuing to practice into their 70s and 80s. They often tell me – "I want to practice forever." However, eventually the clock catches up with them and often they have not prepared for the transition of the practice. Waiting too long can have the following consequences:

  1. Reduced mental and physical competencies resulting in substandard services rendered to clients.
  2. Stress of the practice as a result of having no one available to cover the practice.
  3. Inability to take an extended vacation or time away from the practice.
  4. Inability to explore other outside interests, hobbies, etc.
  5. No coverage or "back-up plan" – practice continuation plan if you will in the event that you become ill.
  6. Risk of loss of control over the future of your practice – clients – employees – exit value in the event that you become incapable of adequately serving your clients and Illinois Supreme Court Rule 7.76 is invoked whereby the court takes over your practice and a appoints a temporary receiver, clients are notified, arrangements are made, and files are assigned out to various attorneys.

You need to get started on finding someone that can eventually take over your practice even if you eventually just close your doors. You still have client files and records, clients that will need ongoing or future representation, and an employee that may need a job.

You may want to start with an Of Counsel arrangement with another attorney and put in place an Of Counsel – or Practice Continuation Agreement – whereby you each agree to cover each other practices in the event of illness or vacation.

A practice continuation arrangement is an arrangement – typically in the form of an agreement or contract – made between an individual lawyer or a small law firm and another lawyer or law firm. The arrangement describes a course of action to transfer a lawyer’s practice and sets payment for its value. In the event of vacation, temporary or permanent disability, or death, a practice continuation arrangement protects the practice, the business interests of the lawyer or law firm’s clients and the financial interest of the lawyer and his or her family. There are different kinds of practice continuation arrangements. Typically a lawyer enters into a one-on-one agreement with another sole proprietorship, partnership, limited liability company, or professional corporation in the community. Agreements can range from simple “dual coverage for each other” for vacation or other temporary absences to sale of the practice in the event of long term disability or death.

While your initial need may be a practice continuation arrangement in the event of illness or vacation – you should also begin looking for someone that you can transition your firm to in the long run as well via practice sale, Of Counsel relationship with another firm, merger, etc.

Good luck on your journey!

Click here for our blog on succession

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

 

Sep 24, 2014


Law Firm Business Development – Individual Attorney Personal Branding

Question:

I am the owner and founder of a 7 attorney personal injury plaintiff firm in the southwest. Over the years we have become the "go to" PI firm in the area. We have an extensive advertising program including TV, radio, and other mediums. I bring in all the business and the other six associate attorneys are primarily worker bees. I have discouraged business development by the associates and now as I approach my retirement years I am realizing that this may have been a mistake and it make take more than a "firm brand" for the firm to transition to the next generation. I would appreciate your thoughts.

Response:

While I believe that a solid firm brand is important and can provide practice value when you transition and retire from the practice of law the failure of your attorneys to develop their own brands or identities will make the transition more difficult and could even result in your firm becoming a "one generation law firm". Clients of law firms tell us they hire lawyers – not law firms. Even through you advertise – your reputation and rainmaking skills have had a lot to do with your success. Your associates must develop their reputations and hone their rainmaking skills as well and you need to help them do this. Here are a few ideas:

  1. If you do not have a marketing plan for the firm – develop one. This will help focus the firm's initiatives and serve as the glue for individual attorney personal plans.
  2. Announce that business development is important and that business development goals and plans will be developed for associates and incorporated into performance reviews and compensation determinations.
  3. Initiate business development training sessions for associates.
  4. Require each associate to prepare a personal marketing plan (business development plan) each year. These plans should be goal driven with specific SMART goals (specific, measurable, attainable, realistic, and on a date specific timeline), approved by you, results monitored quarterly, and incorporated into annual performance reviews and compensation determinations.
  5. Get your associates networking, writing blogs and articles, speaking, and press coverage when possible on case results.

Click here for our blog on marketing 

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

 

 

Jul 22, 2014


Law Firm Attorney Retirement – How Law Firms Are Coping With Aging Attorneys

Question:

I am the Director of Administrator in a 45 attorney law firm in Miami. Twenty of these attorneys are partners and ten of the partners are in their late fifties and mid to late sixties. While we have a semi-retirement program in place it is not mandatory and many of our senior attorneys are unwilling to address issues pertaining to succession and transition of their practices. Do you have any thoughts or ideas you can share regarding creating incentives for senior attorneys to address and deal with the issue of retirement?

Response:

Larger law firms are moving away from mandatory retirement. However, many large law firms still have mandatory retirement. According to a recent survey approximately 57% of law firms with over 100 attorneys have mandatory retirement programs. At the other end of the spectrum many smaller firms that never had mandatory retirement are beginning to incorporate some form of mandatory retirement in their agreements. In firms of all sizes and whether they have mandatory retirement programs or not – getting senior attorneys to deal and cope with aging is a challenge. Here are a few thoughts:

  1. Begin planting seeds to get senior attorneys thinking about retirement and the next stage of their lives.
  2. Conduct educational programs designed to help senior attorneys visualize their retirement years.
  3. Help provide senior attorneys with a reason to want to retire.
  4. Provide career life coaching services to senior attorneys and help them develop other interests and hobbies.
  5. Help senior attorneys develop individualized retirement/succession plans.
  6. Provide financial incentives to those that retire by say age 70 in payout agreements.
  7. Implement phased retirement/wind-down options/approaches.
  8. Consider optional roles in the firm for senior attorneys after they retire and surrender their equity interests.
  9. Insure that the firm has in place competency/peer reviews for all attorneys including senior partners and Of Counsel attorneys.
  10. Insure that the firm has a program that effectively deals with underperforming attorneys.

Aging is a difficult time for all of us and it is normal not to want to think about age related issues much less to begin planning. Your role will be to help senior attorneys take baby steps and come to terms with aging in general.

Click here for our blog on succession

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

Jun 14, 2014


Law Firm Succession: Buying Out the Owner of a Personal Injury Plaintiff Practice

Question:

I am the founder and owner of a personal injury plaintiff practice located in Lexington, Kentucky. I have two associates and four support staff members. All of our cases are handled on a contingency fee basis and our swings in fee collections from year to year can be substantial. I am 64 and would like to transition my practice and retire within the next three years. Both of my associates would like to take over my practice. I believe I am entitled to compensation for my practice and am desiring a fair buy-out. I would appreciate hearing your ideas concerning a buy-out approach.

Response:

You could look at the value of your practice from either a historical or a future perspective. Personally, if I were a law firm or your associates I would be more interested in the future perspective. In other words what fee revenues/cash flows will the practice generate over the next three to five years? In traditional time bill/flat fee firms a multiple of gross revenue is often used as a proxy. In a contingency fee firm such as yours the primary value beyond cash-based book value is the expected value of your cases. Sometimes a firm is able to review a list of cases and estimate the expected value of these cases or estimate a fee range per case. (High-Low, or Conservative-Optimistic estimate).

More often than not it is simply not possible to estimate the value of the cases until they are concluded. In this situation the values will be determined in the future as the cases are settled. If this method is used you would provide a list of cases in progress at the time of your retirement and when the cases are concluded apply a ratio of the time the case was with the firm before and after your exit, apply an overhead factor, and apply your ownership percentage to determine your share of the fee for that case. Your share of the case fees as the cases settle and cash-based book value is your buy-out.

Of course in the end you will have to balance your buy-out against what your associates are willing to pay. If your deal is too high you may run them off – if you make it too low you are leaving money on the table and not realizing the value of your sweat equity.

Click here for our blog on succession

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

 

May 13, 2014


Law Firm Succession/Exit Strategy for Owner of a Six Attorney Insurance Defense Firm

Question:

I am the solo owner of a six attorney insurance defense firm in Phoenix. The other five attorneys are associates – most of whom have been with me three years or less and had limited experience prior to joining my firm. I am 47 and am looking to start to wind down within five years and be totally out of the practice in ten years when I am 57. I want to start thinking about my succession strategy early so I have time to execute it properly. I would appreciate your suggestions.

Response:

If you are like most small insurance defense firms you have a handful of insurance companies that sends you virtually all of your cases. I assume that you bring in all the business, hold the key to the client relationships, and guard those relationships carefully. This may be a double edged sword for you in that while controlling those relationships and using your associates as "worker bees" may keep them from getting close and stealing your clients this approach may also prevent you from developing suitable "bench strength" in the eyes of your clients that could constrain an internal succession/exit strategy down the road. Ask yourself this question – if you made a couple of deserving associates partners today and you left the firm next year would any of the clients stay? Often in situations similar to yours I am told – none. If this is the case you need to begin to hire the right associates – ones that actually want to become partners someday (not all do) and bulk up the team that you have. Otherwise, you may have to bring in lateral talent at the right time or merge with another firm.

Unlike many law firms we are working with you are starting to think about this early – so you have time.

Good luck

Click here for our blog on succession

Click here for out articles on various management topics

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

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