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May 13, 2026

Estate Planning Firm – Flat Fee Effective Rates

Question:

I am the managing owner of a three lawyer estate planning and estate administration firm in Nashville, Tennessee. There are three paralegals, a receptionist, a bookkeeper, two legal assistants, and a firm manager working at the firm. Our estate planning has for many years been billed on a flat rate basis. Our effective rates have been and continue to be much lower than our time bill rates and this is having a very negative effect on firm profitability. Should we consider billing estate planning matters on a time bill basis? I would appreciate your thoughts and suggestions.

Response:

I am currently working with quite a few estate planning/estate administration/elder law firms that have high net worth clients. The majority of these firms use “time bill” billing arrangements. Firms that represent mom and pop smaller net worth clients are using flat fee arrangements for estate planning and asset protection matters and “time bill” arrangements for estate administration and other matters.

Few firms that are using flat fee arrangements are realizing effective billing rates even close to their standard “time bill” rates. In some cases I have found effective rates $100 to $150 per hour less than their standard “time bill” rates for attorneys and paralegals. In some cases the problem is not working effectively or efficiently. In other cases the flat fee price has not been properly set or limits placed on the work that will be done for the flat fee – for example – number or document rewrites, etc.

I believe that more than ever clients are wanting the budgetary certainty that flat fees provide.  I think that a flat fee pricing strategy is a good strategy but the scope of work and proper price point must be properly established. A couple of suggestions:

  1. Do some basic market research – secret shopping – and obtain the best information that you can on competitor pricing.
  2. Review time charges on typical estate planning matters and get a handle on the amount of time that it typically takes – by each office professional – for matters of varying levels of complexity. Include time that is not obvious for administration of the matter, calendaring, communications with client, etc.
  3. Based on these time estimates determine flat fees using the desired standard hourly rate and then add a risk premium of 10% – 20%. If a matters typically takes 10 hours and your desired rate is $200 per hour – set the flat rate fee at $2200.00 – $2400.00.
  4. Incorporate into your engagement letters, fee agreements, etc. Include a provision that allows for time billing when there are extra re-drafts, unforeseen events caused by the client, etc. specified beyond the limits specified for the flat fee amount.
  5. Get at least 1/2 of the fee before commencing work and the other half before delivering and executing the final documents.
  6. Keep time sheets on the matters for time expended.
  7. Review at least quarterly effective rates realized on completed flat rate matters.
  8. If effective rates are below your target rate review the time detail and determine where the problem lies.
  9. Make changes and adjustments if needed.

Recently an estate planning firm client of ours asked their attorneys and paralegals how much time is took for a typical estate plan (trust). They advised as follows:

The problems with the above time estimate was that it did not provide time spend writing up consultation notes and posting to the system, communication with clients, modifications and changes to documents, calendaring, notes to the file, and all the other administrative matters pertaining to the matter. While the initial analysis showed that the effective rate per hour far exceeded the time bill rate – such was not the case when the actual total time expended on the matter was considered.

I believe that properly implemented and managed flat fees can be a worthwhile strategy.

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

 

Apr 29, 2026

Law Firm Succession and Transition – What is the Best Strategy?

Question:

I am a partner in a three partner firm in Fresno, California. We handle exclusively personal injury plaintiff work consisting of auto accidents, slip and fall cases, premises liability, etc. We do not handle medical malpractice, products liability. or mass tort or class action cases. We have no associates working in the firm at the present time. While we have had associates in the past we have not had good experience in recruiting and retaining associates. In addition to a receptionist we have four paralegals.

I am 73 and still trying cases and my other partners are 62 and 68 respectively and still trying cases as well. We recently starting discussion our individual long term plans regarding eventual retirement. I plan on retiring in a year and my other partners are planning on retiring in the next five or six years. What is our best strategy concerning the law firm and our transition? We would appreciate any comments that you may have.

Response:

The biggest challenge for many firms, is finding the right WHO.

The who dictates the what – the actual succession/transition/exit strategy whether it be internal (hiring an associate to groom to take over the practice, merger, practice sale, or referring out cases and closing the doors. In other words, many law firms find that they start down one path and end up on another. Not all non-equity partners and associates want to own a law firm. Not all lateral and merger candidates will be a good fit for your firm and culture. The key is the right relationship and sometimes that takes the form of making someone at the firm a partner, bringing in a seasoned lateral, merging with another firm, selling the practice, or referring out cases and closing the doors. Therefore, succession/transition plans have to be flexible and often the key is not get stuck in creating complex succession plans at the onset. Establish candidate search timelines, outline a general course of action, generate some momentum and see where that takes you. Then build the plan when you can see where the firm is headed.

You are going to have to begin sooner than later exploring your options and conduct a search for the following:

This search and exploration often is the most time consuming and difficult part of the process and often the options identified through this process ends up dictating the succession/transition/exit strategy.

Associate Candidates

You have tried this strategy without success. Years ago, it seemed that all the associates working in law firms wanted to become a partner in the law firm. This has changed because of the new mix of women and men graduating from law schools and entering the legal profession, changing attitudes toward work life balance, other opportunities outside law firms, and other variables. While partnership/ownership is still important to many – do not assume that all the associates that a firm hires hire will even want to be equity partners – especially if it means a hefty capital contribution and signing personal guarantees for a large amount of firm debt. This could be a strategy if you could find an experienced lateral attorney interested in law firm ownership or partnership. I do not believe you have time to invest in the care and feeding that you would need to do with an inexperienced junior associate.

Merger Candidates

 Another option would be to merge with another firm. This could be a viable strategy for your firm. It all comes down to whether the relationship is right for you and your firm. While mergers can be a valid option making them work is often another matter. Our experience has been that that one-third to one-half of all mergers fail to meet expectations due to cultural misalignment and personnel problems.

There can be a whole list of reasons for failure including poor financial performance, attorney defections, loss of key clients, and leadership and management issues. However, it has been our experience that most failures have been the result of poor cultural fit ‑ the wrong WHO. The merging firms – after they have moved past conflict checks and excitement about new client potential – jump immediately to an examination of practice economics and the financials. They fail to perform proper due diligence on the people. It is critical that firms insure that cultural due diligence is a key component of the merger assessment process. Philosophies, personalities, and life styles should be generally compatible. The partners should like each other, have a common vision of the firm’s future, and the deal should make sense. The question is not the what (merge) but the who (people).

You should do all the due diligence that you can – start with the people – then move through the rest of the process.

Practice Sale

Practice sale is an approach that is available in most states. Typically, there are very specific requirements and procedures that a lawyer or law firm must follow in accordance with a state’s rules of professional conduct. Many states have followed or adapted the American Bar Association’s Model Rule 1.17 regarding sale of a law practice.

Referring out Cases 

Some personal injury plaintiff firms simply refer out their cases under a fee arrangement with another firm and close their doors.

You need to discuss among yourselves your individual specific retirement timelines as that also will impact your strategy and how soon you should get started on identify potential candidates – attorneys or law firms.

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

 

Feb 25, 2026

Law Firm Owner’s Transition and Exit Strategies – Clients and Management Roles

Question:

I am the sole owner of a 20 lawyer litigation firm in Chicago. There are five seasoned non-equity partners and fourteen associates in the firm. I am 63 and trying to figure out what to do with the practice. While I am not ready to retire in the next several years I do want to slow down and be retired in five to seven years. How should I approach my transition and exit from the firm? You feedback would be appreciated.

Response:

You have a valid concern that is shared by many.

The pending retirement of the baby boomer generation and the unrelenting challenge of finding and keeping talented staff can have grave consequences for law firms that fail to develop a succession strategy. Steps that you take or do not take five years or earlier prior to your actual retirement will determine whether your practice, clients, employees, and your legacy transitions to another generation. For a small or solo practice, these steps may determine whether your practice has any terminal value at all.

Many are asking, “What do I do with this Practice?” “Is there value or goodwill? “Where and how should I start?

Early planning will pay dividends. Many firms are in “reactionary mode” and are not adequately prepared to transition firm leadership and client relationships.  A firm’s very survival may very well depend upon the steps you begin taking in the next few years.

How well you transition clients and managerial roles will determine the ultimate success of any succession/exit plan. Transition of clients and managerial roles are the two critical components of any succession/exit plan.

Bring Deserving and Qualified Non-Equity Partners into Equity 

Personally, I believe your best strategy will be to bring some of your non-equity partners into equity sooner than later – either with initial buy-ins or no buy-ins for initial ownership minority shares but agreed to buyouts for your remaining equity upon your requirement. We are finding a lot of non-takers today when it comes to equity and you need to find out sooner than later if you have anyone interested in equity. This will determine whether your strategy will be an internal exit strategy or external strategy.

Client Transition

Transitioning client relationships is difficult, it takes time, and it takes more than one simple introduction. It is a lot like cross selling that attorneys talk about but often fail to put into practice.

In a recent BTI Consulting Group report on Benchmarking Law Firm Marketing and Business Development Strategies, the section on cross-selling was titled, “Achilles Heel for Law Firms.” When BTI interviewed 120 Chief Marketing Officers and Directors of Business Development at leading law firms, they found that only 4 percent of law firms rated themselves as highly effective in cross-selling, and 77 percent thought they were ineffective.

My experience and our surveys of our clients and their clients have shown similar results. Cross-selling is talked about a lot and seldom implemented.

Cross-selling can be an effective strategy – but it is not easy and it requires trust, commitment, communication, hard work, dedication, and organizational alignment.

Challenges and Hurdles

Transitioning clients to another responsible attorney(s) within your law firm or to another attorney in another law firm involves numerous challenges that have to be overcome.  Consider the following challenges and hurdles:

  1. Relationships take an investment of time and must be nurtured on behalf of the parties making the introductions and connections as well as the parties trying to form the new relationship. Attorneys often want immediate gratification and the “quick fix” and are unwilling to invest time needed for longer-term results. More than a “one-shot” simple introduction is required.
  2. Clients hire lawyers not law firms.
  3. Client transition requires trust on the part the client, the relationship attorney, and the future responsible attorney. A high level of trust must exist between the attorneys involved and with the client.
  4. There is potential risk of embarrassment for all concerned. The relationship attorney could risk losing the client if the other attorney does poor work for the client. Another issue is the loss of control over the client. The individuals in the client organization could also risk criticism (or even their jobs) if the new relationship does not pan out.
  5. Many law firms are “lone ranger” rather than “firm first” or “team based” firms. As a result, there is no inclination or incentive to either invest the time and effort or take the risk to refer work to others in the firm.
  6. Lack of knowledge regarding other partners’ practices.
  7. Fear of losing clients.
  8. Fear of losing client control.
  9. Compensation systems in many law firms encourage hoarding of work and discourage the referring of work to others.
  10. Communication systems in some law firms do not facilitate relationship building among attorneys. Effective client transition is simply not possible without strong relationships and high levels of trust among attorneys in the law firm.

Client Transition

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 institutional 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. 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.  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 allow for change of the designation.
  3. You will perform such duties from time to time that you determine are in the best interest of the Firm and which are agreeable to you.
  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.

Management Transition

Successful management transition – moving management and leadership from one generation to the next – can also be a major challenge.

Consider undertaking the following, as well as other, management and leadership activities, which may assist you and the firm transition management and leadership roles over the next three to five years.

  1. Invite new equity partners to serve as members on a executive committee, Chair of the Executive Committee, other committees, or assigned direct responsibility and oversight for a specific management function such as:
    1. Client development/marketing
    2. Human resources/personnel
    3. Financial management
    4. A specific project
  2. Allow new equity partners to participate in the development of the firm annual budget and financial plan.
  3. Allow new equity partners to participate in performance reviews of non-equity partners, associates, and staff.
  4. Provide new equity partners with access to all firm financial records and reports.
  5. Allow new equity partners to attend all partner meetings.
  6. Invite new equity partners to meetings with the firm’s accountants and other advisors.
  7. Have new equity partners participate in the recruitment and hiring of attorneys and staff.
  8. Rotate new equity partners in a variety of management and leadership roles over the three-five year transition period.

An effective succession and transition strategy involves coming to terms with aging and retirement, developing a timeline, and identifying transition candidates either internally or externally. An old saying at IBM when I was a business partner with IBM – what gets planned and what get measured is what gets done. You have worked hard to build your practice. Your practice may or may not have value depending upon the steps you take and when you take them. Start early.

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

Feb 14, 2024

Law Firm Succession – Transition of Senior Partners Leadership and Management Roles

Question: 

I am one of three founding partners in a 17 lawyer insurance defense firm in Houston. We have a total of 18 lawyers in the firm – 3 founding equity partners, 4 other equity partners, 5 non-equity partners, and 6 associates. The three of us founding partners are in our 60s and approaching requirement and are concerned about succession planning and transition. We feel that we are in good shape concerning transition of clients but not so concerning management roles and responsibilities. The firm is managed by the three of us and we have kept tight reigns on the administrative/management side of the house. We would appreciate your thoughts.

Response: 

A successful transition strategy involves three components.

  1. Legal Skills (lawyering skills)
  2. Client and Referral Source Relationships
  3. Firm Management and Leadership Roles

While it sounds like you are in good shape concerning legal skills of your other partners and client and referral source relationships, work needs to be done in the areas of firm management and leadership.

Law schools do not train or develop managing partners or lawyer managers, nor does doing excellent and complicated work for demanding clients. Highly competent attorneys do not necessarily make good managing partners or lawyer managers. Some of the best lawyers are the worst managers. The better lawyer managers have a second sense for people and management, in addition to being good lawyers and possibly outstanding rainmakers. Many firms develop successors to management by delegating to selected mid-level and junior partners short term management assignments and by rotating these partners through various management areas to develop their general management skills rather than developing particular lawyers as specialists in specific management areas. These firms begin to train mid-level and junior partners by assigning short term, low risk management activities before entrusting them with key management jobs.

Management Skills

The following are recommended areas in which the management skills of mid-level and junior partners can and should be developed:

  1. Client relations, including origination, development and retention;
  2. Acceptance of new clients and matters and the management of performance of legal work in substantive practice areas and sub-specialties;
  3. Associate recruitment, training and development of a personal and professional nature, promotion, evaluation and compensation and termination;
  4. Administrative staff organization, relationships and utilization;
  5. Budgeting for revenue, expenses, capital expenditures; billings and collections; financial and variance reporting and utilization of resultant financial data and management information;
  6. Technology including computers, software, other equipment and technical support from non-lawyer specialists;
  7. Leases, space utilization, negotiations and construction.

Techniques for Developing Skills

On-the-job-training is the most effective technique for developing and refining the management skills of mid-level and junior partners. Three of the most frequently used approaches for teaching management skills include being assigned to a committee, being elected or appointed to a management or leadership position and serving as a member of a special team.

  1. Committee Membership: Mid-level and junior partners may be appointed or elected to serve on the management or other committees. Depending upon the form of firm governance, partners may be appointed or elected to represent various age groups and/or regional offices in multi-office firms. They may be chosen to serve on other committees such as marketing, associates, recruiting, lateral hires, administrative staff, financial, ethics or the management committee, etc.
  2. Appointed positions: Partners may be appointed to manage functional areas of administrative or substantive firm activity. For example, a partner may be appointed to chair a practice area or one of its sub-specialties. Another one may chair the marketing committee. A third may serve as the firm’s ethics partners, etc.
  3. Special Team: A partner may lead a special team to address a specific issue or function. For example, a partner may be requested to recommend new or emerging practice areas. Another may explore the feasibility of establishing a new regional office. A third partner who has an interest or background in technology may direct the firm’s automation effort, etc.

The mid-level or junior partner selected for training should receive administrative assignments and his or her performance should be evaluated accordingly. Each lawyer manager should be requested to develop a plan for the year, including goals and proposed action plans for accomplishing their objectives. They should be required to review these plans with the head of the committee or the partner to whom they are accountable. Partners who are appointed or elected to specific positions should be accountable to a partner or committee responsible for their actions and be evaluated on their performance. Many law firms consider the success or failure of partners in planning and implementing administrative assignments when recommending or setting their compensation levels. This is done to encourage the firm’s “best and brightest” partners to accept administrative assignments and not feel uncomfortable because they may record fewer billable hours. Also, it would be wise for the managing partner or executive committee to identify and provide other non-monetary forms of recognition to successful lawyer managers.

Planning for the transition of law firm leadership and management calls for the ability of the current managing partner or members of the management committee to spot leadership and management potential among the partner complement. Once this potential has been identified the current management must nurture and develop this potential so as to provide the future leaders of the firm.

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

Aug 24, 2022

Law Firm Succession – Incentives for Partners to Transition Clients

Question:

I am the managing partner of a twelve lawyer firm in Dayton, Ohio. We are a first generation business litigation boutique. We represent mid-size companies and handle multiple matters for these clients. We  have seven equity partners and five associates in the firm. Three equity partners were the original founders and the other four were made partners later on. All seven partners originate client business and have significant books of business. Three founding partners are in their early 60s. We have had little success in succession planning and it seems that the three partners are reluctant to let loose of their clients and even begin any sort of client transition. Our compensation system does not encourage transitioning clients. I would appreciate any thoughts that you may have.

Response: 

I believe that succession planning and client transition, especially for institutional clients, needs to start early – in many cases five years prior to retirement. Retiring partners need to be motivated to:

Here are a few ideas:

1. Retirement Date Notification

Each each partner has the obligation to notify the managing partner, or the executive committee, of his or her
intended retirement date, at least three to five years before their actual retirement from the firm. This notification will begin the transition period which will end upon the partner’s retirement, during which time certain steps will be taken to transition the retiring partner’s clients.

2.  Identification of Transition Clients 

Suggest that the retiring partner and the managing partner, or executive committee, schedule a meeting to review those clients the retiring partner originated or serves as the key client relationship partner. They should also review the types of work and fees generated by these clients.

3.  Client Transition Duties 

The retiring partner and the managing partner, or executive committee, should agree upon those tasks and transitioning activities that will be performed by the retiring partner during his or her transition period. These may include regular visits to the client by the retiring partner and the partner to whom the client will be transitioned.

4. Determining Success of Transitioning Efforts 

Annually, during the transition period and in connection with the firm’s annual compensation review process, an evaluation will be made by the managing partner, or executive/compensation committee, with the transitioning partners, about the retiring partner’s efforts in performing the transitioning activities performed by the latter during the previous year. The managing partner or executive/compensation committee will determine whether the retiring partner is performing the transitioning duties in a satisfactory manner.

5.  Determining Retiring Partner’s Compensation 

Generally, the compensation of those partners who are transitioning towards retirement will be determined in the same manner as compensation for all other partners. However, with respect to the retiring partner, the managing partner and members of the management/compensation committee will pay particular attention to the former’s performance of the transitioning duties assigned. If it is determined that the retiring partner is satisfactorily performing the transitioning activities, the retiring partner will continue to receive full credit for those fee collections from clients being transitioned, in the various categories considered by the managing partner and members of the management/compensation committee in setting compensation. However if it is determined that the retiring partner is not satisfactorily performing the transitioning activities, or if the fees generated from these clients increase or decline, those factors will also be considered by the managing partner and the management/compensation committee in setting the retiring partner’s compensation, and the compensation may be increased or reduced appropriately.

6.  Fee Credit Allocations 

In order to provide incentive to those partners to whom clients are being transitioned, and to insure that those attorneys are fairly compensated for their efforts in transitioning and maintaining these client relationships, the partners designated to be the transitioning partners for the client to be transitioned will also receive credit under the categories as may be applicable, for the fees generated by these clients during the transition period, provided that the managing partner and the members of the management/compensation committee determines that the transitioning partners are making satisfactory efforts to  accomplish the transitioning of clients.

Assignment of credit to the transitioning partner will not reduce the amount of credit allocated to the retiring partner, unless the retiring partner is not satisfactorily performing the transition activities, as described above.

7.  Billable Hours 

To allow reductions in billable hours while also providing time to perform the transitioning activities, without penalizing the retiring partner from a compensation standpoint, a retiring partner will be allowed to reduce his or her billable hours during the transition period without an adverse effect on his or her compensation, so long as the retiring partner is satisfactorily performing the assigned transition activities. Any reduction to the retiring shareholder’s billable hours in excess of the percentage reduction allowed may result in reductions of the retiring partner’s compensation.

8.  Other Incentives 

Some firms have used post retirement client retention incentives in which a percentage of collected fee revenue for clients that stay with the firm are paid for a few years to retired partners as an incentive to effectively transition clients to other lawyers in the firm.

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

 

Jan 26, 2022

Law Firm Succession Planning & Practice Transition – Have I waited too Long?

Question:

I am the sole owner of a twelve-lawyer defense litigation practice in Chicago. We represent automobile manufactures and have approximately ten major clients. I am the only equity partner in the firm and all of the other lawyers in the firm are associates. Two associates are seasoned lawyers with substantial experience and have been with the firm for many years and the other nine have less than five years experience. The two seasoned associates are in their mid-sixties. I am sixty-eight. I just realized that the firm’s office lease expires in eight months and I have decided that this is a good time to retire. I will not sign another lease and I would like to be completely retired in the next six months. My wife has some health issues and I need to devote my total time time to her. I have talked with the two senior associates and they plan on retiring as well. Therefore, I will have to either close the firm or find another firm interested in taking over the firm. Have I waited too long?

Response: 

Possibly so. Eight months is a very short timeline to locate another law firm that might be interested in acquiring or merging with your firm. However, this is not always the case. I have had situations where interested parties were located in a month or two through cold approaches, discussions held, details worked out, and the transaction concluded within six months. If you have a few firms in mind that you could approach the process could go much quicker than if cold approaches have to be used. So your timeline is not impossible but you need to get started yesterday. Keep in mind that client transition is paramount in the success of such arrangements and usually the acquiring firm wants a transition period, often of a year or so in which you work at the firm in a consultant capacity to assist with client relationship management and transition. Therefore, you might have to stick around in an Of Counsel role for a year or two.

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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

May 05, 2021

Law Firm Succession Planning – How Important is a Formal Appraisal Valuation of the Firm?

Question: 

Our firm is an eight lawyer litigation firm in Portland, Oregon. We have three founding equity partners in their early sixties and late fifties, three non-equity partners, and two associates. Recently the equity partners began succession planning discussions among ourselves. Our preference would be an internal succession and transition to the younger non-equity partners in the firm. In our discussions we were discussing buy-in, buyouts, and valuation and one of my partners suggested obtaining a formal valuation. What are your thoughts regarding hiring a business appraisal firm to provide us with a formal appraisal/valuation of our firm?

Response: 

While I don’t wish to downplay a formal valuation, they can be expensive and I find often not really used in the final outcome, especially when it involves selling partnership interests to others within the firm.

Most law and other professional practices sell (to outside parties) for a multiple of annual gross fee income. Often this is discounted (sweat equity discount) when assets or shares are sold to other attorneys within the firm. Generally, this rule-of-thumb method of valuing a law practice is used to value the practice. However, the eventual value of a law practice comes down to what an interested party is willing to pay. In the final analysis the value of the practice is what an outside buyer or an attorney working for the firm will pay for (or invest) the practice. The valuation process is simply a tool to use to help you begin discussions and get to this point.

Many law firms with multiple partners view the law firm simply as a compensation vehicle designed to put as much income as possible in the pockets of the partners. They do not see the firm as an investment vehicle nor do the partners expect unfunded buyouts when they retire or otherwise leave the firm. These firms try to fund retirements with 401k and other retirement vehicles so there is no unfunded buyout upon retirement. The goal of these firms is to be in a position to acquire and retain top lawyer talent. Often these firms simply require an initial capital contribution and return cash-based capital accounts and earnings to date upon withdrawal or retirement. Sometimes a founder benefit is provided for the original founder(s) of the firm as a reward for their sweat equity establishing the make and making the initial investments. Such founder benefits are often a percentage based on an average of a founder’s compensation over the past three years.

Value in a law practice is largely personal to the lawyer and that individual’s ability to attract and retain clients. The lawyer has knowledge, experience, skill, judgment, and reputation—all elements of professional goodwill – not institutional or firm goodwill. As long as clients primarily hire lawyers, as opposed to firms, this will remain a guiding principle in valuing law practices. This is not to say that some firms have not created a “brand identity” that is separate and distinct to the institution. And in larger practices, the servicing team (including other partners and other practice specialties) influence the client’s selection decisions. Those firms are rare.

Often when selling partnership interests to others in the firm affordability and terms plays a larger role than valuation.

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

Sep 04, 2019

Merger vs Transitioning Our Firm to Our Associates

Question:

I am one of three founding partners in a twelve attorney insurance defense firm in New Orleans. The three of us are in our early sixties and contemplating retirement in the next several years. The three of us have been discussing our succession plans and are wondering whether we would be better off merging with another firm or transitioning the firm to our associates. What are your thoughts on this matter?

Response: 

A majority of firms prefer transitioning to the next generation of attorneys within the firm whenever possible. Many founding partners at this stage of their career are often not ready to move to another firm unless they have to.

Advantages of transitioning to associates in the firm include:

Disadvantages of transitioning to associates in the firm include:

I believe that you should start by taking a critical look at the demographics of your associates and raise the following questions:

  1. What are the retirement timelines for each of you? Will you be retiring close to the same time?
  2. Do you have the bench strength – your present associates – to serve your existing clients if the three of you are no longer with the firm?
  3. If the three of you were no longer with the firm could your present associates retain your existing clients?
  4. Do any of your associates have the leadership and management skills to lead and manage the firm?
  5. Do any of your associates have the will to take over the firm and buy-out your interests?

Your answers to the above five questions will determine whether you should consider a merger strategy. It is often difficult to get a “founders benefit” (goodwill value) in mergers with other firms.

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

Jul 17, 2019

Law Firm Succession – Pros and Cons of Hiring an Associate as My Succession Plan

Question: 

I am a sole practitioner in San Diego, California. My practice is mostly general practice with some emphasis on commercial real estate. I am 64 years old and am looking for a way to transition and exit my practice in the next three to five years. I am the only attorney in the firm however there are three legal assistants that work for me. I have been considering hiring an associate so that I have someone to sell my interests to in the next three to five years. I have never had an associate so I would appreciate your thoughts concerning the wisdom of hiring an associate at this stage of my career.

Response: 

In general I prefer an internal succession strategy when the firm has an attorney or attorneys in place that are willing to step up to ownership and take over the firm. Often this is easier said than done. Issues you will face will include:

  1. Unless you are loaded with work that you are unable to handle or you hire an attorney that can bring work with him or her you will be increasing your expenses and reducing your income/compensation.  Since you have operated all these years with just one attorney I assume that there is only enough work to support one attorney. If you are ready to slow down to a reduced work schedule and take less compensation that is another matter. If not, you may want to look for an experienced attorney with some business rather than hiring a lawyer fresh out of law school or wait a little longer till you hire someone.
  2. Associates require care and feeding – in other words training, mentoring, etc. A certain amount of training and orientation will be required even with an experienced attorney. Revenues may lag from one to two years and your will be saddled with their compensation and other related expenses. You have no experience with mentoring attorneys and this may be something that you are ill equipped to do or don’t want to do.
  3. You may end up hiring and training in an associate only to have them leave the firm in a year or so to join another firm and possibly take clients with them.
  4. The associate you hire may only be looking for a 9-5 lawyer job and have no interest in owning a law firm.
  5. The associate you hire may expect to have you hand them your practice for free and he or she may be unwilling to pay you for your practice.

Many firms have had positive experiences with transitioning their firm to associates. Just be aware of the possible pitfalls. You may be better off going a different direction.

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

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