Law Practice Management Asked and Answered Blog

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Apr 05, 2016

Law Firm Debt – Impact of Debt and Other Liabilities Upon Future Growth Options

Question:

I am a member of a three member management committee of a 16 lawyer firm located in Akron, Ohio. We have 10 partners and 6 associates. Several of our partners are in their 50s and 60s. Recently, we have had discussions with a couple of potential merger partners and laterals and in all cases they have backed out advising us that they were uncomfortable with our balance sheet. What can we do to better position ourselves. We desperately need to bring in new talent with books of business?

Response:

First there are the obvious balance sheet items – bank debt, large tapped out credit lines, equipment leases and other liabilities. Then there are the items that are not recorded on the balance sheet – namely unfunded partner retirement buyouts and long term real estate leases. These are often major deal breakers in mergers and scare away laterals. If you have bank and other debt on the balance sheet work at cleaning it up. More importantly if you have unfunded partner buyouts begin either rethinking the desirability of these programs or begin funding this liability now with a goal of the liability being totally funded over the next five to seven years. Then shift to a retirement program that is totally funded. Unfunded partner retirement programs are becoming a thing of the past.

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

 

Mar 30, 2016

Law Firm Compensation for TIme Spent by Partners Managing The Firm

Question:

Firm has three partners, two associates, and 2 staff members. We are a new firm and just started in practice a year ago. We are equal partners and we allocate compensation equally based upon these ownership interests. We believe the system has worked well for us but we been considering whether one person should handle all the management duties and if so how that person should be compensated. We would appreciate your thoughts.

Response:

First I would identify the duties and hours involved and make sure the duties are managing partner level duties and not office manager level duties that should be handled by staff. Delegate or consider hiring an office manager for duties than can be delegated. For duties that can't be delegated I would suggest you that a look at the hours that will be required and determine a  fixed additional compensation amount based on expected hours and the partner's standard billing rate. The partner's compensation would be his/her fixed additional compensation amount plus his/her allocation based upon ownership interest.

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

 

Mar 22, 2016

Law Firm Partner Retirement Buyouts – How to Keep from Breaking the Bank

Question:

Our firm is a 14 lawyer firm in the Boston suburbs with 4 founding partners and 10 associates. Two of the partners are in their 50s and two are in their 60s. Several years ago we adopted a retirement buyout plan for the founding partners where each partner upon retirement is paid the balance of his cash-based capital account and a multiple of one times an average of his last three years earnings paid out over a five year period. I am concerned that when partners begin to retire the retirement payouts will place undue stress on operating funds and the firm's ability to continue to be successful. I would appreciate your thoughts.

Response:

If nothing else you should consider a cap that places a limit on how much can be paid out in a single year where aggregate payments to all retired partners in any one year are capped at 10 percent or less of distributable net income. Any obligations that cannot be paid in one year as a result of the cap would be rolled forward to the next year also subject to the same cap.

Unfunded plans can present problems down the road if they become unaffordable for the next generation of attorneys as they have to be funded out of future earnings. You should look into ways to fund your partner's retirements as much as possible through 401k and other retirements plans, life insurance policies (on each of the partners that can fund the buyout in the event of death or where paid up cash values can be used upon retirement to apply toward buyouts, and sinking funds (Rabbi Trusts, etc.) where funds have been set aside out of current earnings.

We all have been witnessing what is happening with governmental unfunded pension programs. The same thing is happening with law firms that have unfunded retirement programs as baby boomers are retiring in record numbers.

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

Mar 15, 2016

Law Firm Alternative Billing – What Do Clients Think

Question:

Our firm is a 18 attorney firm based in Tucson, Arizona. Our practice is a boutique general liability defense firm. Our clients tend to be self insured large corporations and smaller business firms. Currently all of clients are billed by the hour. Recently we have been discussing whether we should propose an alternative billing approach to our clients. We would be interested in your thoughts.

Response:

I do not want to discourage alternative billing – there are a lot of benefits that can be obtained – however I find that firms practicing your type of law and that have your type of clients that alternative is talked about more than actually implemented. You may find that your clients like the thought of the certainty of fixed fees but have concerns about the quality of representation under such arrangements. Recently, a litigation defense law firm asked me to interview their clients concerning their satisfaction with the law firm. When asking one general counsel about his thoughts regarding alternative billing he told me:

"My concern with fixed fee billing is that there might not be the financial incentive for the law firm to dedicate all the resources and best efforts to obtain the best results for our company. I prefer hourly billing with case management plans and budgets. I want our law firms to be financially successful as long as they achieve results for our company and not be penalized or constrained by fixed fee arrangements."

You may find that your clients are open to discussing alternative billing arrangements but may be hesitant when it comes to implementation. They are comfortable with hourly billing.

With this said I think you should explore the dialog with maybe one pilot client and see where the discussion leads. Insure that you do the proper analysis of that client's billing history, overall risks, and develop a fixed fee strategy that not only allows you to attain your desired billing rate but provides for a risk premium as well. Also build in ability to take exceptions for matters that fall outside the scope of the fixed fee arrangement.

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

 

 

Mar 08, 2016

Law Firm Administrators – New Administrator – Accounting vs. Human Resource Background

Question:

Our firm is a 18 attorney firm based in San Diego. We are considering hiring our first legal administrator and have interviewed several candidates and have narrowed our search down to two candidates. One candidate has a strong financial background and has worked as a director of administration in several very large firms – 200 plus attorneys. The other candidate has a strong HR background, a weaker financial background, and has worked as a firm administrator in two different law firms – a 30 attorney firm and a 20 attorney firm. We like both candidates. Which candidate would you lean toward?

Response:

I would lean toward the administrator that worked for the smaller law firms. Having worked in smaller firms this candidate would be a more hands on administrator which is what a firm your size needs. In a firm your size the critical need is people management and leadership. As long as the candidate has a working knowledge of accounting the candidate should do fine with the oversight of your CPA firm. If you have to you can supplement any accounting deficiencies with outside resources – you can't outsource people management.  

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

Mar 01, 2016

Law Firm Marketing – Estate Planning Firm & Importance of Lawyer Referrals

Question:

I am the owner of an estate planning firm in Oklahoma City. I have four associates that work for me in addition to two billable paralegals and three staff support members. I am looking for ways to improve our business development and marketing. The majority of our business comes from past client referrals and referrals from employees and friends. We spend a considerable amount on advertising which includes our website, print ads, collateral materials, newsletters, etc. We would like to do more to increase client business. I would appreciate your thoughts?

Response:

I find it interesting that you did not mention referrals from other lawyers. I have many estate planning/elder law clients that receive a major portion of their clients from referrals from other lawyers. This should be a key component of your marketing plan. Your business development and marketing efforts should address this potential referral source. You should be investing targeted time:

Review your website and see if it speaks to both your individual clients (mom and pop clients) as well as professional referral sources such as other lawyers.
 

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

 

 

 

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

Feb 16, 2016

Law Firm Acquisition – Acquiring a Personal Injury Plaintiff Practice

Question:

I am a partner in a two owner personal injury plaintiff firm in Los Angeles. We have four other attorneys. We do traditional personal injury work with a high volume of medical practice and products liability. One Hundred percent of our fees are contingency fees. My partner has expressed an interest in retiring and selling his interest to me. How do I go about determining a fair price to offer him for his shares? I would appreciate your thoughts.

Response:

It would be nice if the two of you could agree on a fair price. However, often it is not possible in a contingency fee practice. Often the primary value of a practice such as yours is the value of the pending cases on the books and those values are unknown until the cases are concluded in the future. It all depends on the extent of fluctuations in the annual revenue stream. I just completed two assignments where a dollar amount was agreed to based upon a gross revenue multiple. However, in both cases the revenue streams were fairly consistent over a five-year period. When there are extreme swings in revenue over a three to five year period there often is no choice but to base the acquisition price upon a payment arrangement as cases are completed. A percentage of completion ratio (how long the case was opened before the acquisition and when the case is concluded) or other method will have to be considered as well as overhead paid.

While cases in progress may be the major asset you also should expect to purchase your partner's cash-based capital account or shares of stock as well.

There are a variety of other approaches. I have never seen the same approach used twice.

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

 

 

Feb 09, 2016

Law Firm Marketing Director – Are We Ready For One – What Should we Look For?

Question:

We are a 25 lawyer insurance defense firm in Northwest Dallas. We are managed by a managing partner, firm administrator, and director of human resources. We have been discussing the need for a marketing director. Are we too small? If we decide to hire one what should we be looking for and where should we start our search?

Response:

There is no magic size. I have seen five lawyer firms effectively use a marketing director and thirty lawyer firms that do not have one. It all comes down to your firm's specific need, what you are wanting to accomplish, and what the lawyers are willing to let a marketing director do.

While the popular title is marketing director, director of client and business development, etc. some marketing staff in smaller firms often function more as marketing coordinators and event planners. If you are looking for someone to help the firm devise a competitive strategy, lead the firm's strategic planning effort, help diversify the practice, etc., you need to look for an experienced marketing director with five plus year's experience in law or other professional service firm marketing at a director level.

If you need someone to update the website, write bios, write blogs, update social media, create brochures, and plan and coordinate events – you may only need a marketing manager or coordinator with excellent writing skills. Prior experience in law or professional service firm marketing is a plus but not required. Journalism and mass communications are popular degrees for this position.

The Legal Marketing Association (LMA) is an excellent source for finding candidates. Here is a link to the LMA job bank

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

 

 

Feb 02, 2016

Law Firm Succession – Should I Close My Doors

Question:

I am a lawyer from Carbondale, Illinois area. Last week I attended you Illinois State Bar Association CLE Webinar – Law Practice Succession and Transition – Ideas for Getting Started. I am 66 years old and I fit the "Sole Owner" model that you discussed. I am the practice. I have one associate and one legal assistant and my associate has neither the desire or the ability to take over my practice. I am tired and want to retire by the end of the year. With no successors in site I am thinking that I should just close the doors at the end of the year. I welcome your thoughts.

Response:

It could come to that if you cannot find someone interested in taking over your practice. However, since you have almost a year before your planned retirement I would at least try to see if you can find another lawyer or law firm to buy or otherwise takeover your practice – preferable "buy". Start now as it often takes a year. Make a short list, make some phone calls, have some lunches, get to know some folks, and see what kind of interest there might me. Keep a continual momentum going. Since you are the practice – this will be a concern to a potential buyer especially if you are unwilling to stay on after the sale in a consultative transition capacity. You might want to rethink your timeline – otherwise you may have to simply close the doors and refer out the work and strike the best arrangement that you can.

Click here for a link to my book – The Lawyers Guide to Succession Planning – published this week by ABA

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

 

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