Law Practice Management Asked and Answered Blog

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Nov 12, 2020

Law Firm Owner Succession/Exit Strategy – Admitting Associates to Partnership

Question: 

I am the sole owner of a litigation firm in San Antonio, Texas. In addition to myself I have two associates and three staff members. Both associates have been with the firm over five years. I am 66 and am just starting to think about my exit plan down the road. While I am not in a hurry to retire or work less I believe that I should at least be thinking about my options. I would appreciate your thoughts.

Response: 

I agree that you should begin planning for your eventual retirement and exit from the practice. Anytime a sole owner has associates on board I believe that an internal transition of the practice to those associates should be the first option explored. It can benefit your associates, your staff, and your clients. External practice sales, merger, and Of Counsel arrangements with another firm can be explored after you have explored the feasibility of transitioning your practice to your associates. This assumes that they even have an interest in owning a law firm. Often we find that they don’t.

You should begin exploring whether your associates have such an interest and you may want to consider selling them each a minority interest now so they don’t become dissatisfied and leave the firm and you empty handed. I don’t think I would wait until you are ready to exit the practice to offer them a partnership interest. Partnership is an important career marker for associates and many will move on if they feel their careers are stagnated and they are not advancing.

If you decide to offer them a partnership interest and they accept begin injecting them into client relationships and firm management. This will help ensure a smooth transition when you retire and exit the practice.

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

Oct 21, 2020

Law Firm Effective Communications – During and Post COVID-19

Question: 

I am the firm administrator of a sixteen attorney firm in Kansas City, Missouri. We, like many other firms, have done our best to face up to the challenges presented by COVID-19. For several months attorneys and staff worked remotely from home office using the internet, telephone, and video conferencing as the primary means of communications with clients and the office. To our surprise it worked fairly well but most of the attorneys were glad when they were able to return to the office. We have been having discussions as to the long-term impact of COVID-19 both in the short-term while we continue our fight against COVID-19 and in the long-term after COVID-19 has been defeated. I would be interested in your thoughts.

Response: 

For years law firms have held the attitude that employees – attorney and staff alike must been seen, observed, and on premises in order to be productive.  Law firms that have had and continue to have their attorneys and staff working remotely during COVID-19 have disproved this premise. They have found that not only have their attorneys and staff been able to remain productive but in many cases even more productive then when they worked face to face in the office. However, communications has been a challenge for many firms.

Below is what I refer to as the scale of communication media and richness of each:

1. Face to face
2. Video Conferencing
3. Telephone
4. Email and text

Face to face is the richest form of communication and should be used for sensitive communications such as performance reviews and other such discussions concerning performance, praise, training and mentoring, etc. It should still be used when ever possible in these situations.

Video conferencing using platforms such as Zoom, GoToMeeting, Team, etc. in the second richest form of communication and should be used when face to face would normally be used but is not possible.

Telephone is the third richest form of communications and should be used for less sensitive communications or for face to face situations discussed above when a face to face meeting is physically not possible.

Email, text, and other written communications should be used for routine communications such as assignment of projects and tasks, work instructions, etc.

Sensitive and difficult communications should be communicated through a rich medium such as face-to-face meetings or video conferencing and routine communications through a lean medium such as a memo.

Media richness is determined by the speed the media provides, the variety of communications channels on which it works, the extent of personal interactions allowed, and the richness of language it accommodates. As tasks become more ambiguous, you should increase the richness of the
media that you use.

Our law firm clients have advised us that after awhile they missed the face to face interaction and found that the major problem with working remotely was that the communication with other members of their work team took much longer than walking over to the next office or desk and was frustrating. While I don’t believe that traditional offices will completely disappear, I believe that law firms have learned lessons from COVID-19 and we may see the following changes in the future:

  1. One lessen that was learned was that law firms could trust their lawyers and staff to work and be productive without being on premises and being seen.
  2. More work and related processes will be reengineered. Law firms have identified work and processes that simply don’t need to be done or need to be done in different ways.
  3. More law firms will implement cloud-based practice management and telephone systems.
  4. Video conferencing is an effective communication medium replacement for certain face to face communications and will be use more frequently for team and client meetings as well as initial new client intake meetings.
  5. Law firms will be more willing to institute remote work programs.
  6.  Law firms will reexamine how they use office space and will consider alternative office space arrangements.
  7. Lawyer to secretary ratios will increase.

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

Sep 30, 2020

Law Firm Sole Owner Looking to Retire Next Year Looking for Options

Question: 

I am a solo practitioner in Southern Indiana. I have been practicing law for 43 years and I want to retire next year. My practice is a general practice firm although approximately 80% of my work is estate planning and estate administration. I am the only attorney in the firm and I am assisted by one paralegal that has been with the firm for twenty years. She plans on working for another ten years or so and will need a future home. I am not sure whether there is any practice value, whether I should just close the practice, or whether another attorney or law firm might be interested in my practice. Your advise would be greatly appreciated.

Response: 

A practice review would be required to determine the potential value and marketability of your practice. If your firm has generated adequate revenues, net earnings, and a diversified base of clients and or referral sources your practice should have an appeal to another attorney or law firm. The key question as to whether there is a goodwill value is whether future cash flows will continue from your clients and referral sources after you exit the practice. It has often been said that clients hire the lawyer – not the law firm. However, a well planned client transition with the new acquiring attorney or law firm can increased the odds of success.

I would only consider closing the doors and shutting down your practice as a last resort option. You will not receive any value for the sweat equity that you have invested in the firm or a home for your clients/referral sources and your paralegal. Before considering this last resort option I would begin a search for other candidate attorneys that you might be able to sell your practice or law firms that you might be able to merge with or join up with in an Of Counsel arrangement. An Of Counsel arrangement is often a solution in your situation. In essence you winddown your practice operation, bill out your work in process and collect your receivables, and take your clients and employee over to the other firm. After joining the other firm you work as long as agreed to and you:

  1. Transition your clients
  2. Integrate your practice
  3. Transition your employee
  4. Work until you are ready to retire
  5. Retire

Typically you will be paid under an eat-what-you-kill system based upon your fees collected based upon, working and originating attorney, while working at the firm and sometimes receive a goodwill value based upon a percentage of your client origination fees collected (past and future clients) after your retirement for three to five years.

Joining another firm would be a better option than shutting down if you can find the right fit.

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

 

 

Sep 16, 2020

Law Firm Planning Retreat During COVID-19 – Consider a Virtual Retreat

Question:

I am a partner and a member of a three member management committee in a eighteen attorney firm in Chicago. During the past year we have discussed conducting an offsite long range planning retreat in the fall that would include the partners and other attorneys in the firm. We have never done this before so this would have been a new experience for us. However, with the COVID-19 crisis we have cancelled our site reservations and are wondering whether we can still conduct our retreat remotely? Any thoughts you have would be appreciated.

Response:

Sure you can. I suggest that you consider a virtual retreat using Zoom or some other communication platform. Organizations are holding virtual conferences, churches are conducting virtual services, and law firms are conducting virtual retreats and planning meetings. Last week I attended a two-day video conference and the process went extremely well. There were even small group breakout sessions that focused on specific topics. While a in-person format is preferable, you can get the job done with a virtual retreat. During the current crisis a retreat and long range planning is more important than ever. So, I suggest that you try a virtual retreat.

Here are some suggestions regarding planning your first retreat:

A retreat differs from the typical firm meeting in that it is a specific structured program with an agenda of topics and procedures agreed to in advance.  The purpose of the retreat is to help facilitate change. For example:

Setting up a retreat involves all of the following steps:

Gather Ideas

The first step involves key members getting together to discuss their initial thoughts about the firm, its structure, and its organizational problems to brainstorm for possible topics. Partners and other members of the firm can also provide written suggestions for the agenda. Tentative retreat objectives can be formulated at this time.

Prepare Preliminary Program

A preliminary program is formulated. An appointed retreat coordinator or team develops the preliminary program including tentative:

The coordinator works on further defining goals and objectives of the retreat, how it is to be coordinated, and who will be responsible for various functions and activities.  Coordination checklists and timetables are developed.

Approve and Finalize Program

The preliminary program is circulated for comments and suggestions. Changes are accommodated and the finishing touches are put on the program. The partners agree on all details of the agenda and program and the program is finalized.

Background Research

The brainstorming process will require background data. Internal data such as firm financial reports, client lists, lawyer productivity reports, etc. and external information such as demographic and census data, information on competitors, business trends, etc. should be compiled and organized into appropriate presentation formats such as PowerPoint presentations, whiteboards, flip charts, and handouts.

Retreat Facilitation

A moderator should be assigned to the retreat. The moderator can be a member of the firm if the firm has a member who can be objective and has the skills to properly facilitate a retreat or the moderator can be an objective outsider who has the requisite skills. The moderator serves as the “tour guide” and keeps the retreat on track, in focus, and provides resource information when required. The moderator should be given the authority to control the retreat and enforce the ground rules.

Implementation of Decisions

A retreat will not be successful unless an implementation plan is formulated during the actual retreat and made a part of the proceeding. Specific assignments and completion dates must be agreed upon during the retreat itself and schedules for reporting on progress must be determined.

At the conclusion of the retreat the outcome of the retreat and the implementation plan should be summarized.

Within two weeks after the conclusion of the retreat a retreat report should be written and distributed to all firm members in attendance. Completion dates should be placed on the firm’s docket control system. A retreat follow-up item should be on each and every firm meeting. A post retreat evaluation should be conducted six months after the conclusion of the retreat.

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

 

Aug 27, 2020

Law Firm Partnership – How to Admit Associates to Equity Partnership

Question: 

I am the owner of a six-lawyer law firm in San Diego, California. Our firm is a business litigation boutique firm. I founded and formed the firm nineteen years ago. The other attorneys are all associates of which one has been with me for over ten years, one over five years, and the other three less than two years. I am 56 and still plan on working another ten to fifteen years. However, I don’t want to lose my senior associates and I want them to be around in ten to fifteen years to take over the firm, I also believe that they should be partners. The firm is presently a sole proprietorship. I would like to extend an offer to the senior associate now and possibly to the other senior associate in a a couple of years. How do I get started? What are some of the issues that I should be thinking about?

Response: 

If you have never had a partner in this firm or another firm in the past this will be a new experience for you. Law partnerships are like marriages and choosing the right partner is essential. Not only should the lawyer be an exceptional lawyer as far as legal skills, client satisfaction, fee production, and client origination, he or she should have similar values and goals for the firm that you do. Will you mesh well? At least the associate is somewhat of a known quantity since you know the associate and have worked with the associate for several years. However, the experience will be different. Being a partner with someone is different than a boss-employee relationship.

Here are a few ideas you might consider:

  1. Outline you goals and expectations for the relationship.
  2. Meet with your associate and identify his/her goals and expectations for the relationship.
  3. Determine how much control over the practice and decision-making are you willing to give up? Share?
  4. Determine how much and for how long you are willing to make less?
  5. Determine if the associate will be expected to bring in business? When/Timeline?
  6. Think about the firm you want to build – firm-first or lone ranger (team based or individual practices)?
  7. Decide on firm name – will it change? Should it? Impact on image, clients, etc.
  8. Decision as to capital contribution or buy-in? Yes or No? How much? Timeline for payment?
  9. Ownership percentages
  10. Voting
  11. Compensation
  12. Withdrawal arrangements

I suggest you think about your succession and eventual exit from the firm and what, if anything, you are looking to receive (goodwill value) in monetary terms when you leave the practice. Rather than having a large buyout upon your retirement/exit from the firm tie this to the value per share or unit of ownership interest and establish this is the purchase price as ownership shares are acquired.

Since you are a proprietorship you will need to change the structure of the firm to a multi-owner structure such as PC, APLC, or LLP. (LLC’s are not permitted in California for law firms).

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

 

 

Aug 19, 2020

Law Firm Succession Planning – Managing the Project

Question: 

I am a member of the executive committee of a fourteen attorney firm in Houston, Texas. We have ten partners and four associates in the firm. Seven of our partners are in their sixties and we have done nothing to prepare for the succession and transition of our senior partners and have concerns whether we will be able to continue as a firm. Where and how do we start?

Response:

You need to begin to have some serious discussions with your senior partners as to their retirement goals and timelines and determine how close together their exits will be. Can the remaining three partners hold and serve the clients? How experienced and senior are your associates? I suspect that you will have a large talent gap and you will need to either bring in some experienced lateral talent or consider merging with another firm. This could take a considerable amount of partner time and needs to be managed like you would manage a project, otherwise you will not have the focus and momentum to keep a things on track.

A key question will be how your partners will manage the work of the succession/transition/project while continuing to practice, serve clients, and managing the firm? How will they balance billable client production with the non-billable time that a succession/transition/project will require? Otherwise, the project will drift, will not be prioritized, and will fail to receive the proper attention to keep it moving forward. Newspaper reporters are taught to ask the following question when working on a story:

To succeed at managing a succession/transition/project you will need to ask and answer and address many of the same questions.

WHO

Who will lead, direct, and manage the project? In a solo or solo owner firm, this may be the owner, or an outside consulting firm retained to lead, direct, and manage the process. In a larger law firm, this may be the management or executive committee, a managing partner, or a transition committee formed for such purposes. Larger firms may also retain a consulting firm as well. Other outside advisors such as certified public accountants, financial planners, and insurance professionals may also be involved as well. Specific roles, expectations, and accountability should be developed for everyone, inside and outside the firm that will be working on the project.

WHAT

What is the specific nature of the project? The law firm should define the succession/transition project specifically. Will the project involve looking into all possible transition/succession/ options or will it be limited to a single specific option, such as sale of the practice to another law firm, admission of a non-equity partner or associate to equity ownership, or merger with another firm? Define the specific scope of the project and put it in writing in the form of a succession/transition/ project charter or project plan. Define desired outcomes.

WHERE

If the firm has multiple offices what office location, is the primary focus? In the case of a practice sale or merger, what geographical areas should the candidates be presently located? Will the project team have to be located in the same area as the law firm? Can the law firm and team members be located in different locations? Will the law firm require face-to-face team meetings? Will the meetings be able to be held remotely?

WHY

Why is the succession/transition/ project necessary? Why the project being considered? What are the consequences for failing to start and successfully complete the project – loss of key clients – loss of retirement payout and or sweat equity from the practice? Why is important to start the project now – rather than later?

WHEN

When should the succession/transition/ project start? When should the project be completed? What are the key milestone dates, specific tasks, and specific task start and completion dates?  Examples of two milestone dates in a larger firm that has a transition/phase-down plan might be;

  1. Start phase-down – January 1, 2020
  2. Retire – December 31, 2020

HOW

The HOW involves the how of managing the project. In other words, some of the basic project management tools used to keep the project:

The HOW also involves deciding upon and implementing the succession/transition/strategy that achieves the goals of the solo, sole owner, or equity owners in a larger law firm. Usually the project planning HOW leads to the specific strategy and implementation HOW. The strategy and implementation HOW might involve selling the practice, admitting a non-equity partner or associate to equity ownership, or merger with another law firm. In the case of a larger law firm, it may involve the specific transition and phase-down activities.

If you put in place a solid project plan your partners will be able to balance priorities and transition the firm in a timely and effective manner.

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

 

Jul 22, 2020

Merging a Small Law Firm with a Large National Firm

Question: 

I am a sole owner of four attorney, including myself, boutique litigation law firm in Chicago. I am fifty-two and looking for a long-term succession strategy for my firm. I have been approached by a large Chicago national firm involving merging my practice with their firm. We have had several meetings and they have provided me with an initial proposal. I have spent many years building my law firm, and, by merging with a large law firm it seems that I am not really receiving any value for goodwill. What are your thoughts?

Response: 

It is normal to exchange equity in your firm for equity in a large firm and not receive any cash consideration in those situations where equity partnership is being offered. Some large firms have a goodwill factor which is included in the value of each capital share or unit. The payment of the goodwill factor is usually waived in a merger. However, if you are considering merging with a large law firm and you will not be receiving any cash consideration for your practice, you should give serious consideration to why you are merging. In other words, why work for 20 years and receive nothing for the goodwill or for the value of the client list and the development of excellent personnel? Perhaps you could be included in the firm’s retirement plan, which could be considered a payment for goodwill. Another approach might be for you to receive a certain percentage from your clients and referral source fee collections for say three years after you retire. Receiving cash consideration for goodwill in a merger occurs more often in mergers with smaller firms.

Bear in mind that in many mergers where small firms merger with large firms equity partnership is not being offered and non-equity partnership is being offered instead.

With all of this said there could be other considerations that could result from a merger with a large national law firm such as greater compensation, professional recognition, peer mentoring, size and type of cases, staff and other resources, etc. that could outweigh a cash consideration for goodwill.

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

Jul 01, 2020

Law Firm Acquisitions – Acquiring a Senior Attorney’s Practice

Question: 

I am a partner in a small law firm in Northern Virginia. We are a four attorney firm with two equity partners and two associates. We are interested in acquiring a solo practitioner’s practice that is 60 years old and ready to retire. What are the issues that we should be concerned with before we spend a great deal of time on this matter?

Response: 

I understand your concern and reason for asking for my thoughts. You must immediately determine the nature of the clientele that you would be acquiring and whether the seller is interested in remaining with the firm for a period of at least one year so your firm can become acclimated to the new clients. If the firm’s clientele are older, what would be the reaction if they were represented by younger attorneys? People chemistry is very important. It has often been said that clients hire the lawyer and not the firm. While this is not totally true – there is some truth in this statement. A successful client transition and retention is crucial.

If the sole practitioner is interested in selling out and leaving the area, then you may consider proceeding with the transaction with payments which would be based upon subsequent collections during a period of years after the acquisition. In other words, the more the seller participates during the first year to retain certain clients, the more the set we would receive.

The worst scenario is if the seller dies unexpectedly after signing the agreement. This recently happened one of our clients, and they had to spend a great deal of time and effort trying to retain clients that they had never had contact with.

You must also review the financial records to determine the profitability of the practice. Many sole practitioners do not keep adequate time records, don’t have automated practice management systems, and are not paperless. What is the shape of their client files and how well are they organized? Certain data is stored in their heads. In many cases, the hourly rates are low and could be raised during the first year to make the practice more profitable. However, this increase must be one that will be accepted by the client. The next question would be whether family members are involved in the practice, if they are, there may be problems in the future. The clients know the family, and if there are any remaining family members working in the firm, they may leave the your firm empty-handed. For example, if a paralegal who is a family member leaves the firm after the merger is consummated, several clients could follow the paralegal to their new place of employment. In such situations I have had client law firms that have had such persons execute non-compete agreements. In one situation the deal was aborted by the acquiring firm due to the paralegal not willing to sign a non-compete agreement. This was a situation where the paralegal in the firm actually had the client contact relationship. The owner’s contact with the client was limited. The paralegal had the relationship.

Finally, there should be other safety valves for the purchaser in acquisition of this nature. On a positive note, the situation could present a fine opportunity for growth. Just ensure that the  buy sell and other legal agreements provide the appropriate safeguards.

The above issues such as non-compete and practice sale agreements should be addressed with your business attorney.

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

 

 

Jun 04, 2020

Law Firm Administrator Compensation

Question: 

I am a member of a three member management committee in a sixteen lawyer boutique litigation firm in downtown Chicago. The firm has been in business for over forty years. We have sixteen lawyers in the firm of which ten are equity partners and six are associates. The original founders are retired and we are in second generation.

Until five years ago all partners were involved in all aspects of firm management. At that time we made the decision to put in place a three-member management committee that was charged to handle certain aspects of firm management with the full partnership only participating in major decisions. We hired a firm administrator to handle the day to day administrative responsibilities. Our administrator reports  to the management committee. This structure has worked very well for us. We are currently paying our administrator a base salary and a discretionary bonus. After five years of salary increases our administrator is making more than our associates. Is our present approach to compensating our administrator the best approach or should we be looking at a different method of compensation?

Response: 

Base salary with discretionary bonus is the most common approach that I find being used to compensate firm administrators. The problem with discretionary bonuses is that many law firms don’t tie these bonuses to measurable performance and as a result they become expected and end up being an entitlement. However, I have worked with many firms where we have put in place alternative bonus systems that have either replaced or supplemented discretionary bonuses. This has allowed firms to put more emphasis on performance as opposed to continuing large salary increases for just showing up. While administrators still receive salary increases they are at a lower rate of increase, performance bonuses take on a larger role, a larger percentage of the compensation is variable rather than fixed, and administrator performance is aligned with firm goals.

A few approaches that firms have taken:

These approaches are just a few examples. The key is to align your administrator’s performance with firm goals and pay for performance.

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

 

 

 

 

May 14, 2020

Law Firm Marketing – Using Webinars to Market Estate Planning and Probate Services During and Post COVID-19

Question:  

Our firm is a four attorney estate planning and probate specialty practice in Fresno, California. We are in our 15th year of practice. In addition to word of mouth referrals from past clients as well as referrals from attorneys and other professionals, seminars has been a major source of new business for the firm. In fact, for the last several years seminars has been our number one source of new client business. As a result of COVID-19 we are no longer conducting seminars and we have concerns that this is going to have a major negative impact on our business both now and even in the future after current stay at home restrictions are lifted. We would appreciate any thoughts that you may have.

Response: 

While I don’t have a crystal ball I believe that you are correct in assuming that people are going to be guarded and less likely to want to attend such seminars after current stay at home restrictions are lifted. Even before COVID-19 we have been seeing a trend of more and more people preferring to receive information online. For several years now state bar associations have seen their online CLE attendance surpass attendance at live events. More and more college programs are being offered online – either partially or totally. Several years ago I began advising my estate planning/probate law firm clients to begin experimenting with webinars and many firms have being doing them very successfully and have had good results.

I suggest that you look at some of the webinar platforms such as www.gotowebinar.com, www.webex.com, and zoom.us/webinar. View videos from each product as well as their demos and sign-up for a service. Then attend the vendor’s online training for both organizer and attendee so you have a feel for both sides of the webinar tool. Customize settings for your firm and add you logo, etc. Plan the date for your webinar, decide on a topic, prepare your registration invitation, email invitations, prepare handouts, and prepare your PowerPoint. Generally you need more slides for a webinar than you do for a live presentation. Then practice and practice some more. You need to be comfortable both with the webinar tool as well as giving a presentation to a computer screen. I suggest that you have someone serve as your moderator that will introduce the program and the general program procedures, introduce you, review online questions as they come and read the questions to you either as they come in or at the end of the presentation (depending on how you decide beforehand to take questions), and close out the program.

I think you will find webinars a suitable replacement for live seminars and at a lower cost and time investment.

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

 

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