Law Practice Management Asked and Answered Blog

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Jan 28, 2015

Law Firm Succession – Succession Plan for the Solo Practitioner

Question:

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

Response:

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

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

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

Good luck with it.

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

Jan 20, 2015

Law Firm Hiring Practices – Pros and Cons of Hiring Lawyers that are Children of Firm Partners

Question:

I am a partner in a four partner firm located in Houston. We have three associates in the firm. One of our partners has a son just finishing law school and he would like him to join the firm. We have never had children of partners work in the firm before and I am concerned about setting a precedent. We have a good relationship among all of the attorneys and I do not want to see our relationship tarnished. I would appreciate your thoughts.

Response:

I have seen it go both ways. Many firms have brought children and other family members into the firm and have had excellent results. Others have not. In general I believe that law firms do a better job at this than do other business firms. Your situation is more complicated since you have associates in place that may feel threatened and uncertain as to their futures when you bring in family members. I believe that if you lay the proper foundation and go about it correctly you can successfully bring your children into the firm. Here are a few ideas:

  1. Recognize that for the family members there will be a family system, the family law firm, and an overlapping of these systems. This can be fertile ground for conflict if clear boundaries between the family role and the firm (business) role are not clear. Establish clear boundaries. Family dynamics and business dynamics seldom mix. Your objective should be to draw the clearest possible distinction between the two and make sure that everyone understands that the firm (business) is the firm and the family is the family.
  2. Children should not be brought into the firm unless they want to be involved and satisfy your standard hiring criteria for lawyers. I believe that before your children join the family law firm it is a good idea for them to work for another firm or organization. When they do join the family firm they can bring with them that experience, a supply of new ideas, a network of contacts, and a number of other benefits acquired.
  3. Make it clear to your children that they must "earn their stripes" and come up through the ranks in the same fashion as other associates in the firm. No special privileges. Make it clear that they must earn the respect of other attorneys and staff in the firm.
  4. Put your associates and staff at ease. Make it clear that your children are expected to "earn their stripes" and they will not be promoted to partner over other associates on family status alone. (Unless this is your intent)
  5. Clearly define the role of all parties.
  6. Monitor your own behavior. Don't take sides – either between your children if both join the firm or between your children and other employees in the firm.
  7. Be careful with compensation and other rewards. Compensation should be based up performance and results and consistent and competitive with other law firms of similar size and type.
  8. Communicate, communicate, communicate – your intentions, roles, etc. before and after your children join the firm.

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Good luck! 

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

Jan 07, 2015

Law Firm Marketing – Focusing on a Niche

Question:

I am with a 17 attorney general business firm located in Boston and chair of the firm's three member marketing committee. At this year's planning retreat we discussed the concept of niche marketing and whether we should focus on a specific niche. Your thoughts would be appreciated.


Response:

A niche marketing strategy can help you stand out from the crowd by focusing on a particular segment. Here is an outline of a typical niche marketing program.

  1. Reach Out to Existing and Potential Referral Sources
    1. Contact existing and past client that would be willing to provide leads, give you written testimonials/references and involve you in their professional and trade associations
    2. Contact non-client influentials – attorneys, bankers, editors, executive directors of industry associations, media, and community leaders and work with these people.
    3. Existing practice profile and factors as well as referral sources form the bedrock of a law firm.
  2. Targets of Opportunity
    1. Additional targets of influence
  3. Offer Silver Bullets – Solutions to hot button issues that potential clients have.
  4. Targeting a Niche
    1. Selecting a Niche Target
      1. Size
      2. Location/Zip Codes
      3. Type of Business/Industry
      4. Practice Area
      5. Competitors
    2. Develop an insider understanding of the niche industry (industry success factors)
      1. Critical success factors
      2. Key ratios
      3. Key publications of the niche
      4. Writing, speaking, leveraging memberships with key organizations
    3. Objectives and desired outcomes
    4. Prospective niche client profile
    5. Library of niche publications
    6. Niche database
      1. Existing clients
      2. Prospective clients
      3. Non-client influentials

Often a niche strategy does not involve a new area of practice – it may involve delivering services that you already perform – but marketed to a specific industry group. In essence you are learning the unique needs of a specific industry group, learning their language, and demonstrating that you understand their business better than your competition. An example would by an insurance defense firm that handles the defense for a couple of trucking cases and then creates a niche around the trucking industry.

Place your niche marketing strategy carefully. It takes time, financial resources, and commitment to successfully pull off a niche marketing strategy. Don't try to focus on more than one or two niche markets and insure that the niche that you are targeting is large enough to satisfy your objectives and justify the time and resources that you will be required to invest.

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

 

Dec 30, 2014

Law Practice Management – 5 Ideas for Jump Starting Your Law Firm in 2015

Happy New Year and best wishes for both a personal and professional 2015.

Here are a few ideas to help you jump start your practice in 2015:

  1. During the next week review your 2014 personal and practice performance and consider
    1. Things that you did well and could have done better
    2. Things done poorly
    3. Things that you should have done but did not do
    4. What you should be doing now – in 2015 – to be effective in your practice
  2. Write down what results you expect – goals – for 2015 – both financial and non-financial – and compare actual results against these goals
  3. Ask each person in your firm to create and implement one goal that will improve your practice in some way (revenue, profitability, process, client satisfaction)
  4. Implement one action item that you have been things about for years and procrastinating
  5. Give some though as to what you want to be remembered for – personal and professionally

Good luck in 2015!

https://www.olmsteadassoc.com/blog/category/strategy/

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

 

 

 

Dec 17, 2014

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

Question:

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

Response:

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

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

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

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

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

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

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

 

 

 

 

 

 

 

Dec 06, 2014

Law Firm Collections – Reducing Accounts Receivable Writeoffs for Family Law Matters

Question:

I am the managing partner in a eight attorney firm in Nashville, Tennessee. We are exclusively a family law practice and while we charge a few client on a flat fee basis – most clients are time billed. We ask for a $5000.00 security retainer up front. After the retainer is used we invoice clients for additional time spent on a monthly basis. We are having problems getting paid and are having to write off a large amount of accounts receivable. I would appreciate your thoughts.

Response:

This is a common problem that I hear from family law as well as other firms representing individuals. The law firm collects the initial retainer, the retainer is used up, additional work is done, – often to the conclusion of the matter – the client is invoiced for the remainder of the time expended, and the bill either does not get paid or is paid partially. The law firm ends up writing off the balance.

The best solution is to require the retainer be replenished at a certain point and, within your state's ethical parameters, not perform additional work until the additional retainer is received. Recently a client told me that his office manager's number one responsibility is a daily review of unbilled time compared to unused retainer. When the unbilled time get to 90% used the client is invoiced for additional retainer. When 100% is reach work is stopped until the additional retainer is received.

With today's client billing systems that have integrated trust accounting, assuming that timesheets are entered directly and daily, an office manager or bookkeeper can simply print or review on screen a summary work in process report that shows for each matter the unbilled values for fees and costs, unpaid receivable, and retainer balances in the trust account. Matters with unbilled fees and costs approaching the retainer balance can then be invoiced for additional retainer. The key to making this work:

  1. All timekeepers must enter their own time via direct time entry and daily.
  2. Someone must be assigned the responsibility for daily monitoring and daily invoicing for additional retainer replenishment and help accountable.

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

  

 

Nov 25, 2014

Law Firm Partner Compensation – Individual vs. Firm Based

Question:

I am the managing partner of a 9 attorney firm in Cincinnati. We have four equity partners and five associates. Partners are compensated on the basis of their ownership shares which are currently 25% each. In the past the system worked well – but now we are having problems. The two senior partners are working and contributing less and are taking out half of the compensation which is causing dissatisfaction and division within the firm. We have been discussing alternative approaches. Should we consider a system total focused on individual partner performance and production – an eat-what-you kill if you will?

Response:

I agree that personal production and performance should have a relationship and a tie to compensation. However, a move to a total eat-what-you-kill system might be a drastic first-step move. Eat-what-you-kill approaches can often destroy teamwork in firms that desire to be team-based firms. For firms that want to be lone ranger firms eat-what-you-kill is fine.

Since I don't know what you have done so far it is hard to identify the first step. Sometimes all that is needed is a frank and open discussion and a realignment of percentages tied to recent performance. In other cases is might be appropriate to have different percentages for compensation (participating compensation percentages) based upon say a three years rolling performance average/ratio. One approach would be to use this instead of ownership percentages for allocating profit to the partners. Another approach might be to create two profit pools – say 70% of firm profit and allocate this profit to the partners based upon participating percentages and 30% of firm profit and allocate this profit to the partners based upon ownership percentages.

Obviously there are many of approaches that you can take. This approach moves closer to individual performance but retains firm participation as well.

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

 

 

Nov 18, 2014

Law Firm Administrators – Effecting Change by Selling Your Ideas to Your Partners

Question:

I am the firm administrator with a 27 attorney firm in Detroit. We have fifteen partners and twelve associates. I have been eight months with the firm and in this position. I replaced another administrator who was terminated because the partners did not believe he lived up to their expectations. He was their firm administrator. This is my first law firm and I want to be successful. I feel that I am struggling and am not sure of my priorities. I would appreciate your thoughts.

Response:

Few things are as important to an administrator’s future as that person’s ability to influence the decision-making process and effect change.  Skills and competencies are important but so are results. In order to transcend to the next level and enhance their value to their law firms, administrators must help their firms actually effect positive changes and improvements and improve performance. This requires selling ideas to partners in the firm and having them accept and actually implemented. To succeed administrators must achieve three outcomes:

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

 

 

Nov 11, 2014

Law Firm Budgeting – Creating a Financial Budget for 2015

Question:

I am the managing partner of a 12 attorney firm in Springfield, Illinois. We have never had a financial plan or budget but I have been thinking of creating one for next year. I would appreciate your thoughts as to whether the time invested in putting one together is worth the effort.

Response:

I believe that successful firms:

  1. Are focused
  2. Have a sense of where they have been and where they are heading 
  3. Have a vision and a strategy
  4. Have business and financial plans
  5. Have goals and measured attainment 
  6. Foster accountability from self and others 
  7. Are proactive 
  8. Work the books and aggressively managed and balance the RULES (Rates, Utilization, Leverage, Expenses, and Collections)

Lawyers that fail to focus their practices; set goals, measure accomplishment, and foster accountability will fall short and not meet their financial objectives.

Attorneys need to begin focusing their practices, setting firm and individual performance goals, measure accomplishment, and implementing systems to instill accountability from all members of the team – attorneys and staff alike.  Budgeting is a tool that can help you measure goal attainment and how well you are doing.

What is measured is what gets done

With budgeting law firms and attorneys can:

  1. Reduce worry and stress at home and at the office 
  2. Improve productivity and profitability  
  3. Increase accountability – yourself and others  
  4. Focus the practice  
  5. Improve balance between personal and professional life  
  6. Maximize practice value for eventual practice transfer/transition

Keep in mind that budgeting entails both financial and non-financial goals.

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

 

 

Nov 04, 2014

Law Firm Attorney Compensation in a Contingency Fee Firm

Question:
 
Our firm is a five attorney personal injury plaintiff law firm located in San Francisco. We have 2 equity partners, one non-equity partner and two associates. One hundred percent of our fees are contingency fees. Our attorneys work on some cases together. We do not keep time sheets.

The two equity partners are compensated based upon their ownership interests and this has worked well. We are looking to improve our compensation for the non-equity partner and the two associates. Currently they are paid salaries and a percentage of firm collected fee revenue over a certain threshold. We feel that they have not been profitable and we have been overpaying them. We would appreciate your thoughts.

Response:

Personally I think that a percentage of firm revenue or profit should generally be reserved for equity partners or shareholders. There should be a reason for them to want to become equity partners. I would tie the majority of their compensation to individual performance – client origination revenue, working attorney production revenue, and responsible attorney revenue, and case profitability - being the primary factors. Develop specific guidelines for client origination (rules for the credit – direct effort of the attorney versus the brand of the firm). Since you don't keep time sheets you will have to develop some method for allocating the working attorney credit when attorneys work together on cases – subjective determination of value and contribution to the case, etc. Without timesheets it will also difficult to determine profit at the matter/case level. Decide how you want to weigh origination, working attorney, responsible attorney and case profitability and then use these to determine a compensation percentage to be used for overall compensation or bonus.

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

 

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