Law Practice Management Asked and Answered Blog

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Apr 03, 2019

Valuing a Personal Injury Law Practice

Question:

I am the owner of a three attorney personal injury practice in Columbia, South Carolina and I am contemplating retiring in seven years. I have an associate on board that I would like to sell my practice over the seven years. How do I go about valuing my practice and determining how much I should ask for?

Response: 

A few of the various methods used solely or in combination with other methods for valuing a law firm include:

  1. Asset Based – ignores the importance of a firm’s earnings and cash flow (Goodwill Value)
    1. Book value – adjusted to accrual-based financials
    2. Replacement cost
    3. Appraised value
    4. Market value
  2. Comparable firm transactions
  3. Discounted cash flow – based on projected future financial performance of the firm.
  4. Rule of thumb using multiples
    1. Multiple of gross revenue
    2. Multiple of net profit or earnings
    3. Multiple of EBITDA (Earnings before interest, income tax, depreciation, and amortization. (EBITDA is a measure of a firm’s operating performance)
    4. Multiple of SDE – seller discretionary earnings after owner compensation adjustments (expensing appropriate salary)
  5. Rule of thumb variables
    1. How much repeat business is expected
    2. Number and type of clients
    3. The transfer-ability of client and referral source relationships
    4. Dependence on only a few large clients
    5. Whether the firm has been institutionalized or is a personal practice and uniquely the firm owner
    6. Other attorneys and staff
    7. Firm infrastructure and systems
    8. Historical reputation of the firm
    9. Contingency fee practices

Personal injury firms are difficult to value due to the variability in cash flows that are often the case with many firms.  Some personal injury firms have relatively predictable cash flows and others have very large swings. When this is the case the typical solution is cash-based book value plus a percentage of case fees as they are concluded with a percentage of completion factor applied.

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

Mar 26, 2019

Hiring Lawyers that are Children of Law Firm Partners

Question: 

I am an associate attorney in a nine-attorney firm in Orlando, Florida. There are five partners and four associates in the firm. I have been with the firm four years and I am the senior associate. I am concerned about my future. Recently one of the partners announced that he was bring his son, who recently graduated from law school, into the firm as an associate. Other partners have children in law school. I am concerned about my future. I have hopes of becoming a partner in the firm in the next few years. I am afraid that with partner children in the firm this may not happen. What are your thoughts on this matter?

Response: 

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.  I believe that if the firm lays the proper foundation and goes about it correctly children of partners and existing associates can coexist. Here are suggestions that I suggest for law firms:

  1. Recognize that for the family members there will be a family system, 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. A firm’s 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 the firm’s  standard hiring criteria for lawyers. I believe that before partners children join the law firm it is a good idea for them to work for another firm or organization. When they do join the 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. The firm must make it clear to partner’s 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. The firm should put the associates and staff at ease. Make it clear that children of partners are expected to “earn their stripes” and they will not be promoted to partner over other associates on family status alone.
  5. The firm should clearly define the role of all parties.
  6. The partners should monitor their own behavior. They should not take sides – either between their children if they join the firm or between other partner’s children and other employees in the firm.
  7. The firm should be careful with compensation and other rewards. Compensation should be based on 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 partner’s children join the firm.

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

Mar 20, 2019

Associate Attorney and Non-Equity Partner Compensation

Question: 

I am the owner of a seven lawyer insurance defense firm in downtown Chicago. Two of the lawyers are non-equity partners and four are associates. Currently I pay the associates a set salary and a performance bonus based upon annual billable hours over 1800. Until last year non-equity partners were paid in the same fashion, however non-equity partners received a few additional perks such as a firm credit card and a country club membership. Last year I changed the non-equity partner compensation system to focus on collected receipts rather than billable hours. Non-equity partners receive a salary and a performance bonus based upon working attorney collected received above a established threshold and a delegation bonus.

Currently all of the non-equity partners are paid salaries above $100,000 and two of the associates are above $100,000.

My results with the two bonus systems are dismal at best. My objective was to motivate my attorneys to bill more hours. However, they don’t seem interested. Very few have received bonuses. Last year I had several lawyers that did not even bill 1500 hours. What have a done wrong?

Response: 

There is noting wrong with your approach to compensation. You may have the wrong people on the bus. They simply aren’t hungry and this is not something you can teach. You are paying them salaries high enough that they can pay their bills – they are content and don’t want to put in the additional work to earn the extra income. Work-life balance is as important to more and more young attorneys as is money. If your attorneys are simply meeting the thresholds (billable hour or revenue expectations) and not exceeding them that is one thing. However, if your attorneys are not meeting the minimal expectations (hours or revenue thresholds/expectations – this is another issue as they are not producing at a level to justify the salaries they are being paid. Salary adjustments downward may be in order or simply terminating them. I don’t know many insurance defense firms that will tolerate less than 1800 billable hours.

While you must get compensation right in order to acquire and retain top lawyer talent as well as reward performance and reinforce desired behaviors, the starting point is hiring and retaining the right people to begin with.

Research from a classic business study that was highlighted in the popular business book “Good to Great” (Collins, 2001) authored by Jim Collins found that the method of compensation was largely irrelevant as a causal variable for high and sustained levels of performance. Other research also bears out that performance and motivational alignment are impacted by intrinsic and other factors other than just extrinsic factors such as compensation or methods of compensation. Over the years I have seen too many partners leave lucrative situations in law firms to join other firms for less compensation or to start their own firms to suggest that it is not only about the money or compensation package.

Jim Collins sums it up best in the following quotes from Good to Great (p 10-13)

“First who – then what”

“They get the right people on the bus, the wrong people off the bus, and the right people in the right seats.”

“People are not your most important asset. The right people are.”

Your compensation system should not be designed to get the right behaviors from the wrong people, but to get the right people on the bus in the first place, and to keep them there. Your compensation system should support that effort.

James Cotterman, Altman & Weil, Inc., (Cotterman, 2004) contents that there are two groups of employees for whom compensation is not an effective management tool. The intrinsically motivated (6% to 16% of partners perhaps) do not need compensation as an incentive. The struggling performers (another 6% to 16%) will not react favorably to a compensation system that rewards positive behavior.

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

Mar 13, 2019

Law Firm Attorneys Overuse of Email and Text Messaging

Question: 

I am the owner of a four-attorney firm in Indianapolis, Indiana. The firm has three associate attorneys plus three paralegals and three other staff members. One of my attorneys recently advised me that he wanted to do more work remotely. The next day I emailed him my thoughts and advised him that I would not let him work remotely. He then emailed me that he was giving me his two weeks notice. What should I have done differently?

Response: 

You should have met with him personally and discussed the matter face to face. Email has its uses but I find it is often overused and used in situations where it should not be.

Note the following scale of communication media and richness.

1. Face to face
2. Telephone
3. Email and texts

Face to face is the richest form of communications and should be used for sensitive communications such as performance reviews and other such discussions concerning performance, praise, training and mentoring, etc. It should have been used in the situation you discussed in your question.

Telephone is the second 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 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.

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

Mar 06, 2019

Law Firm Financial Management – Managing the Firm’s Inventory

Question: 

Our firm is a eighteen attorney firm in Portland, Oregon and I am the recently hired firm administrator. This is my first law firm. My previous employment was with a small manufacturing and distribution company. I have read some articles that discussed the importance of managing inventory in a law practice. Does a law firm even have inventory? I would appreciate your comments.

Response: 

Inventory (or pipeline) management is a term used in the management consulting profession to refer to the process by which you continually evaluate your active opportunities (prospective clients to booked clients) for their balance of QUALITY and QUANTITY. The goal is to continually stay on top of the overall health which is a full pipeline. Pipeline management allows client relationship managers to more accurately forecast fee revenues, better staff and manage client engagements, and close more client business.

I often also refer to Inventory or Pipeline Management in law firms in the context of using financial dashboards by which the individual charged with financial management responsibilities is continuously aware of significant changes in the firm’s Inventory or Pipeline (from prospects to cash):

By comparing these dashboard statistics to a prior month, quarter, or year – you are able to avoid financial surprises down the road.

Law firms do have inventory and that is their unbilled work in process (matters in process) or in the case of a contingency fee firm I usually refer to work in process as cases in process.

How well this inventory is managed – managing what is in front of you rather than what is behind you is a critical component of financial management and has a major impact upon the profitability of the firm. However, this responsibility falls primarily to the attorneys responsible for the matters. However, in your capacity as administrator you can provide the reports and oversight to help keep them on course.

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

 

 

Feb 27, 2019

Law Firm Succession and Transition – All Three Partners Retiring at the Same Time

Question: 

Our firm is a personal injury plaintiff litigation firm in Denver, Colorado. I am one of three partners in the firm. We have one associate that has been with us for twelve years and three recent law grad associates with less than three years experience.  The three partners started the practice together over thirty years ago and we are all in our early sixties. Our lease expires in three years and we need to think about the future of the firm. All three of us are not ready to retire but none of us want to sign another lease. When we do retire we would want to retire at the same time. Do you have any suggestions?

Response: 

I believe your first step would be to agree on your timeline for the group’s phase-down and eventual exit from the practice. It sounds like three years, while it may not be the date that you want to exit from the practice it may be the date that you sell your partnership interests or begin the transition of your interests. Many firms that have other attorneys working in the firm prefer an internal succession strategy as opposed to an external strategy – selling or merging the practice. An internal strategy will depend upon:

I believe your second step is to reach a conclusion as to the above three questions. You may have to have some candid discussions with you associate to determine his or her interest level and his or her readiness to take over the practice. If you determine that your senior associate is your succession strategy you need to decide whether you are willing to start selling the associate shares sooner than later and admit the senior associate as a minority interest partner. As part of this partnership admission you would also execute an agreement for the purchase of additional shares over the next few years and upon your actual retirements. This way you get your associate committed and begin executing a transition plan focusing on additional legal and business skill development as well transitioning client and referral source relationships and firm management responsibilities.

If you determine that your senior associate is not your succession plan you will have to consider other options such as bringing in a seasoned lateral attorney that has the needed skills and desire to take over ownership of the firm, selling the firm to another firm, or merging the practice.

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

Feb 20, 2019

Law Firm Growth – Is Growth Always the Best Strategy

Question: 

I am the sole owner of a five-attorney litigation firm in Mesa, Arizona. I started the firm twelve years ago after leaving a large firm where I worked for a very large national firm in Phoenix. I was an income partner in that firm. For a few years I operated as  a solo with a legal assistant. Then I began adding associates and staff. Now we have me and four associates, a office manager/bookkeeper, two paralegals, and two legal assistants. Our annual gross fee revenues are around 1.2 million, the overhead is high, my net income is not all that much more than what I was making as a solo. My associates aren’t willing to put in the time to generate the billable hours that we need and then there is the time and stress of managing all of this. Is growth a good thing?

Response: 

Not always – depends upon your goals and your area of practice. If your area of practice is a low billable rate ($150-$175 per hour) practice area such as insurance defense or municipal law, it will be difficult to reach a desirable personal income level without associate attorney leverage. However, if you are in a practice area with bill rates of $300 to $500 per hour you may be able to attain the personal income levels that you desire without associate leverage and growth. It all depends upon your personal income goals, your ability to support and handle the work that you have, and your ability and desire to manage a group of attorneys.

Growth requires that you manage others as well as yourself. More office space is required – more overhead to support the additional people. Growth puts a strain on cash flow and requires additional working capital. A new set of skill sets (people skills) is now required.

Some Lawyers Never Develop the Skills Needed or Desire to Go to This Level and Firm Growth is Restricted as a Result.

I refer to this phase as Sole Owner Phase. I have client law firms in this phase than consist of an attorney owner, a handful of employed associates, paralegals, and staff. These firms may have 3 to 4 people or ten or more. I have sole owner law firms with over 100 employed attorneys and staff. I work with other sole owners that choose to remain solo (without other attorneys) and are quite successful. It all comes down to what you are comfortable with.

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

 

 

Feb 12, 2019

Law Firm Communications – Tools that Can be Used to Improve Communications

Question:

Our firm is a sixteen attorney personal injury insurance defense firm located in Dallas, Texas. I am a member on our three-person management committee. We have been experiencing associate attorney and staff turnover. Recently, we had all employees complete confidential surveys concerning their thoughts and feedback concerning the firm. One theme that was central to all was that the firm has poor communications with employees. I would like to hear your thoughts on what we need to do to improve.

Response: 

Obviously, more specifics would be helpful. Communication is a broad topic. Are they talking about mentoring, training, updates of what is going on in the firm, etc? However, here a a few best practices to think about:

  1. Find ways to improve communications with members, associates and staff.
  2. Use the appropriate communications vehicle for the task at hand. (Face-to-face, voice mail, e-mail, memo, etc.)
  3. When a few employees are not following policies, or causing difficulties – resist the temptation to send out a blanket e-mail to all – and have the courage to counsel and discipline the individual offender. The will improve the overall morale and attitude of others in the firm.
  4.  Hiring
    1. Terminate marginal people.
    2. Develop procedures to ensure that the firm is hiring from a pool of qualified
    3. Formulate formal hiring and firing policies.
    4. Insure that hiring’s and firings are documented in accordance with the firm policies.
  5. Updated employee handbook.
  6. Training
    1. More formal training and mentoring programs should be designed for staff and associates alike. In addition to typical legal and office topics, other topics should include skill training in:
      1. English language (staff)
      2. Communications
      3. Law firm economics generally (associates)
      4. Management
      5. Time management
      6. Time Keeping
      7. Marketing
      8. Client service
      9. Speaking and writing
  7. Communications and Policies
    1. Communications can always be improved, and the appropriate channels used for the appropriate situation. (e.g. individual face-to-face, staff meetings, telephone call, memo or email.)
    2. The firm should insure that it is delegating as much as it should. In particular,
      partner time spent on administrivia.
    3. People with growth potential should be placed where they have the greatest potential to grow.
    4. The staff should know what they are trying to accomplish.
  8. Employee handbooks should insure that the following policies are included:
    1. Relations with clients
    2. Objectivity
    3. Confidentiality
    4. Investments and other financial dealings with clients
    5. Outside work
    6. Overtime or bonus
    7. Salary review
    8. Insurance coverage
    9. Sick leave
    10. Continuing education and tuition reimbursements
    11. Time off to attend various training and professional functions
    12. Dues for professional and other organizations
    13. Allowable expenses and reimbursement procedures
    14. Involvement in civic and other community organizations
    15. Speeches, articles and books
  9. Staff members should be made aware of the firm policies and changes in policy.
  10. The firm should develop a procedure for feedback from the associates and staff to use to improve the knowledge and skills of all staff. (Internal survey, suggestion box, and other tools)
  11. The firm should conduct regularly scheduled frequent meetings.
  12. Attorney and staff errors should be handled in a way to improve performance and maintain respect for the firm. Not placing blame.

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

 

Feb 05, 2019

Law Firm Client Level vs Matter Level Client Origination Credit

Question: 

I am the owner of an eight-attorney insurance defense law firm in the greater Chicago area. All of the other attorneys in the firm are associates. They are currently paid a salary plus a bonus for billable hours that exceed certain thresholds. I am in the process of establishing a non-equity partner tier and for this tier I want to setup a different compensation system with the focus on collected revenues rather than billable hours. I will continue to pay non-equity partners a salary with a bonus for collected working attorney and responsible attorney fees for other timekeepers work over target threshold’s. I have given some thought to client origination of business but since we have a small universe of insurance company clients not sure how this would play out. I would appreciate your thoughts.

Response: 

I agree that at the non-equity partner level you should consider shifting the focus to collected revenues rather than billable hours. At the non-equity partner level it should be your goal for them to become managers of work (responsible attorneys) rather than just workers (working attorneys). Therefore, I believe that your compensation system should compensate the non-equity partners for their individual work (working attorney collections) as well encourage them to delegate and push work out to associates and paralegals (responsible attorney collections).

Client origination is the other variable that some firms include in their compensation programs. The general idea is that attorneys should be Finders, Minders, and Grinders. In an insurance defense firm it will be difficult for associates and non-equity partners to originate new clients at the client level.

The firm’s existing clients were probably all originated by you and there are probably a limited number of new client opportunities. While I believe your focus for non-equity partners should be on working attorney and responsible attorney collections, I think that it is important that you at least track business or client origination so that you measure your non-equity partners business development efforts and results. A better origination measure to track in your situation might be new matter origination rather than client origination. I suggest that you track, and not directly compensate, origination at the non-equity partner level. Track and reward via a salary increase or discretionary bonus instead.

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

 

 

 

Jan 29, 2019

Law Firm Structure and Growth

Question: 

I am the administrator with a firm in Buffalo, New York. We have fourteen attorneys – seven partners and seven associates. We are an eat-what-you kill law firm. All the partners have to weight in and agree on any and all management decisions. Our management team consists of “all partners”. While I have been hired as the administrator to management the firm, I have very little authority to do anything. The partners all have the freedom to do as they please and there is very little accountability to each other. Recently we have been discussing the pros and cons of why we might want to change our governance and overall structure. I would be interested in your thoughts.

Response: 

I believe that law firms that are “firm first” team based firms and organized along these lines have (or will have) a competitive advantage with respect to clients, legal talent, and merger partners. As law firms grow the “lone ranger” confederation approach no longer works. Decision-making is too time consuming, partner time is wasted, and opportunities are missed. Synergy (where one plus one equals three or four) is not achieved and the firm achieves little more than any one of the attorneys could achieve in solo practice.

Recently I was working with a similar size firm in Chicago that was looking for a merger partner. When the other firm learned that my client was a “lone ranger” firm they discontinued discussions. Larger firms that are “team-based” are not interested in merging with “long ranger” firms – they tend to cherry pick key talent from these firms rather than pursuing mergers or combinations.

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

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