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Jul 03, 2019


Non-Equity Partners Receiving Percentage of Firm Profit as a Bonus

Question: 

I am one of four partners in a personal injury plaintiff firm in Denver. In addition to the three of us we have one equity partner and two associates. Our non-equity partner and our associates are paid salaries and discretionary bonuses when performance warrants bonuses. Our non-equity partner is pressing us for more money and a different approach to his compensation. A couple of our partners have suggested that in addition to salary we pay the non-equity partner a share of firm profits. What are your thoughts?

Response: 

Personally, I am against sharing firm profits with non-equity partners. I believe that non-equity partners should only share in some of the profit from their working attorney and or responsible attorney collections. Sharing firm profits should be reserved for equity partners – those that are invited into the partnership ranks, buy-in, and share in the risks as well as the profits of the firm. I would suggested that you replace the discretionary bonus or in addition to it implement an incentive bonus system based upon working attorney and or responsibility collections above a certain threshold. You may want to also consider a bonus for client origination as well. Another approach, if the non-equity partner is willing to forego his guaranteed salary or accept a lower salary, would be a percentage of his working attorney and or responsible attorney collections on a first dollar basis rather than above a threshold.  While a few of our clients have shared firm profits with non-equity partners this has been a small number with poor results. Many firms are moving away from formulaic approaches to compensation however this does not seem to be the case with personal injury firms.

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

Jun 19, 2019


Burning Issues for a New Law Firm Owner Starting Firm After Leaving BigLaw

Question: 

I have recently started a law firm in the suburbs of New Orleans after leaving a large law firm in the city. I was a non-equity partner in the firm and had worked for the firm for fifteen years. I worked in the estate planning group and handled complex estate planning matters for wealthy individual clients. Much of the business was referred to the firm by large bank trust departments. I have been promised referrals from some of these banks. I had other referral sources as well that will be sending business. The focus of my practice will be exclusively on complex estate planning for wealthy clients. A paralegal and an associate from the firm will be coming with me. During my career my focus has been on practicing law and not running a business. What are some of the challenges and burning issues that I will face?

Response: 

You are starting with the advantage of probably having grown up with excellent training and mentoring that larger firms are capable of providing. As a result you probably have an excellent skill set and it sounds like you have learned how to get business and have developed referral relationships. However, you also have been accustomed to firm management and other resources that will not be available to you in a smaller firm. You will have to get your hands dirty and handle much more of the firm management and administrative functions than you had to do in the larger firm.

Some of the challenges and burning issues that will keep you awake at night will probably include:

  1. Hiring, training, motivating, compensating, and retaining attorneys and staff – both those that initially join you and future hires. Small firms often cannot afford to provide the level of compensation and benefits that larger law firms and other businesses provide. You must creative and use other carrots such as flexibility, work-life balance, etc. to be competitive.
  2. Additional sources of business. Even though you have promises from past referral sources to send you business the business may not materialize from these sources for various reasons. You must be prepared to proactively marketing your practice. A content-rich website, client seminars, and additional referral source development should be at the top of your list.
  3. Cash flow will be a challenge and issue, at least initially. Insure that your have sufficient working capital to start your firm and access to adequate credit lines if you need them. Obtain retainers from clients upfront, stay ahead on retainer replenishment, and bill promptly. Watch your spending but focus on revenue generation.
  4. Balancing your time between servicing clients and managing the practice. In your prior firm your primary mission was to practice law and serve clients. Now, as the sole owner of a law firm, you will also have management and administrative responsibilities. Your time between these two areas will require careful balance – neither can be neglected. While you can eventually hire some help you can never relinquish total responsibility for running the business.
  5. Development of systems. Processes and procedures will need to be documented in office policy and procedures manuals. Computer hardware and software will need to be acquired and implemented. There will need to be oversight over these systems. You should at least have a “top level” understanding of these systems.
  6. Client demands. Client demands and workloads can often take a toll on new owners. There will a time will your will be so busy you would like to hire additional help but not so busy that you are ready to or can justify doing so.

These are just a few of the challenges and burning issues that others from BigLaw starting their own practice have discussed with us.

Good luck with the launch of your practice.

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

May 07, 2019


Law Firm Succession Planning in a Fourteen Attorney Firm – Internal vs External Strategy

Question:

I am the managing partner in a fourteen attorney firm in Austin, Texas. Our firm represents hospitals in their defense against malpractice claims. We have four equity partners, six non-equity partners, and four associates. The four equity partners started the firm thirty years ago and we are all in our late fifties and early sixties. We plan on working another eight years and then plan on retiring approximately at the same time. We may remain on as Of Counsel. Of our six non-equity partners, five are in their early and late sixties. We are considering making one an equity partner in the near future. Our associates are all recent law graduates that we hired right out of law school and all have been with the firm less than five years. What is our best succession strategy – merger or growing our own future partners?

Response: 

Most firms, and I agree with this, prefer an internal strategy and would like to grow their own and leave a legacy of the firm. Mergers can be fraught with problems and are often not successful. Depending on the size of the other firm, many firms are not willing to provide any compensation for practice goodwill beyond the compensation and benefit package. It sounds like you have had your independence for thirty years and you may not be comfortable giving that up and working in a merged firm environment for eight years.

However, a merger is often easier. You have a challenge on your hands since you have to replace four partners and only have one possible future equity-partner candidate on deck. In part it will depend upon the age and the experience of the one non-equity partner. Is he even willing to step-up to equity, invest in the firm, and buyout your interests? My experience these days is that a lot of non-equity partners are saying “no” to equity. With your type of clients you probably need at least three or four seasoned partners in order to convey to the clients that you have adequate “bench strength”. When the four of you retire unless you can build up the bench strength the firm will be also lacking leadership and firm management experience.

You have five years in which to build up your talent pool. You will have to first see if you can recruit and bring in some lateral talent – attorneys in their forties with fifteen to twenty years experience. Look for attorneys that want to be more than just worker-bees – that want to have future equity interest in a firm. If this strategy works out, begin bringing them into equity as soon as possible to ensure that the commitment is there by having them buy shares upon admission. Begin client and management transition no later than three years prior to your retirements.

If you are not able to bulk-up your talent pool or you have no one interested in equity ownership, then you will have to consider a merger strategy. I would begin a merger search three years prior to your retirements.

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

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

Jan 16, 2019


Improving Productivity and Profitability in a Sole Owner Six Attorney Insurance Defense Law Firm

Question:

I am the owner of a six attorney insurance defense firm in Indianapolis, Indiana. I started the practice twelve years ago with myself and a paralegal and have grown the firm to where is is today – six attorneys, two paralegals, and two other staff members. While I have done well, and am taking home around $350,000 a year, I am not sure if we are attaining the numbers that we should be. I have a fifteen hundred billable hour expectation with a per hour bonus payable for each billable hour exceeding fifteen hundred. I do not have any attorneys that have reached this expectation. Our billing rates average around $150 per hour. I am wanting to put in place a partnership track and am not sure where to start. You thoughts would be appreciated.

Response

Let me first illustrate the profitability levers for law and other professional service firms:

R – Rate – billing rate (effective rate, realization rate, etc.).
U – Utilization – the number of billable hours.
L – Leverage – the number of associates/paralegal, etc. to owners or equity partners.
E – Expenses – office overhead
S – Speed – time it takes from the time work is done to when cash comes in the door.

With the low billing rates that are prevalent in insurance defense firms the primary profitability levers that can be managed in an insurance defense practice are utilization, leverage, and expenses. Insurance defense firms need 1800 – 2000 annual billable hours from their associates, a high leverage ratio of three or four associates for every equity partner, and low expenses  – i.e. no frills office space.

You are doing fine now with regard to compensation but this would not be the case if you had partners – the profits would not be there to pay higher salaries. Less than 1800 annual billable hours is not acceptable and it sounds like there are no consequences for non-attainment of the 1500 hours. You need to look into the reasons as to why your associates are not attaining the 1500 hours. Possibilities could include:

If there is enough work you need to focus on the other factors and let everyone know what the consequences are for not attaining the billable hour expectation. Start with the 1500 hour expectation as an initial baby step but then increase the expectation to 1800 hours as soon as your can.

As you think about a partner track keep in mind the issue of leverage and don’t be temped to make too many partners.

Keep an eye on your expenses.

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

 

 

 

Dec 06, 2018


Hiring an Associate Attorney as a Solo’s Exit Strategy

Question: 

I am a solo practitioner in Central Illinois. I have been in practice for 30+ years and I just turned sixty. I have two staff members and no other attorneys in the firm other than myself. I plan on working another five years and then I would like to gradually exit from my practice and then retire. I want to have a home for my clients and employees and I would prefer to be able to sell my interest to an associate attorney working for the firm. I think we have the work to justify hiring an associate and this is the route I would like to go. I have never had an associate so I am not sure what I should look for. Your thoughts would be most appreciated.

Response: 

I believe that an internal succession/exit strategy is your best option if you can find the right associate. Unlike years ago, there are many associates today that just want a job and work/life balance is more important than taking on an ownership role in a firm. They simply are not interested in the work, stress, and risk that it takes to own and manage a law firm. So it is important when searching for an associate that you really vet out this interest to insure that you are hiring someone that will be willing to buy out your interest when you retire and take over your practice.

I have worked with a lot of firms that think they have an exit plan via an associate only to be told no when approached with a proposal to acquire their practice.  When you interview candidates look into their history and their family history to see if you can find a hint of entrepreneurship. You may want to hire a more seasoned attorney that has a small practice that could expand his or her practice by becoming part of your practice. Hire someone that has an interest in the business of law as well as practicing law.

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

Nov 14, 2018


What Does it Cost to Operate a Law Firm?

Question: 

Our firm is a four attorney personal injury plaintiff law firm with three partners and two associates located in upstate New York. Could you advise us as to what the expected cost range per year is for an attorney to practice? Assume the attorney generates gross revenue of $500,00 per year. What should he/she expect to earn as gross income based on that revenue?

Response: 

Depends on the type of practice, whether the firm does extensive advertising, etc. In general, the average range of margins are running from 35%-45%. In other words the partnership pie – profits available to partners whether in the form of W2 salary or net income. If a partner were practicing alone with minimal overhead and maximizing the use of technology the margin could be better. In general a lawyer generating $500,000 in revenue in a firm such as yours with typical overhead -hopefully 35% – 45% margin – $175,000 – $225,000. I have worked with some firm such as foreclosure law firms where the margins are 15% margin and some high volume advertising PI plaintiff firms at 20% margins.

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

Oct 24, 2018


Law Firm Client Surveys – Developing a Client Service Improvement Plan

Question: 

Our firm is a twenty-four attorney litigation firm in Pittsburgh. We represent insurance companies and business firms. We recently conducted a client satisfaction survey of our top tier clients via telephone and face-to-face interviews. We have discovered that we have numerous issues regarding client satisfaction. Where do we go from here?

Response: 

Nothing is more important to your firm’s future than exceptional client service. An effective client service improvement program is one of the most important marketing initiatives that a firm can undertake. National studies demonstrate that approximately 70% of clients who stop using a particular attorney do so because they feel they were treated poorly or indifferently and 30% changed attorneys because their previous attorneys weren’t available. Clearly, from what law firms’ clients are telling us in our telephone interviews with them – attorneys and law firms need to improve client service by integrating a client-first service focus into everyday practice.

Frequently when we mention action plans and implementation to a group of attorneys we get the following reactions and responses:

Moving from debate to action planning and implementation is difficult for attorneys. However, unless a firm can move from debate and ideas to actual accountability and implementation it will remain anchored in the past in a field of dreams, obsolete practices, and unhappy clients.

Here is a road map to help you get started:

  1. Assemble the client service improvement team
  2. Review the issues discovered from the client survey
  3. Identify and write a client service mission statement and client service goals
  4. Brainstorm solutions you can and are willing to implement
  5. Put together the client service improvement plan
  6. Implement the plan
  7. Notify clients, especially the clients that were interviewed, of the changes that the firm will be implementing.

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

 

May 08, 2018


Of Counsel Arrangement as a Law Firm Exit Strategy

Question: 

I am the owner of a solo real estate practice in Merced, California. I have two staff members that work for me. I am the only attorney in the firm. I am sixty years old. While I am concerned about the long term exit from the practice I am also concerned about office coverage in case something would happen to me in the short term. I appreciate any recommendations that you may have.

Response: 

Forming an Of Counsel relationship with another firm is an option that many solos are taking. Sometimes it is a final arrangement where a solo winds down his or her practice and then joins another firm as an employee or independent contractor. He or she is paid a percentage of collected revenue under a compensation agreement with different percentages depending upon whether the practitioner brings in the business, services work that he or she brings in, or services work that the firm refers to the practitioner. In other situations, an Of Counsel relationship is used as a practice continuation mechanism that provides the solo with additional resources and support if needed. An Of Counsel relationship can also be used to “pilot test” a relationship prior to merging with another firm. We have had several law firm clients that has taken a phased approach to merger with Phase I being an Of Counsel “pilot test” exploratory arrangement and Phase II being the actual merger.

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

 

Feb 06, 2018


Partner Withdrawal from a Law Firm

Question: 

I am a partner in a law firm in Walnut Creek, California with four other partners and three associates. We are a general practice firm and our clients are primarily individual clients. I have a good relationship with my other partners. I have decided to leave the firm and join a larger firm in San Francisco. I have notified my partners in writing of my intention to leave and they are supportive of my decision. Therefore, I anticipate a amicable withdrawal. Since this is the first time that a partner has left the firm for any reason we are not sure what the next step is. Please share with us any thoughts that you have.

Response: 

It sounds like you will be fortunate enough to have an uncontested withdrawal. Leaving a partnership takes planning and foresight. If your firm has a partnership, shareholder, or operating agreement your have a starting point. However, even if you have such an agreement, I have found that in most cases there are still a myriad of issues and details that still have to be resolved. You and your partners will still need to negotiate the terms for your withdrawal and ultimately sign a withdrawal or separation agreement. Your partners may be unhappy about certain issues, or in you leaving, but in the end, will do the right thing either because they have to or because they want to.

While there are a lot of moving parts and details to tend to the major issues that have to be resolved when a partner withdraws from a partnership involve:

I suggested you start by developing a project plan outlining all the tasks and sub-tasks with start dates, target completion dates, dates competed, and to whom is assigned to each of the tasks that are going to have to be accomplished. At the top of the list will be to negotiate a withdrawal or separation agreement that addresses the above issues and minimizes your risks and future liability. Here is a checklist you can use to get started:

  1. Review the firm’s current partnership, operating, or shareholder agreement to ensure that you follow any and all withdrawal requirements.
  2. Identify all assets and liabilities, on and off balance sheet, and come to an agreement with your partners on the status of those assets and liabilities and any ongoing responsibility that you may have.
  3. Identify all contracts, liens, mortgages and other obligatory documents that name you personally or where you otherwise act as a personal guarantee or surety.
  4. Based on the above information, negotiate withdrawal terms.
  5. Have yourself removed from all obligatory documents and/or where you a personal guarantee or surety.
  6. Draft a withdrawal agreement that documents everything, and have it executed properly by each of your partners.
  7. If there is a long-term commitment by the firm to you to pay you money over time, or retire some form of debt, consider mechanisms to enforce those commitments, including the right to audit or security interests.
  8. Make sure your name is removed from all firm formation documents, including to the Operating Agreement (for an LLC), Partnership Agreement, Shareholder Agreement or Bylaws, Corporate Register (if a C-Corp or S-Corp, Articles, and with the IRS, if your name was used as the responsible party when your FEIN was obtained.

Once you have a withdrawal agreement in place you can begin to address some of the other tasks that will have to be addressed. Review your state’s rules of professional responsibility concerning withdrawal – particularly those pertaining to client notification, conflicts of interest, etc.

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

 

 

 

 

 

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