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Oct 10, 2019

Finding and Training in a New Estate Planning Attorney

Question: 

I am the owner of an estate planning firm in the Western Chicago suburbs. My practice is a specialized practice that focuses on estate planning, estate administration, estate litigation, and elder law. While I was a solo practitioner for many years approximately four years ago I brought in an associate that had three or four years experience with an other estate planning firm. Unfortunately, he just gave me his notice and advised that he was leaving to join another firm. We have too much work for me to handle by myself and I am going to need another attorney with estate planning experience. How do I go about finding this person. Any suggestions that you have will be appreciated.

Response: 

I have assisted several of my Chicagoland estate planning law firm clients as well as clients in other parts of the country and I can tell you that experienced estate planning/administration and elder law attorneys are like gold and hard to find. This was even the case during the 2008 recession when recent law school graduates and experienced attorneys with other skill sets were having difficult times finding jobs. Now, with the current job market, finding experienced estate planning/administration and elder law attorneys is even more difficult. Many of these attorneys tend to work in small firms, are loyal to their firms, and less mobile. They tend to stay put and often remain with one law firm for their entire careers.

I would start your search for an experienced attorney by:

  1. Putting the word out through your professional network. Ask around.
  2. Prepare an ad for the position
  3. Post the ad with www.indeed.com, ISBA.org Career Center, LinkedIn, local suburban bar associations, and local law schools.
  4. Have resumes come to you electronically.
  5. After initially reviewing resumes and narrowing down to candidates of interest use a telephone interview as your first interview and face to face for a subsequent interview if appropriate.

If after thirty days or so you are having no luck you might have to consider using a local headhunter or simply looking for a recent law graduate and investing the time to train a new attorney.  Several of my estate planning/administration and elder law clients are having to hire new law graduates and train them. Many have been quite satisfied with the results and now believe it is the best way to go. Recent law graduates start with a clean slate and do not bring in any baggage or bad practices or habits picked up in other law firms. They are often more loyal and stay with the firm longer.

A few suggestions concerning recent law school graduates:

  1. Look for candidates that took elective courses in estates/trusts/elder law.
  2. Look for candidates that had meaningful clerking experience with law firms specializing in estate planning/administration and elder law. Not running errands but meaningful experience.
  3. Develop a comprehensive training plan with specific timelines designed to get the attorney billable and productive as soon as possible in easier forms of work (possibly guardianship) and then gradually move the attorney into simple estate plans and more complex areas over time.
  4. Be patient – the process will take time – consider it an investment.
  5. It will take time for you to make money from the new associate. Be happy if you cover the cost of the associate in the first year.

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

Oct 03, 2019

How to Handle the Messaging and Public Relations When a Law Firm Partner Leaves

Question:

Our firm is a twelve attorney litigation defense firm in Phoenix, Arizona. We have eight partners in the firm and I am a member of our executive committee. Yesterday at a partner meeting we were advised by four partners that they were leaving, would be starting a new law firm, and would be taking several key clients that they handle with them. A couple of associates and staff members will be going with them. What do we tell people and how do we go about it? You suggestions are most welcomed.

Response: 

My first suggestion is to move very quickly otherwise the rumor mill will get started and rumors will get ahead of you. You must get in front of the message to all audiences. The remaining and the departing partners should meet immediately, come to terms and agreement with the message, and be prepared to answer the following questions:

  1. Who is leaving
  2. Why following
  3. Whether the relationship is contentious or amicable
  4. How the departure is going to effect clients
  5. Whether the departing partners are named partners
  6. Future name of both firms
  7. Where the two firms will be located
  8. Contact information

I further suggest that you:

  1. Plan and advance and drill
  2. Identify your audiences and appropriate messages for each
    1. Clients
    2. Employees
    3. Legal community
    4. General public community
  3. List anticipated questions that your audiences will have
  4. White out the answers to the questions
  5. Write out the message for each audience
  6. Designate a single spokesperson to respond to the press and others so that messaging remains consistent from firm management.
  7. Identity clear lines of authority.
  8. Ensure that you follow the rules of professional responsibility in regarding client communications.

Situations such as this can be very stressful for all concerned. Try not to let your personal feelings cloud your vision and get in the way of a properly planned transition. There will be a lot of work to be done on the part of the remaining partners and departing partners. A well designed project plan will be helpful in managing all the tasks that will have to be handled and managed. The public relations should be at the top of the list.

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

Aug 21, 2019

Law Firm Strategic Planning in a One Day Planning Retreat

Question: 

Our firm is a twenty-attorney litigation firm in Miami, Florida. We are managed by a three-member management committee supported by a firm administrator. While our committee and our firm administrator are entrusted to make many of the operational decisions, all partners must weight in on and vote on all major decisions as outlined in the firm’s management plan. Currently we do not have a strategic plan and our firm administrator has suggested that we can accomplish this in a one day off site retreat with all the partners. Is this realistic?

Response: 

This is a little bit aggressive and optimistic. The strategic planning process is as important as the end result – the strategic plan document, so you don’t want to rush the process. Two sessions a few weeks apart would be better as it would give some time for the ideas and discussion from the first session to cook and simmer until the second session. However, you might find that one session is all that you are going to get. If this is the case you need to do some homework before the retreat. I suggest the following:

  1. Solicit feedback from all your partners using a questionnaire. An online questionnaire such as SurveyMonkey would be preferred. Questions should include general attorney demographic information as well as issues and challenges facing the firm and suggested solutions, future direction of the firm, succession planning, talent management, practice area expansion or contraction, etc.
  2. Develop a retreat planning session agenda and workbook with all relevant supporting materials such as questionnaire results, financial reports, recent relevant articles, draft strategic plan with at least a mission, vision, goals, objectives, and issues sections completed in rough form. This should be developed by the management committee beforehand.
  3. Provide all your attorneys with the agenda and workbook at least two weeks prior to the planning retreat to allow them to come to the retreat fully prepared.
  4. Keep the retreat focused on strategic issues with day to day operational items discussions being off limits. Discuss the questionnaire results then use the draft Strategic Plan as an outline for the session. Try to get consensus on mission, vision, goals, objectives, and issues by the halfway point of your session. Focus the remainder of the session on developing specific strategies dealing with issues and goals outlined.
  5. After strategies have been developed, develop specific action items for each strategy with start and completion target dates for each action item with the name of the person that will be responsible for completion.

Once the retreat is over the management committee should finalize the rough notes from the planning session into a initial draft of the strategic plan and circulate to all partners for review and comment. Hopefully, the management committee based upon comments can finalize and launch the strategic plan within thirty days, if not a partner meeting should be scheduled for additional discussion.

Using an approach to similar to what I have outlined will improve your chances of a successful one day planning retreat.

Good luck.

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

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

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