Law Practice Management Asked and Answered Blog

Category: Factors

Jan 03, 2019

Law Firm Non-Equity Partner Subjective Compensation Factors

Question:

Our firm is a seventeen-attorney commercial litigation firm in Atlanta, Georgia. I am a member of our firm’s management committee that decides raises and bonuses for non-equity partners and associates. Currently our non-equity partners are paid a salary and a discretionary bonus. We would like to stay with this approach however we have had complaints that our system is totally arbitrary. We would like to be able to provide more transparency – a general list of the items that we consider when making our decisions on salary and bonuses. You thoughts would be appreciated.

Response:

Here is a suggested list of factors with weights that you might want to consider:

Fee Production – Client Origination Collections – 25% weight
Fee Production – Working Attorney Collections – 25% weight (billable hours in some firms)
Profitability of Work – 10% weight – (effective rate per hour, realization, etc.)
Delegation of Work – 10 weight (delegation to paralegals and associates)
Client and Case Management – 5% weight
Technical and Professional Competence – 5% weight
Professional Conduct – 5% weight
Firm Management and Leadership – 15% weight

You can adjust this list for your particular situation and what is important for your firm.

Here is a sample list of subjective compensation factors with detailed consideration factors with weights and points.

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

Sep 05, 2018

Law Firm Valuation – Factors that Effect Firm Value

Question:

I am the owner of a small estate planning firm in Kansas City, Missouri. I have two associates and four staff members. I am considering acquiring a small (solo) practice in a nearby community. I have read some of your articles as well as your book on succession planning and valuation, and the multiple of gross revenue used to establish a goodwill value for a law firm. What are some of the factors that can impact whether the multiple is higher or lower – a firm’s potential value?

Response:

While multiples of gross revenue is a common approach, a key ingredient should be the profitability picture before distribution to owners. In other words, what is the quality of earnings? A firm that nets fifty percent of gross revenue would generally command a higher price that a firm that nets twenty-five percent. Factors that should be considered in determining a firm’s potential value are:

Quality of Partner Earnings
Quality of Personnel
Strategic Location
Nature of Clientele
Practice Areas
Fee Structure
Hours Managed by Partner
Investment in Office Facilities
Investment in Technology
Quality of Services per Client Satisfaction Reviews
Firm Stability

The average partner or owner earnings figure is the critical component. If the average partner/owner’s income is low, normally the practice is not worth much. A good business person will not pay for a business and pay a premium when it cannot be justified.

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