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Apr 08, 2020

Law Firm Succession and Exit Planning in the Era of Covid-19

Question: 

I am the owner of a general practice firm in the Southwest Suburbs of Chicago with four associates and four staff members. I am 66 and was planning on beginning to work on my retirement plan this year and approach two of my senior associates regarding acquiring my practice. I was hoping to retire and exit the practice two years from now. Now with the Covid-19 situation I am not sure what I should do. Is this a good time to even think about approaching my associates? While business is slow we are doing fairly well working remotely. I still want to retire and be done in two years. I would appreciate your thoughts.

Response: 

One thing is for certain, you will continue to age regardless of the virus and unless you needed higher income in your last year or two, your retirement goal and timeline has not changed. While I would not suggest approaching your associates for the next few months I believe you could begin some of the preparatory work. When I work with law firms on succession planning projects there is a sequence of work steps that take place that take time and often the process can take several months. For example:

  1. Initial call with owner or partners.
  2. Document request to law firm.
  3. Law firm collecting and gathering documents (financial and other) and sending to us.
  4. Financial and document reviews.
  5. Telephone with owner or partners.
  6. Telephone interviews with associate candidates that you are thinking of transitioning the practice.
  7. Preparation of opinion letter (valuation, approach, etc.)
  8. Telephone call with owner or partners re discussion of opinion letter and next steps.
  9. Preparation of proposal to be presented to associate candidates.
  10. Conferences calls.
  11. Presentation of proposal to associates.
  12. Execution of legal documents.

So as you can see there is a lot of pre-work that needs to be done before you even approach your associates. Slow times are a good time to work on non-billable administrative and management projects and unless you have changed your mind on your retirement and exit goals this might be a very good time to begin working on your succession and exit planning.

Since legal skill, client, and management transition takes times you don’t want to wait too long otherwise you may have to move your retirement timeout out further.

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

 

Jul 17, 2019

Law Firm Succession – Pros and Cons of Hiring an Associate as My Succession Plan

Question: 

I am a sole practitioner in San Diego, California. My practice is mostly general practice with some emphasis on commercial real estate. I am 64 years old and am looking for a way to transition and exit my practice in the next three to five years. I am the only attorney in the firm however there are three legal assistants that work for me. I have been considering hiring an associate so that I have someone to sell my interests to in the next three to five years. I have never had an associate so I would appreciate your thoughts concerning the wisdom of hiring an associate at this stage of my career.

Response: 

In general I prefer an internal succession strategy when the firm has an attorney or attorneys in place that are willing to step up to ownership and take over the firm. Often this is easier said than done. Issues you will face will include:

  1. Unless you are loaded with work that you are unable to handle or you hire an attorney that can bring work with him or her you will be increasing your expenses and reducing your income/compensation.  Since you have operated all these years with just one attorney I assume that there is only enough work to support one attorney. If you are ready to slow down to a reduced work schedule and take less compensation that is another matter. If not, you may want to look for an experienced attorney with some business rather than hiring a lawyer fresh out of law school or wait a little longer till you hire someone.
  2. Associates require care and feeding – in other words training, mentoring, etc. A certain amount of training and orientation will be required even with an experienced attorney. Revenues may lag from one to two years and your will be saddled with their compensation and other related expenses. You have no experience with mentoring attorneys and this may be something that you are ill equipped to do or don’t want to do.
  3. You may end up hiring and training in an associate only to have them leave the firm in a year or so to join another firm and possibly take clients with them.
  4. The associate you hire may only be looking for a 9-5 lawyer job and have no interest in owning a law firm.
  5. The associate you hire may expect to have you hand them your practice for free and he or she may be unwilling to pay you for your practice.

Many firms have had positive experiences with transitioning their firm to associates. Just be aware of the possible pitfalls. You may be better off going a different direction.

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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

Apr 24, 2019

Law Firm Training Tools – Documentation of Processes and Procedures in Firm Procedural Manuals

Question: 

I am the sole owner of a six attorney personal injury firm in San Francisco with five support staff. My father started the firm twenty-five years ago and has since retired from practice. I took over the practice five years ago. At the time I took over the practice we had just my dad, myself, a couple legal assistants, and no technology. Since then I have done a lot to grow the practice including adding attorneys and staff as well as implementing technology. My biggest problem is training new attorneys and staff. We have no written documentation as to how we do things so training has to be done orally by myself or others every time a new attorney or staff member joins the firm. Can you offer any suggestions?

Response: 

Sounds like you don’t have a written employee handbook or procedures manuals. These are essential tools that every law firm regardless of size should have. These tools dramatically reduce time that has to be spent by others to on-board new employees and can facilitate bringing on lower cost employees with less experience such as recent law graduates or paralegal graduates.

The employee handbook outlines the firm’s employment policies and contains sections such as:

An operation or procedures manual is the firm’s how-to-do-it guide. It defines the purpose of work, specifies the steps that need to be taken while doing the work, and summarizes the standards associates with both the process and the result. Your operation or procedures manual specifies this is how we do it here. Every process in the firm should be documented in your manual – from marketing – to accounting –  to IT – to legal case work. Sections in your manual might include:

Procedures manuals are often a list of steps in outline form. The American Bar Association has a book – The Law Office Policy and Procedures Manual that may help you get started. 

In my earlier life I spent nine years in the United States Air Force Judge Advocate Generals (JAG) office and there I learned the importance of policy and procedures manuals and I carried this into both law firms where I worked prior to starting my consulting practice thirty-four years ago.

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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 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

Aug 07, 2018

Firm Administrator vs Director of Administration or Chief Operating Officer

Question: 

Our firm is a fourteen-attorney firm in South Florida. I am the senior member of a three member executive committee. Our firm is in the second generation of partners. The founders retired five years ago. Upon their retirements we changed our governance from a managing partner to an executive committee model supplemented with a office administrator – some refer to the position as the office manager. Our executive committee model has worked relatively well. The administrator that we hired five years ago is still in place but we are not satisfied with his performance. We believe that this is in part due to the fact that our expectations have changed. When we hired him we thought that we needed an office administrator primarily to manage the office staff and the billing and bookkeeping function. So we hired an administrator that had worked, as his first job out of junior college, as an office manager in an eight-attorney firm for two years and had an associates degree in accounting. He has does a good job with managing the staff and the billing and bookkeeping. However, we have now discovered that we want more – we want executive level leadership. We want someone that is respected by all the attorneys and can:

  1. Provide overall leadership
  2. Help lead the executive committee
  3. Develop create solutions to problems
  4. Lead the associates
  5. Serve as marketing director, etc.
  6. Take the lead in strategic planning and implementation of a strategic plan

I welcome your thoughts and opinions.

Response: 

Yes your expectations have indeed changed. Your administrator has not been able to grow in the role expectations that you now have for the position and does not have the education or experience to meet your new demands.

My observations are as follows:

  1. You would like your administrator to act and think like an owner/partner.
  2. You would like your administrator to be a quick learner.
  3. You would like your administrator to provide a higher level of management insight and bring business training and experience to the table.
  4. You would like your administrator to be accepted as a peer professional by all the attorneys in the firm.
  5. You would like your administrator to be innovative and willing to question the status quo.
  6. You would like your administrator to provide recommendations concerning new methods for  improving the firm’s operations and profitability.
  7. You would like your administrator to be able to resolve most administrative issues with minimal guidance from the executive committee.

I believe that you would like an administrator to serve more in the role as a Director of Administrator or Chief Operating Officer and your present administrator simply does not have the education, experience, and maturity to function in this capacity. If you want someone to serve in this capacity you will have to hire someone with degree credentials – such as a MBA or CPA, that will facilitate the candidate’s acceptance by other attorneys in the firm as a peer professional as well as provide the candidate with the academic tools needed to carry out the expectations of the position. In addition, you need to hire someone that has ten years plus as a director of administration or chief operating officer position in a similar size firm or company – preferably a firm that provides professional services such as a law firm, accounting firm, engineering firm, etc. You will have to look beyond the titles that candidates have had and inquire into the specific duties and roles performed. You will need to back up this inquiry with solid reference inquiries.

A director of administrator or chief operating officer position is rare in a fourteen-attorney firm. Many firms your size have administrators or office managers similar to the office administrator that you currently have. The downside to establishing such a position in your firm will be the salary that you will have to pay – more than many of your attorneys and even some partners are being paid – and turnover in the position when an opportunity from a much larger firm comes along.

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

Aug 01, 2018

Law Firm Merger or Of Counsel Arrangement and Due Diligence Information from Larger Firm

Question: 

I am a solo practitioner in upstate New York and I hope to retire three years from now and move to Florida and spend my retirement years there with my family. I have been talking with a larger firm, twenty-attorneys, in Albany that has an interest in me either merger my practice with their firm or joining as Of Counsel. My plan would be to work three more years, gradually phase back, and transition clients and referral sources.

I have had several meetings with the partners in the firm and they are now asking me for detailed due diligence information – tax returns, financial statements, etc. I have no problem providing these documents however I was wondering if I should be asking them for information. What do you think?

Response:

I believe that you are entitled to similar due diligence information from the other firm. You need to see what you are getting into.

Usually the smaller firm gets less – but they should share some information with you as you have with them.

I would ask for the following from them (or discuss with them):

  1. Five years profit and loss statements, balance sheets and tax returns.
  2. Lawyer and staff headcount for each of those five years.
  3. Current hourly billing rates.
  4. Description of practice area mix of clients by dollars collected – practice type and office location.
  5. Description of how the firm bills (hourly, flat rate, contingency)
  6. Copy of all leases (office space, equipment)
  7. Copy of malpractice insurance policy and last application.
  8. Salaries and benefits for equity and non-equity partners.
  9. Any governance plan or agreements.
  10. Copies of all partnership agreements or operating agreements for all business entities.
  11. Any documents pertaining to the retirement of partners including information as to obligations for partners who have already retired and those nearing retirement.
  12. Compensation data for equity and non-equity partners.
  13. Copy of the written compensation plan for equity partners if one exists or if not a discussion of how the compensation system works.
  14. Information on the line of credit and copies of all debt agreements.
  15. Copies of third party vendor agreements (equipment leases, subscriptions)
  16. Copy of the firm’s present malpractice insurance policy and most recent application.
  17. List of benefits provided.

I presume that you all have discussed any potential client conflicts of interest, etc.

You need to zero in whether the arrangement is going to be a merger or Of Counsel arrangement. If the arrangement is to be an Of Counsel arrangement the firm will be less likely to be willing to share all the information on the list and you will have less need as well. However, I believe you should at least have the basic financial and compensation information.

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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

 

Dec 13, 2017

Law Firm Owners Use of a Leadership Team

Question: 

I am the owner of a fourteen-attorney law firm in South Bend, Indiana. The firm is a health care firm that represents various medical facilities in the area. All of the other attorneys in the firm are associates. Currently I function as the managing attorney and make all of the management decisions. I also bring in the bulk of the clients into the firm. I am wanting to retire in the next five years and I would like to sell my interests to three associates in the firm. However, I am not sure that they would be good partners with each other, whether they have the management skills and client development skills to lead the firm, or whether they would even want to be partners. My other option would be to merge with another firm. However, I would prefer to sell my interests to the three associates rather than merge if at all possible. What are your thoughts?

Response: 

I appreciate your situation. I think you need to sort of “pilot test” the three associates. If you had other equity partners I would suggest that you form a three member management committee to begin transferring some of your management responsibilities and client relationships. Since you don’t have any equity partners I would not create or label a management committee which is usually a decision-making body with each member having a vote. You might consider forming a committee that you call the Leadership Team with the three associates and yourself serving as members on the team. This would be an advisory group with you retaining control. You would try to run the group by consensus but you would still be the ultimate decision-maker. I would start by starting the team with limited areas of management, responsibility, and authority. Teach them how to work as a group and gradually increase the team’s responsibility and authority. See how it goes and observe the interpersonal dynamics. After a year you should have a good idea whether they can work together as partners and whether an internal succession strategy will work for you. You might want to create a different category for these associates – senior associate or non-equity partner at the time that you do this as well.

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

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