Law Practice Management Asked and Answered Blog

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Mar 03, 2015

Sale of Law Practice and Alternative Approaches

Question:

I am the owner of a solo practice located in the western Boston suburbs. I have been considering selling my practice. Do you see many practitioners selling their practices?

Response:

Yes, I am seeing many solo practitioners selling their practices. However, I also see many lawyers looking to exit their practice start by thinking that they will sell their practice. However, when all is said and done the arrangements often take one of the following arrangements:

  1. Admitting an existing associate to partnership and then having the associate buy out the owners partnership interest in a retirement payout.
  2. Bringing in an associate and mentoring and grooming them, admitting the associate to partnership when he or she is ready, and then having the associate buy out your partnership interest in a retirement payout. Sometimes partnership interests are sold gradually over time.
  3. Merger with another law firm.
  4. A wind-down of the practice and then Of Counsel relationship with another firm with a client transition/payout arrangement.

Many solo practitioners are often taken back by the inflexibility of some of the various state rules of professional conduct concerning sale of law practices and find the above approaches more flexible.

Click here for our blog on succession

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

Jan 20, 2015

Law Firm Hiring Practices – Pros and Cons of Hiring Lawyers that are Children of Firm Partners

Question:

I am a partner in a four partner firm located in Houston. We have three associates in the firm. One of our partners has a son just finishing law school and he would like him to join the firm. We have never had children of partners work in the firm before and I am concerned about setting a precedent. We have a good relationship among all of the attorneys and I do not want to see our relationship tarnished. I would appreciate your thoughts.

Response:

I have seen it go both ways. 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. Your situation is more complicated since you have associates in place that may feel threatened and uncertain as to their futures when you bring in family members. I believe that if you lay the proper foundation and go about it correctly you can successfully bring your children into the firm. Here are a few ideas:

  1. Recognize that for the family members there will be a family system, the family 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. Your 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 your standard hiring criteria for lawyers. I believe that before your children join the family law firm it is a good idea for them to work for another firm or organization. When they do join the family 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. Make it clear to your 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. Put your associates and staff at ease. Make it clear that your children are expected to "earn their stripes" and they will not be promoted to partner over other associates on family status alone. (Unless this is your intent)
  5. Clearly define the role of all parties.
  6. Monitor your own behavior. Don't take sides – either between your children if both join the firm or between your children and other employees in the firm.
  7. Be careful with compensation and other rewards. Compensation should be based up 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 your children join the firm.

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Good luck! 

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

Oct 08, 2014

Law Firm Succession – Consequences of Waiting Too Long

Question:

I am a solo practitioner in an estate planning firm in Carbondale, Illinois. I am the only attorney in the firm. I have one legal assistant that has worked for me for ten years. I am 72 years old. I suppose it has always been my goal to practice forever as I have been in denial about my age. I have done nothing concerning the eventual transition of my practice and I don't even have anything in place in the event that I would become ill and out of the office due to illness. I am beginning to have more and more health problems and as a result I am coming to the realization that I must address the transition of my practice. Please share your thoughts.

Response:

Age denial is a common problem that I see with senior attorneys that are continuing to practice into their 70s and 80s. They often tell me – "I want to practice forever." However, eventually the clock catches up with them and often they have not prepared for the transition of the practice. Waiting too long can have the following consequences:

  1. Reduced mental and physical competencies resulting in substandard services rendered to clients.
  2. Stress of the practice as a result of having no one available to cover the practice.
  3. Inability to take an extended vacation or time away from the practice.
  4. Inability to explore other outside interests, hobbies, etc.
  5. No coverage or "back-up plan" – practice continuation plan if you will in the event that you become ill.
  6. Risk of loss of control over the future of your practice – clients – employees – exit value in the event that you become incapable of adequately serving your clients and Illinois Supreme Court Rule 7.76 is invoked whereby the court takes over your practice and a appoints a temporary receiver, clients are notified, arrangements are made, and files are assigned out to various attorneys.

You need to get started on finding someone that can eventually take over your practice even if you eventually just close your doors. You still have client files and records, clients that will need ongoing or future representation, and an employee that may need a job.

You may want to start with an Of Counsel arrangement with another attorney and put in place an Of Counsel – or Practice Continuation Agreement – whereby you each agree to cover each other practices in the event of illness or vacation.

A practice continuation arrangement is an arrangement – typically in the form of an agreement or contract – made between an individual lawyer or a small law firm and another lawyer or law firm. The arrangement describes a course of action to transfer a lawyer’s practice and sets payment for its value. In the event of vacation, temporary or permanent disability, or death, a practice continuation arrangement protects the practice, the business interests of the lawyer or law firm’s clients and the financial interest of the lawyer and his or her family. There are different kinds of practice continuation arrangements. Typically a lawyer enters into a one-on-one agreement with another sole proprietorship, partnership, limited liability company, or professional corporation in the community. Agreements can range from simple “dual coverage for each other” for vacation or other temporary absences to sale of the practice in the event of long term disability or death.

While your initial need may be a practice continuation arrangement in the event of illness or vacation – you should also begin looking for someone that you can transition your firm to in the long run as well via practice sale, Of Counsel relationship with another firm, merger, etc.

Good luck on your journey!

Click here for our blog on succession

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

 

Sep 09, 2014

Law Firm Staffing and Growth Models – Lateral Partners & Of Counsel

Two weeks ago I was asked by the managing partner of a 16 attorney insurance defense firm about staffing and growth models for an insurance defense firm and I listed the following models and discussed the first model – grow your own associate staffing.

Attorney staffing/growth models include:

  1. Grow Your Own Associate Staffing
  2. Lateral Associate Staffing
  3. Contract – Staff Associate Staffing
  4. Lateral Partners (Equity or Non-Equity)
  5. Of Counsel (Various Approaches and Purposes)
  6. Mergers (Or Small Firm Acquisitions)
  7. Branching

This week I will outline the pros and cons for number 4 and 5 – Lateral Partners (Equity or Non-Equity) and Of Counsel.

Lateral Partners (Equity or Non-Equity

PROS

  1. Maybe a quicker way to increase profitability and cash flow.
  2. Allows the firm to acquire talent that it may not have time to grow or develop.
  3. Allows the firm to expand into new areas if the candidate has said experience and brings a book of business with him or her.

CONS

  1. Desired compensation may not fit within the firm's existing compensation structure.
  2. Clients may not come or materialize.
  3. May be issues with cultural fit.
  4. Costs may not be justified.

Of Counsel – Various Approaches and Purposes

  1. Allows the firm to acquire partner level talent, business, etc. without offering partnership.
  2. Provides the firm with a way to acquire a practice of someone wanting to retire.
  3. Provides the firm with a way to pilot test new lateral partner candidates and evaluate in a first-phase approach.
  4. Provides the firm with a way to partner with other firms.
  5. Provides a way for the firm to enter more new market areas.

Other models to be discussed in upcoming posts.

Click here for our article on hiring associate attorneys

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

 

    

Jun 14, 2014

Law Firm Succession: Buying Out the Owner of a Personal Injury Plaintiff Practice

Question:

I am the founder and owner of a personal injury plaintiff practice located in Lexington, Kentucky. I have two associates and four support staff members. All of our cases are handled on a contingency fee basis and our swings in fee collections from year to year can be substantial. I am 64 and would like to transition my practice and retire within the next three years. Both of my associates would like to take over my practice. I believe I am entitled to compensation for my practice and am desiring a fair buy-out. I would appreciate hearing your ideas concerning a buy-out approach.

Response:

You could look at the value of your practice from either a historical or a future perspective. Personally, if I were a law firm or your associates I would be more interested in the future perspective. In other words what fee revenues/cash flows will the practice generate over the next three to five years? In traditional time bill/flat fee firms a multiple of gross revenue is often used as a proxy. In a contingency fee firm such as yours the primary value beyond cash-based book value is the expected value of your cases. Sometimes a firm is able to review a list of cases and estimate the expected value of these cases or estimate a fee range per case. (High-Low, or Conservative-Optimistic estimate).

More often than not it is simply not possible to estimate the value of the cases until they are concluded. In this situation the values will be determined in the future as the cases are settled. If this method is used you would provide a list of cases in progress at the time of your retirement and when the cases are concluded apply a ratio of the time the case was with the firm before and after your exit, apply an overhead factor, and apply your ownership percentage to determine your share of the fee for that case. Your share of the case fees as the cases settle and cash-based book value is your buy-out.

Of course in the end you will have to balance your buy-out against what your associates are willing to pay. If your deal is too high you may run them off – if you make it too low you are leaving money on the table and not realizing the value of your sweat equity.

Click here for our blog on succession

Click here for out articles on various management topics

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

 

May 27, 2014

Law Firm Merger – Merger of a Solo with a Two Attorney Firm

Question:

I am a solo in Bloomington, Illinois. I have just completed my third year in solo practice. I have one full time secretary, a paralegal, and I office share with a group of attorneys. My overload is low and my margin is 61%. I have been approached by a two attorney (2 partners) firm regarding merging with their firm. One of the partners is relatively new (joined the firm 3 years ago) and the other is the firm founder and is planning on retiring in the next year. On average the other firm's revenue per attorney and partner earnings is on par or even less than mine. Their overhead is much higher. The two partners have been operating on a handshake with no succession/transition plan for the senior partner and no understanding of retirement financial arrangements (buy-out). While I have some concerns and fears about merging I believe that merger would provide me access to mentoring, additional resources and staff, and ability to improve my competencies and handle larger more complex cases. I would appreciate your thoughts.

Response:

I would be concerned that you have been approached to help with the buy-out of the senior partner. In essence this may be a large unfunded liability that you and the other partner will be saddled with for a number of years. It sounds like, based upon past performance of the other firm, that if there is a substantial buy-out of the senior partner you could end up making less for several years. Other than your rent there will be marginal cost savings as a result of the merger. Improvement in your earnings will be dependent whether you and the other partner can in fact generate larger cases, larger revenues, and increased leverage. 

If I were you I would ask the firm to work out the details concerning the senior partner's retirement as to timeline, the mechanics, the cost/funding of the buy-out, and put same in writing. Once this is accomplished factor this into the rest of your due diligence and analysis.

If the firm is unable to get their arms around the retirement of the senior partner issue I would stay clear.

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

 

May 20, 2014

Law Firm Compensation – Bringing in an Associate with a Small Book of Business

Question:

I am the sole owner of a law firm in Walnut Creek, California. I have three associates and five staff members in the firm. I am looking to hire another associate. The associate I am considering has been out on his own for five years – no office and no employees. He would bring around 30 active matters with him. I was thinking of paying him a salary with a discretionary bonus based upon performance. Fees originated and generated would be a major component of the performance determination that would impact future salary increases, bonuses, and eligibility for partnership. However, I believe that I must do something with regard to the business that he brings with him. I would appreciate your thoughts and suggestions:

Response:

I agree with your general approach with regard to his compensation. Payments for originations for associates gives me pause.  However, I believe you have to treat business that he brings with him differently. Here are my thoughts:

  1. Create a list of the pending matters that he will bring with him. The list should list the A/R and WIP for time bill matters. For flat fee matters whether the fee has been collected and spent, whether there will be any more fee, the amount of work that remains to be completed (percent), and the estimated hours required to complete the work. For contingency fee work – a list of the expected fee - low and high – for matters in progress.
  2. He should get 100% of A/R and unbilled WIP earned but not billed or paid before he joins the firm. 20% of the work done after he is with your firm.
  3. I would pay him 20% of the fees earned (prorated) for flat fee matters while the matter is with your firm if a fee will be due and paid. If not – your firm should be entitled to an offset for the overhead servicing his work for which there will be no fee forth coming.
  4. Once the matters on the list are concluded any future work that he originates would be "firm accounts".

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

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