Bringing In New Law Firm Partners

Strategies for Minimizing Your Risk

By John W. Olmstead, MBA Ph.D CMC

You believe you have identified the right person – or whom you believe is the right person for partnership. However, just because the associate has been a good associate does not mean that the associate will be a good partner – the relationship will be different. But at least the associate is somewhat of a known quantity since you know the associate and have worked with the associate for several years.

Here are a few ideas you might consider:

Outline you goals and expectations for the relationship.
Meet with your associate and identify his/her goals and expectations for the relationship.
Determine how much control over the practice and decision-making are you willing to give up? Share?
Determine how much and for how long you are willing to make less?
Determine if the associate will be expected to bring in business? When/Timeline?
Think about the firm you want to build – firm-first or lone ranger (team based or individual practices)?
Decide on firm name – will it change? Should it? Impact on image, clients, etc.
Decision as to capital contribution or buy-in? Yes or No? How much? Timeline for payment?
Ownership percentages
Voting
Compensation
Withdrawal arrangements

Once you can come to terms with some of the above issues craft a suitable partnership or operating agreement that you can both live with.

Should You Consider a Lateral

Initially consider and decide upon the actual goals and objectives that you hope to achieve by bringing in the lateral and your particular requirements and specifications for the candidate. Start by focusing on the person – then move to the other areas that must be considered. It is critical that you get the right person on the bus.

Here are a few ideas to help you get started:

Do some research on the law firm that the candidate is with now in order to understand the culture and environment in which he/she has been working, potential conflicts, referral issues, etc.
What are the reasons that he/she is considering leaving the firm?
Candidates experience and professional history.
What practice area does he/she work? Clients served?
Can the candidate bring clients?
In the candidate’s practice compatible with your practice and needs?
Assemble a candidate financial profile – billings and collections past five years – working, originating, and billing attorney figures, realization, write-offs, etc. (If you can’t get financials get what you can – at least get tax returns of candidate to determine what he/she has been making.
Access financial health of client portfolio, if clients will be coming along with the candidate.
Determine if a level of synergism will result as a result of the arrangement.
Does a deal make business sense?

Hiring Associates That Can Be Effectively Groomed for Partnership

Years ago it seemed that all the associates working in law firms wanted to eventually become a partner in the law firm. This has changed as a result of the new mix of women and men graduating from law schools and entering the legal profession, changing attitudes toward work life balance, other opportunities outside law firms, and other variables. While partnership/ownership is still important to many – don’t assume that all the associates that you hire will even want to be equity partners – especially if it means a hefty capital contribution and signing personal guarantees for a large amount of firm debt.

A question that I would ask – have you really discussed with your associates their interests in equity ownership? As a group? Recently an associate, whom the firm had written off, advised me that while he was not interested now due to his present situation in life, he would be in maybe five years – especially if others also were brought in as well – in other words he did not want to have the responsibility alone and be an equity owner by himself.

I suggest that you talk with your people and see where they really stand. Help them to begin developing client development skills. Depending on you and the other partner’s retirement timeline – you may have to consider other options such as laterals or merging with another firm.

A key suggestion is to look for entrepreneurial associates when you hire. The desire for ownership of a business if often in a person’s blood. Don’t start the interview with a discussion from law school until the present. Dig deeper into hobbies, family, etc. that will provide clues as to whether you may be hiring someone that just wants a law job or someone that eventually wants to own or be a partner in a law firm.

Do You Really Want Partners

You may want to ask yourselves whether you want employees or partners. What is the criteria for becoming an equity partner? Is client development part of that criteria? Should they contribute capital? If they are not adding value to the firm – growth – you are diluting the earnings pool and reducing the size of the pie for yourselves. Personally, I think in small firms criteria for becoming an equity partner should, among other things, include client development and a capital contribution. They should have some skin in the game, contribute capital, and signup for their share of the liabilities. I also believe they should then be included in the inner circle.

Then, depending upon whether you are considering equity and non-equity partner tiers, you should develop non-equity and associate career progression plans – associate to non-equity partner and non-equity partner to equity partner – outlining timeline for consideration, the consideration process, the criteria, and the respective and expectations for each. (What it means)

Capital Accounts

Typically a buy-in or capital contribution is not required for non-equity partners nor do I recommend such. Typically non-equity partners are salaried and may participate in some form of an incentive bonus system tied to individual, team, or firm financial performance. They are also not required to assume any responsibility for any of the firm’s financial liabilities or debts.

If you intend on bringing in the associates as equity partners that is another matter. I believe that all new partners should be expected to contribute capital and have some “skin in the game.” Whenever a firm admits a new partner, the firm should require the new partner to contribute capital. Increasingly, a partner’s capital requirement should bear a relationship to the partner’s share of profits. You may want to allow new partners a reasonable period of time to fund their capital accounts – say five years or help them arrange favorable terms at your bank to finance their capital accounts.

Some firms have a buy-in tied to either the cash-based book value of the firm or the accrual-based book value (includes accounts receivable and work in process). This is not the typical practice although I do run into it. Usually capital accounts are tied to working capital needed to operate the firm and the percentage of ownership/income that each partner will have.

There are only three ways to increase a firm’s working capital to cover cash flow requirements and fund growth:

1. Have partners put more money in
2. Have partners take less money out
3. Borrow

Many firms use bank credit lines instead of capital contributions to pay routine firm expenses and partner draws during periods when cash flow is tight. It has been my experience that firms that follow this practice have ongoing financial challenges and problems.

The reality is that many firms are under-capitalized – don’t become one of them!

Make the criteria tough and resist the temptation to make everyone a partner.

John W. Olmstead, MBA, Ph.D., CMC, is a Certified Management Consultant and the president of Olmstead & Associates, Legal Management Consultants, based in St. Louis, Missouri. The firm helps law and other professional service firms improve the operations and management of their practices and the lives of their practitioners. The firm, founded in 1984 serves clients across the Globe assisting them with implementing change and improving operational and financial performance, management, leadership, client development and marketing.

Dr. Olmstead’s assignments have covered the spectrum of management issues. However, in recent years most of his time is focused on engagements helping firms with:

Partner Compensation
Governance
Succession/Exit Planning
Strategy & Competitive Business Models
Profit Improvement programs
Client Service Programs

Dr. Olmstead is the Editor-in-Chief of “The Lawyers Competitive Edge: The Journal of Law Office Economics and Management,” published by Thomson West. He is currently serving as Past Chair, Illinois State Bar Association Standing Committee on Law Office Management and Economics and as a member of the Legal Marketing Association (LMA) Research Committee. Dr. Olmstead may be contacted via e-mail at jolmstead@olmsteadassoc.com. Additional articles and information is available at the firm’s web site:

Bringing In New Law Firm Partners

By John W. Olmstead, MBA Ph.D CMC

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