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July 2015

Jul 28, 2015

Law Firm Compensation – Client Origination Guidelines

Question: 

I am the managing partner of a 25 attorney firm in Charleston, South Carolina. Our practice is limited to insurance defense. We have eight equity partners and four income partners, and five associates. Our firm is in second generation and virtually all of our clients were originated by first generation partners that are no longer here – they have since retired. Our compensation system focuses totally on working attorney dollars. I believe that we must begin to stress the importance of origination of new clients and factor that into the equation. I would appreciate your thoughts.

Response: 

Origination of new client business is important in any firm. Many insurance defense firm are too dependent on four or five insurance companies and need to diversity their client portfolio. Origination should be at least a factor in compensation systems – whether treated objectively or subjectively. There are pitfalls and you will need to establish specific rules, guidelines, and a policing committee. 

Here is an example of origination guidelines that some law firms have implemented:

  1. Firm Employee or Employee Referral. Whenever the firm is employed by one of its non-lawyer employees or by a client referred by such employee, the client should be considered a firm client and no origination attribution aware should be made.
  2. Employee of Existing Client. When an employee of an existing client (other than a principal) becomes a client of the firm, the presumption will be made that the employee is a client of the attorney to whom the employer is attributed. There may be extenuating circumstances calling for a different result, and these circumstances should be brought to the attention of the Attribution/Compensation Committee.
  3. Martindale and Similar Lawyer Lists. Referrals generated by Martindale and other such lawyer lists should always be considered clients of the firm.
  4. Clients Resulting from Prior Clients. In the case of a client attracted to the firm by reason of a lawyer's prior representation of another client, the new client shall be presumed to be the client of the lawyer to whom the existing client is attributed unless the new client was demonstrably attracted by the lawyer representing the existing client.
  5. Direct Referral by Existing Client. In the case of a referral by an existing client of Lawyer A to Lawyer C (by reason of Lawyer C's particular expertise), the client shall nevertheless, in most instances, be deemed to be the attributed client of Lawyer A.
  6. In-Town Referrals. Referrals by lawyers in (name of city) resulting from conflicts of interests should be considered firm clients. However, some referrals to our firm are made by other lawyers who have recognized the particular expertise of one of the lawyers in the firm. All in-town referrals should be first referred to the Attribution/Compensation Committee prior to any attribution being made.
  7. Out-of-Town Referrals. In Most instances, out-of-town referrals (other than from lawyer lists) are the result of friendships and professional associations between lawyers. The attribution should properly be awarded to the lawyer to whom the referral is made.
  8. Paralegals. All dollar amounts resulting from the work performed by paralegals shall be attributed entirely to the attorney to whom the client is attributed.
  9. Contingent Fee Cases. Upon receipt of the firm's share of amounts payable under a contingent fee contract, the originating attorney should be attributed ___% of the fee and the remaining ___% should be spread among the lawyers in proportion to their hours of service on the case, taking into consideration their respective hourly rates.
  10. Joint Referrals. The affected lawyers should meet in an attempt to resolve their respective sharing. If, however, the matter is not resolved, it should be referred to the Attribution/Compensation Committee for a binding decision.
  11. Retiring Partners. The clients of retiring partners are presumed to be firm clients.
  12. Attribution/Compensation Committee. All origination attributions should be reviewed by the Attribution/Compensation Committee in the same fashion that it reviews new clients. Independent inquiry should be made of new clients where there may be some question as of the appropriateness of attribution.

Click here for our blog on compensation

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

 

 

 

Jul 22, 2015

Law Firm Dissolution – New Firm Startup – Steps to Be Taken

Last week a firm advised that their law firm was splitting up via a dissolution and forming two new law firms. I outlined some of the steps that would need to be taken to dissolve the firm.

This week I will discuss some of the typical steps that will need to be taken to start the new law firms. Some of these steps include:

ESTABLISH NEW LEGAL ENTITY 

  1. File articles or other documents for entity formation. (LLC, LLP, PC, etc.) 
  2. Obtain FEIN Number
  3. Open new bank accounts
  4. Establish line of credit with bank
  5. Draft operating agreement/partnership/shareholder agreement
  6. Agree on approach to partner compensation
  7. Draft a business and marketing plan for the firm.
  8. Obtain any required business permits.
  9. Obtain office space, if moving, and negotiate lease – or negotiate new lease with landlord of present space.

IT & SYSTEMS 

  1. Decide on equipment and software being retained
  2. Decide on billing and accounting system data conversion strategy.
  3. Decide on MS Exchange Server conversion strategy.
  4. Decide of document management system conversion strategy.
  5. Purchase new software that may be required as a result of licensing.
  6. Install, configure, and populate billing and accounting software.
  7. Obtain new internet domain name and e-mail addresses

NOTIFICATIONS 

  1. Notify courts
  2. Notify bar associations
  3. Notify all vendors
  4. Notify post office
  5. Notify insurance carriers
  6. Obtain malpractice insurance with tail coverage
  7. Notify Yellow Pages and other directories
  8. Notify phone company. 
  9. Obtain new phone number if needed
  10. Notify tax authorities
  11. Notify Westlaw/Lexis, etc.

HUMAN RESOURCES 

  1. Employee meetings
  2. Setup payroll system – in house or outsourced
  3. Deal with medical insurance transfer
  4. Deal with 401k and other benefit plan transfer
  5. Update employee handbook
  6. Update administrative policies and procedures manual

FACILITIES 

  1. Decide on whether the firm if staying in current space or moving. If staying, decide on how much space is excess
  2. If staying, decide on what space the firm will occupy and what space will be sub-leased or turned back to the landlord if possible
  3. Negotiate lease with the landlord
  4. Office signage
  5. Decide whether any space improvements are needed.
  6. Decide on internal move date and who will be in what locations (if staying)

CLIENT RELATIONS AND DEVELOPMENT

  1. Notify clients of dissolution – joint letter – both firms – in accordance with rules of professional responsibility
  2. Meet with clients
  3. Develop new sources of clients

PUBLIC RELATIONS AND MARKETING 

  1. Public relations campaign
  2. Business identity plan (branding, logo development, etc.)
  3. Create marketing collateral materials (letterhead, brochures, business cards, etc.)
  4. Create and launch new website
  5. Open house or some event

The tasks involved in launching a new firm are numerous, specific to each individual firm, and this is just a starting list. You can use this list as a starting point to develop your own project plan. Suggest that you create a central project plan to get everyone handling various tasks on the same page. The plan should include tasks, specific responsibilities and start and target completion dates.

Good luck with your new firm!

 

Click here for our blog on succession

Click here for out articles on various management topics

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

 

 

Jul 14, 2015

Law Firm Dissolution – Steps To Be Taken

Question:

I am the managing partner in a 14 attorney firm in Seattle. Our partnership has voted to dissolve the firm effective the September 1,2015. Two new firms will be formed. Eight attorneys will be going to one firm and six to another firm. What steps do we need to think about in managing this project?

Response:

You actually have two projects to manage. The dissolution project and the new firm start-up project for the firm that you will be joining. The other firm will also have a new firm start-up project as well. I will address in this blog some of the dissolution steps and I will address some of the new firm start-up steps in next week's post.

Dissolution Steps

  1. Create a master project plan.
  2. Identify who will be in control of the wind down. Firm or representatives from both sides.
  3. Contact the firm's accounting firm.
  4. Identify a spokesperson to address associates and staff.
  5. Identify a spokesperson to handle the press and other outside sources.
  6. Notify associates and staff.
  7. Create a checklist of ongoing obligations and responsibilities.
  8. Create a list of memberships and special arrangements.
  9. Notify insurance carriers.
  10. Notify clients by letter of the dissolution.
  11. Determine compensation for those that manage the wind down.
  12. Follow-up on outstanding delinquent accounts receivable.
  13. Develop a dissolution agreement and have signed by all partners.
  14. Identify who will have control of the files – paper and electronic.
  15. Determine last day of operations.
  16. Determine how and when the final work in process will be billed and by who.
  17. Address the office lease obligation.
  18. Address the equipment and other lease obligations.
  19. Determine the value of all firm assets as of the last day of firm operations.
  20. Identify contingency fee matters and negotiate a separate agreement regarding how to pay all involved when the cases are settled.

These are just a few of the many steps that are involved. Next week I will post Part I – Steps to be Taken to start-up your new firm.

Click here for our blog on succession

Click here for out articles on various management topics

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

 

 

Jul 07, 2015

Law Firm Ownership – Acquiring a Founding Partner’s Interest – Question from a Reader

Question:

I have a quick question on a recent column of yours that appeared on last week's blog and Illinois State Bar Association (in an ISBA email).

You refer to the following:

“One to one and a half times the owner's average earnings for the past five years is typical. "Does this mean the total firm revenues or the amount the owner attorney received as income? I thought I have seen that multiplier to be on total firm revenue.

Thank you!

Response:

I was speaking in terms of net profit or earnings – not gross fee income.

It is true that we often speak in terms of a multiple of gross fee income when trying to value a firm. Typically a best case is a multiple of 1.0 – often less – .60 – .75 or even less. Downward adjustments are made to the multiple based upon practice risk, how high the overhead is, likelihood of clients or referral sources remaining etc. 

For example:

Law Firm A – has $1,000,000 in gross income and the net earnings of the owner is $600,00

 vs.

Law Firm B – is a collections practice – very high overhead intensive practice- has $1,000,000 in gross income and the net earnings is $150,000.

Using a multiple x gross has to be discounted substantially for law firm B due to risk, overhead, etc.

It is sometimes simpler to think in terms of net profit – with the typical ranges between 1.5 – 2.0.

Click here for our blog on succession

Click here for out articles on various management topics

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

Jul 01, 2015

Law Firm Ownership – Acquiring a Founding Partner’s Interest

Question:

I am a senior associate in a eight attorney elder law firm in Miami. There is one owner (founder) and seven associates including myself. The owner has approached me with a proposal to over time buy out his interests. I am the only senior associate in the firm and the only associate that he has approached concerning selling his interests. Specifically his proposal is as follows:

  1. Pay him $825.00 for the practice over five years.
  2. After five years I will own 100% of the shares.
  3. My compensation arrangement will remain the same (salary plus formula percentage incentive bonus based upon my responsible attorney collections) until I have acquired 100 percent interest of the firm.
  4. The owner wants to work in the firm indefinitely after his interest are acquired as an employee or Of Counsel.

I don't know how to respond to this proposal and would appreciate your thoughts? Is it fair? Does it make sense?

Response:

It makes sense for him. Seriously, you are going to need much more information that this proposal. To get started you need to ask for and review the following:

  1. Profit and Loss statements and Balance Sheets for the past five years.
  2. Tax returns or Schedule C for the past five years.
  3. A report showing the current accrual based assets – mainly unbilled work in process and accounts receivable. There are often the largest assets that a firm has and it is not on a typical cash-based profit and loss statement.
  4. A list showing any off-balance sheet liabilities.
  5. Copies of the office lease and other leases to determine lease liabilities.

From these documents you can get a feel for the cash-based net equity, the accrual-based net equity after considering work in process and accounts receivable and unrecorded liabilities.

Two numbers that may be even more important is the average fee revenue generated over the past five years and the average compensation (net profit plus compensation – W2 and K1 earnings) that the owner has been earning over the past five years.

Here are a few thoughts:

  1. One to one and a half times the owner's average earnings for the past five years is typical. So from this guideline you can evaluate the appropriateness of the $825,000.
  2. What assets are included? Will he exclude any assets?
  3. Will you be able to acquire minority interests over the five years as you pay towards the payout? I will insist on such.
  4. If you do acquire minority interests as you go will there be a profit pie for you to share in or will the owner increase his compensation, personal perks he passes through the firm, cut down on his working time, etc.? You should get a handle on compensation as well.
  5. I would not have the owner's employment open ended after you acquire 100% interest. Have some protection in case he fails to produce or has physical or mental problems that affects his performance. Suggest an Of Counsel agreement that gets reviewed and renewed annually.
  6. Consider whether there is a transition that insures that the clients and referral sources stay with you after he retires. If he has not groomed you, involved you in relationships with clients and referral sources, had you giving seminars, and plugged you into referral sources future business could drop off dramatically. This should be factored into the value.
  7. Weigh the cost-benefit of starting your practice v.s. purchasing his practice. 

Good luck!

Click here for our blog on succession

Click here for out articles on various management topics

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

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