Law Practice Management Asked and Answered Blog

Category: Culture

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Dec 16, 2020

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Law Firm Equity Partner Buy-ins and Buy-outs – Pros and Cons

Question: 

Our firm is an insurance defense firm based in Denver, Colorado. The firm was founded in 2015 by two founding partners and we have grown to a firm of twelve attorneys – two founding equity partners, three non-equity partners and seven associates. Non-equity partners are included in firm management and the non-equity partners serve as members on the management committee. Non-equity members are compensated in the same manner as are equity partners – salary and bonuses determined by three year moving average ratios of weighted working attorney and originating attorney collections. Partner ownership interest does not factor into equity partner compensation. The firm does not have a partnership agreement. The firm is currently considering admitting qualified non-equity partners as equity partners. We are considering having a requirement that new equity partners purchase their shares via a buy-in tied to a firm valuation that includes a goodwill value.  Our initial discussion with the equity partner candidates that we are considering has not been positive. They feel there should be no buy-in and they don’t see any benefit to being an equity partner. We would like you thoughts and opinions on this matter.

Response: 

I can see where there is little distinction in your firm between equity and non-equity partners. I encourage firms when creating a non-equity tier to resist the temptation of giving away the farm and not retaining some incentives for non-equity partners to want to become equity partners. Typically, I suggest that there be a different compensation structure for equity partners than non-equity partners so that there is a compensation component for bearing the risk of ownership for equity partners. Often I suggest that non-equity partners come under a different compensation structure than associates, be given a few additional perks, and be included in partner meetings to a degree but not having a vote.

Approaches to buy-ins and buy-outs are all over the place in law firms. Here are a few of the common approaches:

1. Naked in and naked out – given shares or percentage interest. No buy-in at all. A new equity partner is given a percentage interest or shares with no buy-in whatsoever. When the partner leaves the firm for whatever reason he or she  is paid their share of earnings to date and that is it. No buy-out for their interest.
2. Naked in and naked out with cash-based capital contribution. A new equity partner is given a percentage interest or shares with a capital contribution in alignment with their percentage interest. When the partner leaves the firm for whatever reason he or she is paid their share of earnings to date and their capital account.
3. Naked in and naked out with cash-based plus WIP and AR buy-in. A new equity partner is given a percentage interest or shares with a capital contribution and a buy-in the unbilled work in process and accounts receivable in alignment with their percentage interest. When the partner leaves the firm for whatever reason he or she is paid their share of earnings to date and their cash-based capital account plus their interest in accounts receivable and unbilled work in process.
4. Purchased shares based on a valuation at the time the shares are purchased and sold. A new equity partner is sold a percentage interest or shares based on a valuation at the time of purchase. When a partner or shareholder leaves the firm for what ever reason he or she is paid their shares of earnings to date and their shares are purchased based upon a valuation of the firm at that time. These valuations often include a goodwill value. Sometimes the purchase price is discounted for sweat equity – time that a equity partner candidate that has been with the firm, etc.
5. Founder Benefit. New equity partners are given a percentage interest or shares with no buy-in or a cash-based capital contribution in alignment with their percentage interest and paid their share of earnings to date and their cash-based capital account, if any, when they leave the firm. However, original founders, in addition to being paid their share of earnings to date and their capital account, are also paid a founder benefit often in the form of a multiple of the average earnings for the past three years.

The spectrum of law firm valuation and withdrawal entitlement theory can be characterized by two polar positions. The first considers the firm as a means to generate income (i.e., compensation), with modest, if any, value beyond the cash basis capital account. This is the dominant view currently in the profession and has resulted in the vast majority of firms valuing only the cash basis balance sheet for internal withdrawal rights. The second considers the firm as an investment, much like most other commercial endeavors.

I have many firm clients that are in their firm generation with original founders that have been in practice for twenty years and these firms have substantial institutional goodwill. Some of these firms sell shares to equity partner candidates based upon a firm valuation including a goodwill value. Other such firms take one of the other approaches. Often the problem with this approach is affordability.

Personally, I believe there should be some skin in the game for a non-equity partner to become an equity partner or shareholder. In your situation you are a young firm and acquiring and retaining lawyer talent should be your primary objective. Therefore, rather than selling shares I believe that you might want to  consider approach number two – naked in – naked out with a cash-based capital contribution that is affordable. If cash is a problem for the candidate have them pay what they can with the remainder payable on a capital (promissory) note paid over a one to three year period. Then have the partnership agreement provide for a founder benefit for the two founders as discussed above (say 1.5 multiple) upon retirement.

Do all that you can to fund partner retirements through 401k plans and other vehicles.

Click here for our blog on partnership

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

 

May 15, 2019

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Challenges in Law Firms that are Family Businesses

Question: 

I am a partner in a husband/wife owned law firm in Seattle, Washington. We have four other associate lawyers in the firm. One of these lawyers is our son and the other is the daughter of my wife’s (who is my partner) brother. We have four staff members of which one is also a family member. We are a general practice firm and we have been in operation for ten years. While the firm has done well over the years we have had our challenges. Office problems seen to follow us home and both staff employees and non-family attorneys are alienated. We have been experiencing turnover of both staff and attorneys. What should we being doing different?

Response: 

I have seen family practices go both ways – successful and not so successful due to the conflict and drama that can exit in family practices if they are not setup and managed properly.  A few of the challenges and issues that can arise in family owned law firms include:

• Preserving family harmony
• Competency of family employees
• Determining compensation for family members
• Admission of family members to partnership and other attorneys in the firm
• Planning for succession and leadership

Family practices must first start by recognizing that there are three social systems at play – the family, the law firm business, and overlap of the two. Unless boundaries and rules are established there will be conflict and tension. Family roles and roles in the law firm should be be developed. Here are a few guidelines that family practices should consider adopting:

1. Develop family and law firm charters – sort of like job descriptions – that outlines roles and responsibilities in the family and the law firm.
2. Establish criteria for who in the family can join the firm.
3. Determine education and experience requirements for joining the firm.
4. Determine how titles of family members in the law firm will be determined.
5. Determine how job performance will be evaluated.
6. Determine consequences for inadequate performance.
7. Determine how compensation will be determined.
8. Leave law firm business at the law firm – don’t bring it home.

Here is a link to an earlier blog in re children of partners who are attorneys working in law firms.

Click here for our blog on human resources

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

 

Jan 04, 2018

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Law Firm 2018 Initiatives and Goals

Question: 

Our firm is an eighteen attorney insurance defense firm located in Los Angeles, California. We have six partners and twelve associates. We represent insurance companies in personal injury and property claims. Over the last five years our growth and our profitability has been flat. We feel that we have enough work to reach our goals but we just don’t think our people are energized. We have a billing requirement of 2000 billable hours but few of our attorneys are hitting them. The partners met a few weeks ago and set for the first time set some goals for 2018. The firm does not have a business or strategic Plan. Do you have any thoughts on 2018 goals and how best we can implement?

Response: 

Since you do not have a strategic plan I assume that you have not done any formal planning in the past. Even firms that do have strategic plans often fail to engage and energize their team. Here are a few thoughts regarding your 2018 goals and initiatives:

1. Most law firms are not run like a business. They haphazardly go through the motions without a plan, without structure, and with no order. The first thing I would suggest is for the firm to make a commitment this year to begin running your firm more like a business with more structure, order, and accountability from your lawyers and staff.
2. If the firm does not have a budget develop a budget this year before the end of January and review the firm’s performance against the budget monthly. The revenue section is particularly important. Build it from the ground up timekeeper by timekeeper. Advise each lawyer and other timekeepers  of their revenue and or hours targets for the upcoming year.
3. Consider a new year kickoff meeting, possibly breakfast or lunch, to jump start the new year that would include attorneys and staff. During this meeting you can accomplish the following:
   1. Recognize team members that performed well the past year.
   2. Provide information about the firm’s past year performance, where the firm is and where it is headed in the upcoming year.
   3. Review the firm’s mission and purpose and specific firm and individual goals for the upcoming year.
   4. The firm kickoff meeting sets the tone for the upcoming year, communicates firm and individuals goals, and energizes team members and solicits commitment.
4. During the year consider the following meeting schedule:
   1. Kickoff meeting – attorneys and staff – early January.
   2. Attorney meeting – weekly
   3. Staff meeting – monthly
   4. Partner meeting – monthly
   5. Midyear meeting – attorneys and staff – early July
   6. Budget and Planning meeting – Partners or Management Committee –  early December.
5. Review your attorney compensation system to ensure that it is rewarding the performance you are seeking.
6. Review your attorney hiring protocols to ensure that you are getting the right people on the bus.
7. Dig deeper and look into why attorneys are not meeting billable hours requirements. Possible reasons might be:
   1. Not enough work.
   2. Attorney not putting in the hours.
   3. Attorney has poor time management habits.
   4. Attorney has poor timekeeping habits.
   5. A combination of all of the above.
8. Implement solutions to above.
9. Take a tougher approach to those attorneys that are not meeting performance targets.
10. Conduct formal performance reviews with each attorney and staff member annually.
11. Commit to starting to work on a strategic plan no later than the third quarter of this year.

Click here for our blog on strategy

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

Feb 17, 2015

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Transitioning to a More Business-Like Law Firm

Question:

I am a partner in a 12 attorney general business firm located in St. Louis, Missouri. I was elected as managing partner earlier this year. I have been a lawyer and with this firm for eight years. I also have a MBA degree and managed a small business before becoming a lawyer. Frankly, I have been amazed at how law firms conduct business and I would like to change our thinking and our culture. Do you have any thoughts?

Response:

Here are five tips that you might find useful.

TIP #1: Work with the attorneys in the firm and help them develop more of a business mindset. Try to get them to become more entrepreneur and learn how to think like businesspersons. Encourage them to look at the world from their client’s perspective and consider their clients their business partners. 

TIP #2: Encourage all attorneys to select their clients carefully. Establish client acceptance criteria. Learn how to say no. Dump undesirable clients.

TIP #3: Encourage all attorneys to brand themselves. Ask them to look for was ways to differentiate themselves from their competitors and to become perceived as the only attorney that can do what they do. Ask them to make a decision – what do they want to be known and remembered for? Unique services, unique client groups, different service delivery strategy, personal style. Have the firm and each attorney create a five-year plan for goal accomplishment.

TIP #4: Encourage each attorney to become “solutions orientated” and become consultants – trusted advisors to their clients as opposed to simply their task and process attorneys. Solutions may involve activities and services other than legal services. Ask each attorney to think out-of-the-box and outside of typical frameworks in which they are comfortable.

TIP #5: Conduct a firm-wide management and leadership assessment and identify strengths and weaknesses. Enhance management and leadership skills through skill development training and personnel acquisitions.

Good luck!

https://www.olmsteadassoc.com/blog/category/strategy/

Click here for our law firm management articles

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

 

Apr 13, 2011

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Balancing the Law Firm Trust Account

Question:

I am the managing partner with a 14 attorney firm in Chicago. We recently hired a new accounting manager/bookkeeper. While she has worked in a few other law firms these firms did not require her to manage a high volume trust account. Our firm has a high volume of transactions that flow through the firm's trust account. We have had problems in the past with prior bookkeepers and outside accountants that did not balance/manage our trust accounts properly. What suggestions do you have or resources do you suggest?

Response:

Failure to properly manage, balance, and reconcile the firm trust account can be a major problem for law firms - from professional responsibility, accounting, and tax aspects. From a bookkeeping standpoint – failure to maintain a trust account sub-ledger for each client that has money in the trust account and insuring that all of the sub-ledgers balance and reconcile back to the trust account bank statement in the biggest problem that I see. You must do more than simply maintaining a checkbook journal register – you must have a sub-ledger for each client. If the firm reflects the trust bank account on it's balance sheet there should be either a contra asset account or a liability account relecting the same amount reflected in the cash account. The total of all of the sub-ledgers should also equal the number in each of these two general ledger accounts. All should reconcile back to the trust account bank statement. If the firm does not reflect the trust account on the balance sheet – then the trust account bank statement should be reconciled to the sub-ledgers.

Many time and billing programs have trust accounting modules that fully automate the trust accounting management function, maintain the sub-ledgers, write trust account checks, and reconcile the bank statement against the client trust sub-ledgers.

There are a whole array of issues that you need to be aware of and stay on top of concerning retainers generally, firm trust accounts, and other matters. You, your bookkeeper, and your CPA need to get educated on all of the ramifications.

Here are a few additional suggestions:

1. Get a copy of your local rules and read them. For Illinois lawyers – get a copy of the Illinois Rules of Professional Conduct of 2010 published by the Attorney Registration and Disciplinary Commission of the Supreme Court of Illinois. www.iardc.org.
2. Insure that your bookkeeper and CPA read these rules and implement appropriate systems to ensure compliance.
3. Get your hands on a copy of the book – ABA Guide to Lawyer Trust Accounts, by Jay Foonberg. Book can be obtained from the American Bar Association website. www.abanet.org
4. Reconcile monthly.
5. Use appropriate software to write checks, record deposits and transfers, renconcile bank statements, and maintain the client trust sub-ledger.
6. Maintain a journal.
7. Maintain a client trust sub-ledger.
8. Insure that funds are transferred to the firm's operating account when fees are earned and appropriate accounting entries made at that time in the firm's books.
9. Stay on top of the trust account.
10. Insure that your bank and credit card company are following proper procedures. Insure that your bank takes services charges, charges for printing checks, etc. from your operating account rather than the trust account.

You are right in desiring to get a handle on this sooner than later. Sit down with your bookkeeper and CPA, get educated on the rules and procedures, and implement appropriate policies and systems now. It is always easier to prevent a mess than to clean up one.

 Click here for our financial management topic blog

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

Nov 02, 2010

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Getting Law Firm Partners Onboard

Question:

I am the managing partner of a 90 attorney firm in Chicago. We have 45 equity partners, 20 non-equity partners, and 25 associates. We have a three member executive committee as well as other committees in place in addition to the managing partner. Five years ago we formulated a strategic plan and have been attempting to successfully implement it since that time. We have had limited success. We don't seem to be able to get our partners "on board" with the actual implementation. I will tell you – I am truly herding cats here. Any ideas on how to get these guys and gals on board?

Response:

Getting your partners on board is always a challenge. The obstacles are almost too numerous to outline. Yet if law firms want to be successful in this turbulent environment they must embrace change and get their partners not only behind new strategies but often they must also be the ones to implement these strategies as well.

Managing lawyers in general is like herding cats. But trying to manage "star partners" is a real challenge. They are the "hitters" upon which a firm's future often depends. True star partners are:

1. Building enduring client relationships
2. Consistently performing up to their full potential
3. Putting the firm first and implementing strategic imperatives

Star and other partners in the firm must continually balance their roles as producer, manager, and owner. Often, these roles may be in conflict. Also there are personal strategies and agendas as well.

Actually, I don't think they can be managed – but they can be led. There is a difference. But in order to accomplish this the following need to be well designed, in alignment and balanced:

Strategy

The personalities, emotions and needs of your partners constrain a firm's ability to design and implement strategy. Keep in mind that firm leadership cannot order the troops forward; instead the troops (partners) must essentially vote with their feet to pursue a new strategic direction. Absent a crisis, partners tend to stay on track and support only modest adjustments to strategy.

Organizational (Structure, Governance, HR Systems)

When organizational characteristics – structure, governance, and HR systems (recruiting, training and mentoring, performance management, and compensation) are aligned with the needs of the partners and the strategy of the firm, they create the conditions under which strategy can be implemented effectively. Matrix and team structures are the norm.  Collegial partnerships, consensus based governance, and leadership at the pleasure of the partners, rules the day. The cats have the power and the leader serves to a large extent at their pleasure.

1. Look for ways to build consensus and create buy-in
2. Involve all partners in major decisions – more than input – but a say
3. Implement a first-rate partner performance management/review/evaluation system
4. Review and insure that your compensation system is fostering alignment
5. Provide as much transparency as possible
6. Review your organizational structure

Culture

The firm's culture deals with its underlying core of beliefs and values, which shape the behavior of the firm. Nothing can weave new strategic and organization choices together and hold them in alignment better than culture. A strong culture can also provide enormous help in attracting, retaining and motivating stars. A strong culture is the glue that helps a firm overcome major obstacles, it can help foster major changes in strategy and or organization, and it can be a strong force for unity and coherence. 

1. Work at building and managing the firm's culture.
2. Recruiting, compensation, training, mentoring, performance management – should also be deployed to reinforce the firm's culture.
3. Guard the firm's culture and keep in mind the impact that laterals, mergers, etc. might have upon it. 

Leadership 

As the firm's leaders you and the other leaders in the firm are serving at the pleasure of your partners. You are probably elected by them. Your positional power is limited – sort of like the President of the United States and the Congress. As a result exceptional leadership skills are needed and each of you must master the skills of building consensus and facilitating decisions so your partners will agree with and support them.

1. Pick the right priorities
2. Pick the right fights and fight the right battles
3. Build support and coalitions through integrity and trust

For a good read on this subject – the book “Aligning the Stars” by Jay W. Lorsch and Thomas Tierney is an excellent resource.

Good luck! 

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Click here for our blog postings on partnership and governance

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

 

Sep 28, 2010

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Dealing with Difficult – Maverick Partners

Question:

Our firm has been discussing how to handle one of our partners. We are are 25 attorney firm. One of mid-level partners who is one of our highest fee producers and best business getter's simply won't follow firm policy or play by the rules. He won't turn in time-sheets in a timely manner, he is argumentative with others in the office, and not a team player. He is "me first" while the rest of the partners in the firm are mostly "firm first". We are trying to build a team based practice and this one partner is holding up our progress. Do you have any thoughts or suggestions on how we should handle this?

Response:

Dealing with "maverick partners" is always a challenge. Of course they seem to always be the heavy hitters and this makes it that much more difficult as often there are major clients and large sums of money at stake – at least in the short term. This can also be major issues and large sums of money at stake in the long term if you don't deal with the maverick partner as well. In addition you won't be able to achieve the vision and goals the firm is trying to achieve.

• For starters – if you have not already – create a well understood set of firm core values or code of conduct that governs behavior in the firm. For example, in most firms people are expected to work hard, be honest, and treat each other with respect.
• Partners as well as all other attorneys and staff should behave in a collaborative, cooperative, and team-orientated manner.
• Partners as well as all other attorneys and staff should comply with all firm policies and procedures.
• Enforce firm policies for all – no exceptions.
• Consider coaching, counseling or other forms of outside assistance if they could prove helpful.
• Lay down the law – confront and deal with the problem partner sooner than later – even if it means he or her leaving the firm.

Many firms have had to deal with the problem of a maverick "huge business generator" who just wouldn’t cooperate with firm policies and caused conflict and tension in the firm.  It is an unplesant task – but in the end – worth the investment. In the end he or she either conforms or leaves the firm. We have been advised by our clients that even though they may have struggled in the short term as the result of the loss of a major fee producer – in the long run the firm was better off and should have done it earlier.

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

 

Sep 14, 2010

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Characteristics of Successful Law Firms – Basic Building Blocks – Block 4 – Partner Compensation

For the past three weeks I have been discussing the characteristics of successful law firms and introduced the following basic building blocks that successful firms typically have in place:

• Partner Relations
• Leadership
• Firm Management
• Partner Compensation
• Planning
• Client Service
• Marketing

Partner relations, leadership building, and management blocks have been discussed. 

The fourth basic building block is partner compensation. Successful firms have a good partner compensation in place. Partners frequently advise us in confidential interviews that they are more dissatisfied with the method used to determine compensation than with the amount of compensation itself.

How much and how partners are paid are probably the two most challenging management issues that law firms face. Many law firms are struggling with compensation systems that no longer meet the needs of the firm and the individual partners. Failure to explore alternatives to failing systems often result in partner dissatisfaction leading to partner defections and disintegration of the firm.

In many law firms compensation systems have been counter-cultural and failed to align compensation systems with business strategies. As more law firms move toward teams many are incorporating new ways to compensate partners in order to develop a more motivated and productive workforce. Team goals are being linked to business plans and compensation is linked to achieving team goals. Such systems reinforce a culture that significantly advances the firm’s strategic goals.

People tend to behave the way they're measured and paid.

What gets measured and rewarded – is what gets done.

However, be advised that compensation does not drive behavior – it maintains status quo. Motivation requires leadership which can have a greater impact upon a firm than anything else.

Compensation systems should do more than simply allocate the pie – they should reinforce the behaviors and efforts that the firm seeks from its attorneys. Many firms are discovering that desired behaviors and results must go beyond short term fee production and must include contributions in areas such as marketing, mentoring, firm management, etc. to ensure the long term viability of the firm.

Click here to read my article on the topic

I will address each of the other building blocks in upcoming postings.

John W. Olmstead, MBA, Ph.D, CMC
www.olmsteadassoc.com

 

Sep 08, 2010

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Characteristics of Successful Law Firms – Basic Building Blocks – Block 3 – Management

For the past two weeks I have been discussing the characteristics of successful law firms and introduced the following basic building blocks that successful firms typically have in place:

• Partner Relations
• Leadership
• Firm Management
• Partner Compensation
• Planning
• Client Service
• Marketing

Partner relations and the leadership building blocks have been discussed. 

The third basic building block is management. Successful firms have a good governance and management structure in place and effectively manage the firm. A major problem facing many law firms is the lack of long range focus and the amount of partner time that is being spent on administrivia issues as opposed to higher level management issues. Time spent in firm governance and management, if properly controlled, is as valuable as, if not more valuable, than the same time recorded as a billable hour. (client production time)

 

 

 

Aug 31, 2010

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Characteristics of Successful Law Firms: Basic Building Blocks – Block Two – Leadership

Last week I discussed the characteristics of successful law firms and introduced the basic building blocks that successful firms typically have in place. These are:

• Partner Relations
• Leadership
• Firm Management
• Partner Compensation
• Planning
• Client Service
• Marketing

Last week we focused on partner relations as a core foundational building block.

The second basic building block is leadership. Successful firms have good leadership in place. This may be a single individual or a core group of individuals. Leadership does not always come from the formalized management structure of the firm.

Leadership is one of the major problems facing law firms. Leaders are needed for managing partner posts, executive committee chairs, and practice group heads.  

Leadership behaviors include:

• Developing people
• Being able to influence others
• Encouraging teamwork
• Empowering people
• Using multiple options thinking
• Taking intelligent risks
• Being passionate about work
• Having a strong clear vision.

 

Leadership skills will need to be included in compensation systems.

Seven traits of effective leaders include:

1. Make others feel important
2. Promote a vision
3. Follow the golden rule and establish trust
4. Admit mistakes
5. Criticize others only in private
6. Stay close to the action
7. Walk the talk.

Leadership is what makes things happen and propels the firm forward, facilitates new directions and attainment of strategic goals, and provides the firms the resiliency needed in today's challenging competitive climate.

Law firms without leadership are easy to spot. They are the firms that are "stuck-in-a-rut", unable to reach agreement or concensus on new ideas, stagnating profitability, partner defections.

Firm must pay attention to this key area and develop leaders for all roles mentioned above.

Click here to read my article on leadership

I will address each of the other building blocks in upcoming postings.

John W. Olmstead, MBA, Ph.D, CMC
www.olmsteadassoc.com

 

 

 

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