Law Practice Management Asked and Answered Blog

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

Jan 26, 2022

Law Firm Succession Planning & Practice Transition – Have I waited too Long?

Question:

I am the sole owner of a twelve-lawyer defense litigation practice in Chicago. We represent automobile manufactures and have approximately ten major clients. I am the only equity partner in the firm and all of the other lawyers in the firm are associates. Two associates are seasoned lawyers with substantial experience and have been with the firm for many years and the other nine have less than five years experience. The two seasoned associates are in their mid-sixties. I am sixty-eight. I just realized that the firm’s office lease expires in eight months and I have decided that this is a good time to retire. I will not sign another lease and I would like to be completely retired in the next six months. My wife has some health issues and I need to devote my total time time to her. I have talked with the two senior associates and they plan on retiring as well. Therefore, I will have to either close the firm or find another firm interested in taking over the firm. Have I waited too long?

Response:

Possibly so. Eight months is a very short timeline to locate another law firm that might be interested in acquiring or merging with your firm. However, this is not always the case. I have had situations where interested parties were located in a month or two through cold approaches, discussions held, details worked out, and the transaction concluded within six months. If you have a few firms in mind that you could approach the process could go much quicker than if cold approaches have to be used. So your timeline is not impossible but you need to get started yesterday. Keep in mind that client transition is paramount in the success of such arrangements and usually the acquiring firm wants a transition period, often of a year or so in which you work at the firm in a consultant capacity to assist with client relationship management and transition. Therefore, you might have to stick around in an Of Counsel role for a year or two.

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

Jan 20, 2021

Law Firm Merger – What’s in a Name?

Question:

Our firm is a ten attorney boutique litigation firm located in Memphis with four partners and six associates. We are in very early discussions with another firm in town that has three partners and four associates. We believe that a merger would improve our lawyer talent base and help us grow. In our last meeting the topic of firm name was discussed and it was an unpleasant discussion and we are concerned that we may a difficult time agreeing on the name of the firm. Is this a common issues and problem?

Response:

Yes. Deciding on a name for the new firm is another interesting reason why some firms decide not to merge. It is unbelievable how egos can override important business decisions when the time comes to choose a name for a combined practice. It is ludicrous for the receptionist to greet you with six names when you call a law office.

Nowhere in the business world should a caller have to wait that long before being able to ask for the person sought. The truth of the matter is that everyone remembers the first and possibly second name of most law firms, and this point should be dealt with in negotiations. The importance of the firm name in marketing and branding should also be considered.

If the combined firm is having trouble with the name of the firm, then obviously the firm is going to have a lot more trouble in the future. Where there are problems in selecting the name of the firm, I would recommend that the firms not merge because of the egos involved. It is a sure sign of future problems when people cannot sit down and immediately offer to give something up – such as inclusion of their name in the firm name. What is more important – firm security, bottom line, future growth, or “your name in the firm?” Some may say all four, but the point is to look at the business opportunity at hand.

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

Jul 22, 2020

Merging a Small Law Firm with a Large National Firm

Question:

I am a sole owner of four attorney, including myself, boutique litigation law firm in Chicago. I am fifty-two and looking for a long-term succession strategy for my firm. I have been approached by a large Chicago national firm involving merging my practice with their firm. We have had several meetings and they have provided me with an initial proposal. I have spent many years building my law firm, and, by merging with a large law firm it seems that I am not really receiving any value for goodwill. What are your thoughts?

Response:

It is normal to exchange equity in your firm for equity in a large firm and not receive any cash consideration in those situations where equity partnership is being offered. Some large firms have a goodwill factor which is included in the value of each capital share or unit. The payment of the goodwill factor is usually waived in a merger. However, if you are considering merging with a large law firm and you will not be receiving any cash consideration for your practice, you should give serious consideration to why you are merging. In other words, why work for 20 years and receive nothing for the goodwill or for the value of the client list and the development of excellent personnel? Perhaps you could be included in the firm’s retirement plan, which could be considered a payment for goodwill. Another approach might be for you to receive a certain percentage from your clients and referral source fee collections for say three years after you retire. Receiving cash consideration for goodwill in a merger occurs more often in mergers with smaller firms.

Bear in mind that in many mergers where small firms merger with large firms equity partnership is not being offered and non-equity partnership is being offered instead.

With all of this said there could be other considerations that could result from a merger with a large national law firm such as greater compensation, professional recognition, peer mentoring, size and type of cases, staff and other resources, etc. that could outweigh a cash consideration for goodwill.

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

Jul 01, 2020

Law Firm Acquisitions – Acquiring a Senior Attorney’s Practice

Question:

I am a partner in a small law firm in Northern Virginia. We are a four attorney firm with two equity partners and two associates. We are interested in acquiring a solo practitioner’s practice that is 60 years old and ready to retire. What are the issues that we should be concerned with before we spend a great deal of time on this matter?

Response:

I understand your concern and reason for asking for my thoughts. You must immediately determine the nature of the clientele that you would be acquiring and whether the seller is interested in remaining with the firm for a period of at least one year so your firm can become acclimated to the new clients. If the firm’s clientele are older, what would be the reaction if they were represented by younger attorneys? People chemistry is very important. It has often been said that clients hire the lawyer and not the firm. While this is not totally true – there is some truth in this statement. A successful client transition and retention is crucial.

If the sole practitioner is interested in selling out and leaving the area, then you may consider proceeding with the transaction with payments which would be based upon subsequent collections during a period of years after the acquisition. In other words, the more the seller participates during the first year to retain certain clients, the more the set we would receive.

The worst scenario is if the seller dies unexpectedly after signing the agreement. This recently happened one of our clients, and they had to spend a great deal of time and effort trying to retain clients that they had never had contact with.

You must also review the financial records to determine the profitability of the practice. Many sole practitioners do not keep adequate time records, don’t have automated practice management systems, and are not paperless. What is the shape of their client files and how well are they organized? Certain data is stored in their heads. In many cases, the hourly rates are low and could be raised during the first year to make the practice more profitable. However, this increase must be one that will be accepted by the client. The next question would be whether family members are involved in the practice, if they are, there may be problems in the future. The clients know the family, and if there are any remaining family members working in the firm, they may leave the your firm empty-handed. For example, if a paralegal who is a family member leaves the firm after the merger is consummated, several clients could follow the paralegal to their new place of employment. In such situations I have had client law firms that have had such persons execute non-compete agreements. In one situation the deal was aborted by the acquiring firm due to the paralegal not willing to sign a non-compete agreement. This was a situation where the paralegal in the firm actually had the client contact relationship. The owner’s contact with the client was limited. The paralegal had the relationship.

Finally, there should be other safety valves for the purchaser in acquisition of this nature. On a positive note, the situation could present a fine opportunity for growth. Just ensure that the buy sell and other legal agreements provide the appropriate safeguards.

The above issues such as non-compete and practice sale agreements should be addressed with your business attorney.

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

Sep 04, 2019

Merger vs Transitioning Our Firm to Our Associates

Question:

I am one of three founding partners in a twelve attorney insurance defense firm in New Orleans. The three of us are in our early sixties and contemplating retirement in the next several years. The three of us have been discussing our succession plans and are wondering whether we would be better off merging with another firm or transitioning the firm to our associates. What are your thoughts on this matter?

Response:

A majority of firms prefer transitioning to the next generation of attorneys within the firm whenever possible. Many founding partners at this stage of their career are often not ready to move to another firm unless they have to.

Advantages of transitioning to associates in the firm include:

Continuation of the legacy of the firm
Continued employment for associates and staff
Potential to receive founder benefit
Flexible buy-out arrangement
Retention incentive for associates in the firm
Ability to continue working in your present office surroundings without having to learn new procedures, form new relationships, and integrate with another firm at this stage of your careers,

Disadvantages of transitioning to associates in the firm include:

Time it often takes to effectively transition associates in the areas of legal skills, client relationships and client development, and firm management.
Associates on deck are simply “too green” and do not have enough experience.
Associates simply want a job, don’t want to be owners of a law firm, and are unwilling to step up and make the required commitment and investment.

I believe that you should start by taking a critical look at the demographics of your associates and raise the following questions:

What are the retirement timelines for each of you? Will you be retiring close to the same time?
Do you have the bench strength – your present associates – to serve your existing clients if the three of you are no longer with the firm?
If the three of you were no longer with the firm could your present associates retain your existing clients?
Do any of your associates have the leadership and management skills to lead and manage the firm?
Do any of your associates have the will to take over the firm and buy-out your interests?

Your answers to the above five questions will determine whether you should consider a merger strategy. It is often difficult to get a “founders benefit” (goodwill value) in mergers with other firms.

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

Apr 17, 2019

Law Firm Merger/Acquisition – Should We Merge or Acquire

Question:

I am the managing partner of an eight attorney firm in Dayton Ohio. We have two equity partners (both in our early fifties), two non-equity partners, and four associates. Our practice is a very niche specific practice and there are only three or four other practices in the state that do the work that we do. There is another firm in Cleveland, Ohio that has approached us regarding possible merger or acquisition. The firm does similar work that our firm does but this firm also handles some areas that we don’t handle but would like to get into that falls within our niche area. There are two founding partners in the firm – one in his late sixties and the other in her early seventies, one associate attorney, and four staff members. The two partners are planning on moving towards retirement and are looking for a succession strategy. They have not shared with us their timeline or any financial information. We have had one face-to-face meeting and several phone calls. We would appreciate your take on this, next steps, and whether we should pursue further.

Response:

You have not indicated whether your firm has a strategic plan? If you do my next question is whether this practice area and having another office three and one half hours away supports the vision of your firm? Often, but not always, a merger will emerge as a way to achieve some aspect of the firm’s vision. For example, a merger might help the firm:

Enhance the firm’s competitive advantage.
Increase the firm’s lawyer bench strength.
Add practice areas that are complimentary to existing areas.
Geographical market expansion
Increase or diversify the firm’s book of clients.
Solidify client relationships.
Increase the depth and breadth of services.

The above would be right reasons to consider a merger or acquisition.

You should take pause if the reasons you are considering merging or acquiring the other firm include:

To merger because other firms are merging.
To correct internal weaknesses.
To solve financial problems.
To deal with unproductive partners.

If your firm does not have a strategic plan you may want to at least engage in some form of internal self-analysis to insure that you are looking through a clear lens, are building a sound business case for the merger or acquisition, and are identifying the characteristics of the ideal merger/acquisition candidate.

In your situation you are looking at actually acquiring a practice three and a half hours away with two senior partners that will be retiring. Obviously, there are risks but the devil will be in the details that will come out of a thorough due diligence examination which I believe is your next step. Here is a link to a prior post concerning information that you should ask the other firm to provide.

Your due diligence examination should focus on:

The firm’s practice and culture
The firm’s clients and client mix
The firm’s people
The firm’s attorneys
The firm’s financial performance and overall economics.
The firm’s infrastructure including IT and communications systems and practices.

Right up front you should ask the partners in the other firm their specific timeline for retirement and how long they will be available for client and management transition. A key issue will be whether clients will remain with the firm when they retire? Are there others in the firm, non-equity partners or associates, that the clients have confidence in to the extent they would remain with the firm or will this all be on your shoulders as owners of the acquired firm? The other question you should should ask up front is what the partners of the other firm are looking for in the form of purchase price or compensation for the firm.

Click here for our blog on succession/exit strategies

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

Oct 10, 2018

Law Firm Merger as an Exit Strategy for Sole Owners

Question:

I am the owner of a small general practice firm in Novato, California. I have three associates working in the firm, three legal assistants, and one office manager/bookkeeper. I started my practice thirty-five years ago right out of law school. I am sixty years old and wanting to retire within the next five years. None of my associates have the ability or the desire to take over the firm. I believe that my best option is to sell my practice to another practitioner or join another firm through merger or other arrangement. I would appreciate your ideas regarding merging with another firm and how I would be compensated and receive payment for the goodwill value of my firm.

Response:

Merger or an of counsel arrangement are approaches that many sole owner firms are taking when there is no one on board that is capable or willing to buyout your interest. Often merger or of counsel arrangements look very similar in how they are structured. Typically, the owner joining another firm:

Winds-down the firm and transitions clients to new firm.
Retains the firm’s cash accounts.
Collects accounts receivable and unbilled work in process on the books before the transition date through the old firm.
Sells fixed assets to the other firm if the firm is interested in purchasing.
Retains responsibility for any liabilities on the books before the transition date.
Transfers trust accounts to other firm for clients that agree to have their matters transferred to the new firm.

Employees that the new firm has accepted would join the new firm and receive compensation and benefits spelled out in the merger or Of Counsel agreement.

How the arrangement will be structured and how compensation/buy-out will be structured will depend upon the size of the other firm. I assume that you will be looking at a firm similar to your size or a little larger (1-20 attorneys). If this is the case and if the arrangement is structured as a merger you would more than likely be classified as a non-equity partner and not an equity partner. While the other firm could pay you in the same manner that other non-equity partners are paid, often a special compensation arrangement is developed where you are paid a percentage of your collections and if you are lucky a referral fee arrangement for your client origination’s for two or three years after your retirement – typically twenty percent. In many cases if will be difficult to get a goodwill value payment and impossible in mergers or Of Counsel arrangements with large firms.

Another option would be an outright sale to another sole owner or small firm for a fixed price for the goodwill value of your firm and any assets the firm desires to acquire. More than likely this would be with an initial down payment and payments over a three to five-year period. Typically, practice sale agreements have provisions whereby the purchase price can be reduced if revenues fall below a certain level.

Click here for our blog on compensation

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):

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

Click here for our blog on compensation

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

Apr 17, 2018

Subjective Law Firm Partner Compensation Systems

Question:

I am a partner in a twelve attorney commercial litigation law firm in Palm Beach, Florida. There are five partners in the firm. We are contemplating merging with another firm in the area of similar size. We have done our due diligence and have come across a possible non-starter – the compensation system. Our compensation system is totally objective – formula-based very close to an eat-what-you-kill system. The other firm has operated under a subjective system and they are pushing for the firm to operate under this type of system. We would appreciate your thoughts and enlightenment concerning subjective-based systems.

Response:

Subjective-based systems are the most commonly used approach to setting partner compensation, especially in larger firms. More and more firms your size and larger are moving to subjective systems as a result of the failure of other systems to account for the full range of contributions that partners make to the law firm. Subjective systems can take on a variety of forms but the central theme of such systems is that they rely on a subjective assessment of partner performance, without reference to specific weighting of factors or a set formula. This is not to say that subjective systems lack structure or predictability, or that they don’t consider objective financial data. Successful subjective compensation systems include these elements and more.

Subjective compensation systems vary widely. Here are some of the most common elements found in subjective systems:

Prospective vs Retrospective System. Systems can take the approach that sets compensation at the beginning of the year by assigning relative shares of the profits and applying allocations as the profits are earned or await the end of year results before making major allocations of profits. Prospective approaches are more common than retrospective approaches. However, most prospective approaches reserve some funds for year-end allocation.
Who Makes Compensation Decisions. Since the system is not a simple plug and play using a formula, either a person or a group must be empowered with deciding how profits will be allocated among the partners – how they will be compensated. In most firms these decisions fall upon the executive or compensation committee. Often the success or failure of the compensation system hinges on getting the right people that are trusted by all of the partners on such committees.
Factors – What Does the Firm Reward. Most subjective systems have defined factors that the system is designed to reward. Some compensation committees have these outlined very specifically in writing and others simply communicate the factors or consideration criteria verbally prior to annual performance reviews or through general discussions of goals.
Data Review. The better subjective systems review financial performance data for each partner and subjective data for each partner often in the form of performance evaluation or peer review.
Client Origination. Some firms consider client origination as a direct factor, others simply track client origination, and yet others do not track it all all.
Point Structure. May firms use a point structure in which partners are moved up or down depending up their performance.
Bonus Pool. Bonus pools are often used in such systems to reward exceptional performance.

In additional to subjective compensation systems some firms used hybrid systems that employs objective (formula) and subjective components.

Subjective systems are not for all firms. They will fail with out strong, trusted, leadership. In very small firms it is difficult to structure a compensation decision making body.

It sounds like your firm and the firm you are thinking of merging with may come from two very different cultures. Subjective systems work well for firms that are “firm first” firms but not for lone ranger firms that often operate under eat-what-you-kill systems. If you firm is not a long ranger firm and your are in fact a “firm first” firm or aspire to be such you may be able to adapt to a subjective system. However, you may need a post-merger phase-in period. Another comprise approach might be a hybrid system.