Law Practice Management Asked and Answered Blog

Category: Succession/Exit Strategies

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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!

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

May 20, 2015

Law Firm Succession – Coming to Terms With Aging

Question:

I am the managing partner in a 12 attorney firm in Chicago. We have 6 partners and 6 associate. We a boutique litigation firm. Three of our partners are in their mid to late 60s and should be thinking about retirement but they seem to be in denial? How to we begin to addresses this issue?

Response:

Several years ago I was giving a presentation to an ALA (Association of Legal Administrators) Chapter and after the presentation an administrator came up to me and asked, “what kind of financial incentives can we put in place to encourage some of our senior attorneys to retire”? I responded by saying “help them identify some hobbies.” While my comment was partially in jest, many attorneys,
especially baby boomers, have invested so much into their careers and law practices they have not had either the desire or time to invest into other areas of interest.

The more difficult components of retirement include:

For some people the best way to retire may be to continue working.      

For others, rather than being a time of easing back and retiring into old age or continuing to work in one’s old job or career, it can be a time of personal growth and an opportunity to explore other interests, callings, and vocations. It can be a time of freedom to do what you always wanted to do but could not because you had to earn money and the pressure of work prevented you from pursuing you dreams and interests that were in tune with you values and beliefs. Here is a list of a few areas that lawyers approaching retirement might want to explore:

  1. Teaching courses at a local law school or university
  2. Pro-bono work
  3. Writing
  4. Photography, gardening, travel, or other hobbies
  5. Serving as a director on a profit or non-profit board
  6. Counseling
  7. Volunteering

Retirement planning begins with taking the time to think about how one will use their time.
If you live fifteen years beyond your retirement your will have 28,800 hours that will have to be filled with retirement activities. (five days a week, eight hours a day, 48 weeks, for fifteen years)

Find ways to encourage your senior attorneys to explore and think about their future and explore other interests - both at home and at the firm.

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

 

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.

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

Feb 24, 2015

Law Firm Succession Planning & Mid-Career Partner Roles

Question:

I am a partner and a member of the Executive Committee of a 250 attorney firm in the mid-west. We have had a succession plan in place for several years for our senior partners. Several have completed their phasedowns successfully and others are struggling. One of our challenges is many of our mid-career partners are simply not ready. I would appreciate your thoughts.

Response:

This is a common problem that many larger firms face as their senior partners phasedown to retirement and try to transition client relationships and firm managerial and leadership roles to the next generation. Often the focus of non-founders is on billable hours and working attorney fee collections as opposed to non-billable longer-term investment activities such as client development,  firm leadership, and management.

Unlike smaller law firms most large law firms do invest time and effort in developing mid-career partners in these areas. However, often more can be done. Here are a few thoughts:

  1. Profile and Personal Brand Building. While developing new clients and new sources of business is always a goal – another questions is – is the mid-level partner, who is planned as the future responsible partner, bio/brand strong enough to entice the client to stay with the firm after the senior partner retires? Often it is not. All mid-level partners should have active personal development plans that requires profile enhancement and personal brand development. These plans should include steps to be taken and tasks to be completed as well as a timeline including milestones and deadlines.
  2. Go Deep with Client Relationship Development. Clients hire lawyers – not just law firms. In fact, the law firm brand is what gets the firm on the client's short list – the lawyer and his or her personal brand is what lands the client – the lawyer's relationship with the client is what keeps the client. Clients work with lawyers they like and trust – transitioning this to another lawyer in the firm will take time and nurturing – more than one or two meetings.
  3. Encourage Mid-Level Partners to Invest the Time to Understand Their Client Business as Well as Their Industries. Clients of law firms are always telling us that their law firms do not understand their business.
  4. Encourage Mid-Level Partners to Raise Their Hands, Volunteer, and Take Baby Steps Toward Leadership and Management Roles in the Firm. Such steps will cause senior partners in the firm to take notice and eventually lead to appointments to various committees and possibly eventually to an appointment on the Executive Committee.
  5. Work at Producing Excellent Work Product. In addition to the above excellent work product and hard legal skills, client service, and personality are all critical as well.  

I would encourage mid-level partners to try to budget 70% of their worked time for billable client production and 30% for non-billable investment activities.      

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

       

 

 

Feb 11, 2015

Law Firm Succession – Client Transition Plan

Question:

I am a founding partner in a 17 attorney firm with nine partners and eight associates located in Chicago west suburbs. We represent business firms and other institutional clients. I am the primary rainmaker in the firm. I am 60 and am planning on retiring when I am 65. My concern is how to effectively transition clients. I would appreciate your thoughts.

Response:

Successful client transition – moving clients from one generation to the next – is a major challenge for all law firms. Shifting clients is not an individual responsibility but a firm responsibility. To effectively transition clients the individual lawyer, with clients, must work together with the firm to insure the clients receive quality legal services throughout the transition process. Both the individual lawyer and the firm must be committed to keeping clients in the firm when the senior attorneys retire. Potential obstacles include:

Transitioning client relationships effectively can and where possible should take a number of years – preferably five years – typically not less than three years. 

The following client transition plan might be an approach you could take to transition clients over a three to five year period:

  1. Review your Top Client List and develop and implement a detailed action and milestone plan for each significant client.  
  2. In consultation with the Firm Executive Committee, designate one or more Co-Responsible Attorney(s) for each existing client, and each new client as to which you are the Responsible (Primary) Attorney. You, in consultation with the Firm Executive Committee, may for cause adjust or amend the Co-Responsible Attorney(s) designation as to any Transitioning Client. The stated goal in designating one or more Co-Responsible Attorneys for each client is to facilitate the transition and retention of your clients upon your retirement and phase-out from the practice of law. You will agree to introduce the Co-Responsible Attorney(s) to the client when you are reasonably available, and work with the Co-Responsible Attorney(s) to transition the client and client matters to the Co-Responsible Attorney(s). You and the Co-Responsible Attorney(s) shall meet to discuss and evaluate the timing for the transition of each client. However, notice to clients shall be solely at your discretion. The Co-Responsible Attorney(s) may, at your discretion, prepare all invoices for legal services rendered. You will review and approve all invoices unless you agree to the contrary in writing. The client’s wishes shall be paramount in the designation or selection of any Co-Responsible Attorney(s) and client satisfaction shall at any time allow for change of the designation of same.    
  3. You will perform such duties as the Firm Executive Committee of the Firm may from time to time determine to be in the best interest of the Firm and which are agreeable to you. You will  agree that your professional procedures will be in accordance with the rules and regulations promulgated by the Firm Executive Committee. You will also maintain the records as reasonably required by the Firm Executive Committee. 
  4. Of Counsel. After the conclusion of the final transition year, the firm may enter into an “Of Counsel” relationship with you. In that event, you would be listed as “Of Counsel”. The relationship would be subject to both parties agreeing on the terms and conditions of the “Of Counsel” relationship.

Effective client transition takes time so start early. Clients hire lawyers not law firms.

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

 

 

 

 

Jan 28, 2015

Law Firm Succession – Succession Plan for the Solo Practitioner

Question:

I came across your firm while researching law partnerships. The short story is as follows: I am a sole practitioner and have been practicing for over 35 years. I have a high volume practice and I employ 7-8 people. Business is good and actually on the rise. I have a great office manager and outstanding loyal staff. The practice is on semi- autopilot for me. I have a young associate lawyer in my office that shares space and is  learning my practice but actually seems to be making his own way in a different practice area. He wants to buy into my practice. We have had some serious talks. He's capable and I think the right person to transition with. I have asked myself why sell/partner/transition when I don't have to? I am not ready to retire. With that said a 3-5 year plan may make sense. Let me know your thoughts.

Response:

The real value for most practitioners is the cash flow from working in the practice. Exit value is secondary and only makes sense when you are ready to quit or retire.

Eventually, however you will retire (retirement, death, etc.) as the clock runs. The biggest problem that I am finding is that practitioners that are ready to exit the practice is finding attorneys willing to buy the practice or buy out partnership shares in the event of a partnership. I am working with practices where is has taken a couple of years to find the right WHO and this often dictates the WHAT – merger, partnership, Of Counsel, sale, etc. The approach that works best is an internal transition via bringing an associate into partnership. So, I would take a serious look at the attorney that you are speaking about, maybe have him become a partner (member in a LLC) with minority interest initially, and incorporate into your agreements how compensation will be handled, him acquiring additional interests down the road, and the arrangement for your retirement payout upon your actual retirement.

Don't wait until you are ready to retire – take some baby steps now.

Good luck with it.

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

Dec 17, 2014

Law Firm Valuation – Establishing a Value for a Family Law Practice

Question:

John, where do you begin to get a value on a family law practice? It seems that one times gross revenue is unfair since it is usually one time business. I saw you speak at an ISBA event and this question was not addressed.

Response:

Regarding your question – it sort of depends on whether you are buying or selling and where you want to start. In general I agree with you that a multiple of one times gross for a family law practice is probably high. It depends on whether the practice has built up more of a firm brand vs. an individual brand. In other words institutionalized the practice. Also on where and how the firm gets business – advertising, referral sources, etc. A firm that has practice (institutional) goodwill might very well start at a multiple of one whereas a practice where the goodwill is personal goodwill the multiple might be .75 or less – in some cases even zero. I know of a few family law practices in the Chicago area that have been sold for .33 of gross revenue. 

Often the initial asking price has little to do with regard to where you end up. Often, due to the concern that the clients and business might not materialize for the new buyer many firms are sold on various forms of an "earn-out" or a small payment at closing with the remainder paid and based on a percentage of revenues collected over a period of time – 3 to 5 years.

I have seen PI and other one shot matter firms sell for one times gross revenues but this is a best case scenario. CPA firms fare much better.

If you are the seller and your practice is a personal practice you probably will have to start with an asking price around .75 or less – if you have branded the practice and have others besides yourself – you might ask for more.

If you are the buyer I would balk at 1 times gross and would want to discuss provisions for reduction in purchase price if revenues fall below a certain level over a certain time period. Better yet – no payment at closing with the payout totally based and paid as revenues are collected in the future.

Getting to "the number" will involve balancing the seller's concern that the buyer will let the practice die on the vine versus the buyer's concern that the clients and referrals with not materialize.

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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 24, 2014

Law Firm Business Development – Individual Attorney Personal Branding

Question:

I am the owner and founder of a 7 attorney personal injury plaintiff firm in the southwest. Over the years we have become the "go to" PI firm in the area. We have an extensive advertising program including TV, radio, and other mediums. I bring in all the business and the other six associate attorneys are primarily worker bees. I have discouraged business development by the associates and now as I approach my retirement years I am realizing that this may have been a mistake and it make take more than a "firm brand" for the firm to transition to the next generation. I would appreciate your thoughts.

Response:

While I believe that a solid firm brand is important and can provide practice value when you transition and retire from the practice of law the failure of your attorneys to develop their own brands or identities will make the transition more difficult and could even result in your firm becoming a "one generation law firm". Clients of law firms tell us they hire lawyers – not law firms. Even through you advertise – your reputation and rainmaking skills have had a lot to do with your success. Your associates must develop their reputations and hone their rainmaking skills as well and you need to help them do this. Here are a few ideas:

  1. If you do not have a marketing plan for the firm – develop one. This will help focus the firm's initiatives and serve as the glue for individual attorney personal plans.
  2. Announce that business development is important and that business development goals and plans will be developed for associates and incorporated into performance reviews and compensation determinations.
  3. Initiate business development training sessions for associates.
  4. Require each associate to prepare a personal marketing plan (business development plan) each year. These plans should be goal driven with specific SMART goals (specific, measurable, attainable, realistic, and on a date specific timeline), approved by you, results monitored quarterly, and incorporated into annual performance reviews and compensation determinations.
  5. Get your associates networking, writing blogs and articles, speaking, and press coverage when possible on case results.

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

 

 

Jul 22, 2014

Law Firm Attorney Retirement – How Law Firms Are Coping With Aging Attorneys

Question:

I am the Director of Administrator in a 45 attorney law firm in Miami. Twenty of these attorneys are partners and ten of the partners are in their late fifties and mid to late sixties. While we have a semi-retirement program in place it is not mandatory and many of our senior attorneys are unwilling to address issues pertaining to succession and transition of their practices. Do you have any thoughts or ideas you can share regarding creating incentives for senior attorneys to address and deal with the issue of retirement?

Response:

Larger law firms are moving away from mandatory retirement. However, many large law firms still have mandatory retirement. According to a recent survey approximately 57% of law firms with over 100 attorneys have mandatory retirement programs. At the other end of the spectrum many smaller firms that never had mandatory retirement are beginning to incorporate some form of mandatory retirement in their agreements. In firms of all sizes and whether they have mandatory retirement programs or not – getting senior attorneys to deal and cope with aging is a challenge. Here are a few thoughts:

  1. Begin planting seeds to get senior attorneys thinking about retirement and the next stage of their lives.
  2. Conduct educational programs designed to help senior attorneys visualize their retirement years.
  3. Help provide senior attorneys with a reason to want to retire.
  4. Provide career life coaching services to senior attorneys and help them develop other interests and hobbies.
  5. Help senior attorneys develop individualized retirement/succession plans.
  6. Provide financial incentives to those that retire by say age 70 in payout agreements.
  7. Implement phased retirement/wind-down options/approaches.
  8. Consider optional roles in the firm for senior attorneys after they retire and surrender their equity interests.
  9. Insure that the firm has in place competency/peer reviews for all attorneys including senior partners and Of Counsel attorneys.
  10. Insure that the firm has a program that effectively deals with underperforming attorneys.

Aging is a difficult time for all of us and it is normal not to want to think about age related issues much less to begin planning. Your role will be to help senior attorneys take baby steps and come to terms with aging in general.

Click here for our blog on succession

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

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