Law Practice Management Asked and Answered Blog

Category: Succession/Exit Strategies

« Earlier | Later »

Jun 14, 2014

Law Firm Succession: Buying Out the Owner of a Personal Injury Plaintiff Practice

Question:

I am the founder and owner of a personal injury plaintiff practice located in Lexington, Kentucky. I have two associates and four support staff members. All of our cases are handled on a contingency fee basis and our swings in fee collections from year to year can be substantial. I am 64 and would like to transition my practice and retire within the next three years. Both of my associates would like to take over my practice. I believe I am entitled to compensation for my practice and am desiring a fair buy-out. I would appreciate hearing your ideas concerning a buy-out approach.

Response:

You could look at the value of your practice from either a historical or a future perspective. Personally, if I were a law firm or your associates I would be more interested in the future perspective. In other words what fee revenues/cash flows will the practice generate over the next three to five years? In traditional time bill/flat fee firms a multiple of gross revenue is often used as a proxy. In a contingency fee firm such as yours the primary value beyond cash-based book value is the expected value of your cases. Sometimes a firm is able to review a list of cases and estimate the expected value of these cases or estimate a fee range per case. (High-Low, or Conservative-Optimistic estimate).

More often than not it is simply not possible to estimate the value of the cases until they are concluded. In this situation the values will be determined in the future as the cases are settled. If this method is used you would provide a list of cases in progress at the time of your retirement and when the cases are concluded apply a ratio of the time the case was with the firm before and after your exit, apply an overhead factor, and apply your ownership percentage to determine your share of the fee for that case. Your share of the case fees as the cases settle and cash-based book value is your buy-out.

Of course in the end you will have to balance your buy-out against what your associates are willing to pay. If your deal is too high you may run them off – if you make it too low you are leaving money on the table and not realizing the value of your sweat equity.

Click here for our blog on succession

Click here for out articles on various management topics

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

 

May 13, 2014

Law Firm Succession/Exit Strategy for Owner of a Six Attorney Insurance Defense Firm

Question:

I am the solo owner of a six attorney insurance defense firm in Phoenix. The other five attorneys are associates – most of whom have been with me three years or less and had limited experience prior to joining my firm. I am 47 and am looking to start to wind down within five years and be totally out of the practice in ten years when I am 57. I want to start thinking about my succession strategy early so I have time to execute it properly. I would appreciate your suggestions.

Response:

If you are like most small insurance defense firms you have a handful of insurance companies that sends you virtually all of your cases. I assume that you bring in all the business, hold the key to the client relationships, and guard those relationships carefully. This may be a double edged sword for you in that while controlling those relationships and using your associates as "worker bees" may keep them from getting close and stealing your clients this approach may also prevent you from developing suitable "bench strength" in the eyes of your clients that could constrain an internal succession/exit strategy down the road. Ask yourself this question – if you made a couple of deserving associates partners today and you left the firm next year would any of the clients stay? Often in situations similar to yours I am told – none. If this is the case you need to begin to hire the right associates – ones that actually want to become partners someday (not all do) and bulk up the team that you have. Otherwise, you may have to bring in lateral talent at the right time or merge with another firm.

Unlike many law firms we are working with you are starting to think about this early – so you have time.

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

Apr 15, 2014

Buying a Law Practice: What Should I Be Considering

Question:

I am an associate in a law firm in Akron, Ohio. The firm is an estate planning practice consisting of the owner/founder of the firm, myself, and two legal assistants. I have been with the firm for ten years and this is the only firm that I have worked with since law school. The owner is 67 and has announced that he wishes to retire. He has approached me and provided me with a proposal to buy his practice via an arrangement where I would initially pay him a down payment of 50% of his asking price and after two years the other 50% would be paid over a period of five years. The arrangement would be structured as a partnership and for the two year period we would be 50-50 partners. Compensation would be based upon these ownership percentages. The owner's asking price is two times his average net earnings ($125,000) – $250,000. Average revenues – $210,000. I would appreciate your thoughts and suggestions:

Response:

Buying a law practice is a major commitment and major investment. To a large extent you are buying a job as well as hopefully a book of business. Here are a few ideas that you may wish to consider:

  1. A general rule of thumb for establishing a value for when a law practice is being sold to an outside buyer is a multiple of 1.0 times average gross revenue or a multiple of 2.0 times average net earnings. Typically this is a best case scenario for an outside buyer. Buy-ins for associates that have invested "sweat equity" over the years is usually less. In addition you must consider the extent of repeat client business, talent of those that will remain with the firm, management skills and ability of the new owner, and management infrastructure. (IT, databases, case and document management systems, automated billing and accounting systems, etc.) Personally, I think the asking price/buy-in figure is high. Try to get the owner to do better for you.
  2. Review at least the last five years financial statements and insure that there are no surprises.
  3. Insure that all debt and potential malpractice claims are disclosed.
  4. Review the office and equipment leases.
  5. Create a demographic profile of the firm's clients and referral sources.
  6. Have you been able to generate a book of business? If no, why not? Do you believe you will be able to in the future?
  7. Create a business plan for the future practice and share with the bank when applying for any needed financing.
  8. Are you sure you want to own and manage a business?
  9. If you will be borrowing money from a bank determine all the interest that you will be paying as well as any interest on the five year payout to the owner. Determine the time it will take to receive a return on your investment – how many years. If you pay $250,000 for the practice plus interest – say $300,000 over five years – will you earn this amount in additional income over and above what you are presently earning and is there upside potential? Does the deal make sense?
  10. Insure that you develop a partnership agreement for the new partnership. Insure that is provides for retirement of the owner after two years – if not be careful of the compensation arrangement.
  11. Insure that the owner makes a commitment to timely transitioning client and referral source relationships.

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

 

 

 

 

Feb 04, 2014

Law Firm Succession – Is There any Real Future Value in My Solo Practice?

Question:

I am a 64 year old solo practitioner in Arlington, Virginia. There are no other attorneys in the firm – I have one legal assistant. My practice is concentrated in estate planning and estate administration. I have just started giving thought to retirement and what to do with my practice. I want to provide continuity for my clients, security for my employee, and salvage any sweat equity from my practice if there is even such a thing? Personally, I question whether there is any potential for receiving any value from the practice – I think when you are done – you are done? What are your thoughts?

Response:

It all depends upon the practice, not waiting too long, and finding the right WHO.  About a year ago I had this discussion with an owner of a practice and he held the position that when you are done – you are done. However, after we assisted him with a year-long hunt – he successfully sold his practice for a multiple of 1.0 times average of the last five years fee revenue with 85% paid at closing and the remainder paid out over three years.

Another sole owner recently sold a practice for $50,000 at closing and 20% of gross practice revenue for five years paid when fees collected.

So I believe if you don't wait too long and take the time to look for the right WHO – value from your sweat equity can be realized.

However, if you don't do your homework and start early – you are right – when you are done – you are done.

Click here for our blog on succession

Click here for out articles on various management topics

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

Nov 12, 2013

Law Firm Succession – Motivating Senior Partners to Embrace Retirement

Question:

i am the managing partner of a 12 lawyer firm in Rochester, Minnesota. I am in my early 50s. Two of my partners are in their 60s and two are in their 70s. None of them want to discuss retirement – in fact they jokingly state that they would like to work forever. Do you have any thoughts regarding encouraging/motivating senior partners to embrace retirement?

Response:

I am working with more partners and firm owners in their 50s that have clearer ideas about their retirement timeline (often at age 65) than partners in their 60s and 70s. These partners are often the firm founders that built their firms and have a different attitude toward work and life than their partners that are in their 40s and 50s. Work/life balance is often a foreign concept to this older generation of lawyers.

Often "the firm" has been the primary – or only interest – for some of these partners at the exclusion of family and other outside interests. In other cases, the partner's spouse may have passed away and the firm is the partner's LIFE. In such situations bringing up the subject is often difficult.

While this is a difficult subject – not discussing the non-discussible because the topic is uncomfortable – is not the answer. Here are a few ideas:

  1. If the firm does not have a partnership or operating agreement or has one that does not adequately address retirement of the partners – use this to approach the subject of retirement. Approach the topic from the vantage point of "all partners" and not to single out solely the older partners.
  2. Consider a mandatory retirement at say age 70 provision but also incorporate an "Of Counsel" option that allows senior partners to continue to contribute to the firm in possibly a different role after retirement.
  3. For those partners that want and need to be able to continue to come to the office and contribute to the firm – make it clear, that if approved by the partnership, retirement does not mean that they have to leave. They can still have a place within the firm.
  4. Rome was not built in a day – take baby steps by having periodic partner open and frank discussions about retirements and succession.
  5. Provide retirement planning assistance to those senior partners that desire it. Such assistance might also include helping partners develop other outside interests and hobbies.
  6. Provide incentives in the retirement-buy-out plan to encourage earlier retirement and management and client transition.

Click here for our blog on succession

Click here for out articles on various management topics

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

 

 

Oct 22, 2013

Law Firm Partnership – The Importance of Compatibility and Good Fit

Question:

I am the sole owner of a estate planning firm in Evansville, Indiana. I have three associates that work for me and four staff members. I am 64 and wanting to get started on a succession program – either by forming a partnership with one or more of the associates or with another attorney or attorneys that I might bring into the firm via merger. I have always been on my own so I am a little cautious. I do want to work another eight years or so. What pitfalls should I be looking out for?

Response:

Creating and maintaining a successful partnership takes a lot of work. Partnerships fail for numerous reasons but the number one reason for failure is "poor fit." Poor fit can destroy a partnership before it even gets started. Fit isn't as much about "the money" (financial goals) as it is about personal and professional goals.

As you consider future partners give some thought to the following:

  1. Compatible work ethic – Determine whether each of you envision working long, hard hours to accomplish firm goals. Are each of you willing to do whatever it takes to get the job done?
  2. Shared vision – Do each of you see a similar outcome? If everything were working perfectly what would that look like?
  3. Alignment of values – Do you share consistent and similar values? Each of you list your top five and compare.
  4. Integrity – Do each of you have the same views and principles?
  5. Dealing with conflict – How do each of you deal with and manage conflict?
  6. Trust – Do you trust each other?
  7. Sense of humor – Can each of you laugh, be lighthearted and have fun?

Before you decide to partner with someone it is critical that you determine where you agree and where you disagree on key issues.

Invest the time in getting to know your future partners at a deep interpersonal level and make sure that your personal and professional goals mesh.

If you do a good job insuring that you have a good fit you will go a long way toward insuring a successful partnership.

Click here for our partnership blog

Click here for articles on other topics

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

 

 

Jul 20, 2013

Law Firm Succession Strategy for An Owner That Wants to Keeping Working

Question:

I am the founder and solo owner of a small firm in Memphis. Besides myself there is one non-equity partner and four associates. We handle the transactional and litigation work for small and large business concerns in the Memphis area. I am 60 now and would like to begin slowing down over the next five years – but I want to continue working – I don't want to retire completely. Over the past few years I have focused more on client development as opposed to serving clients and have turned over much of the client service work over to other attorneys in the firm. While I would like to receive some compensation from my sweat equity – I also do not want to place an unreasonable financial burden (large cash buy-in/buy-out) on others in the firm. Legacy of the firm is important as is a place to continue to work and contribute – so I really would like to transition the firm internally to deserving attorneys employed by the firm. What are your suggestions concerning how I might accomplish this?

Response:

I often ask attorneys – are you more a lawyer that wants to lawyer or a business person that enjoys and wants to focus on the business of law. It sounds like you, as you approach retirement, would like to spend more of your time "finding" rather than "minding" or "grinding". You might want to consider the following:

  1. Get a feel for the value of your firm. If you have been taking home say $400,000 per year – using that as a starting point for your rough value figure if you were to sell your practice to outsiders. Would you be willing to discount to transition the members of your current team? If so, maybe that figure might be $200,000 – $300,000.
  2. Establish a date when you want to start to wind down.
  3. Decide on your future role, institutionalize the role and write a job description for it. You might want to consider a role such as Business Development Director or Manager. Establish specific goals and expected outcomes for the role. 
  4. Then plan a gradual wind down with gradual draw reduction but at a level that in essence is greater than the ratio of time reduced providing you with say – $200,000 over a five year period of time.
  5. Put in place a commission arrangement where you would receive a commission on fees (say 20%) from new clients that you bring into the firm after the date that a program is put in place. I would suggest a 5 year sunset provision whereby after five years the commission decreases to zero – requiring you to continue to develop new relationship and bring new clients into the firm.

Click here for our blog on succession

Click here for out articles on various management topics

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

 

Jun 22, 2013

Law Firm Succession – Where and How Should I Start

Question:

I am the sole owner of a 8 attorney practice in Houston. I am 55 years old and am beginning to think about retirement. The other attorneys are associates in the firm. What do I need to be thinking about in order that I can transition out of my practice and have money for retirement. While I have put some money in a 401k, I am not yet financially secure enough to retire.

Response:

You are not alone. As the baby boom generation ages – more and more attorneys are asking this question. Unless you have an appropriate Exit Planning Strategy and put in place a sound Exit Plan, it is doubtful that you will be able to cash in on the full value of the goodwill that you have created. To exit successfully you need:

You will need to consider whether you should consider merger, sale of the practice to an outside buyer, or sale of the firm to the other lawyers in the firm. You need to find ways to institutionize the firm so that in additional to professional goodwill (your personal reputation and goodwill) you develop practice goodwill (goodwill of the firm that will remain after you have left the firm). Develop your lawyers and create a desire and motivation for them to want to be owners/partners in the firm. Develop your staff and practice systems. Diversify and stabilize your client base.

If you decide to sell to attorneys in the firm – begin the process early so that most of the buy-in is completed before your actually leave the firm. The longer the planning horizon – the easier they buy-in burden will be for others.

Click here for our blog on succession

Click here for out articles on various management topics

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

Jun 11, 2013

Law Firm Buyout Arrangements in a Contingency Fee Practice

Question:

I am a partner in a four partner law firm in Cleveland, Ohio. Our firm does class action contingency fee cases and all of our fees are contingency fee. We do keep time of our time expended on these cases even though we don't bill by time. One of our partners has announced that he will be withdrawing from the firm. We each have 25% ownership interests. How do we value the firm and determine his buy-out. Our partnership agreement does not address this nor do we have any precedent. Do you have any suggestions?

Response:

The real value component is the value of your unsettled cases and it will be difficult – if not impossible – to determine the value of these cases until they are concluded in the future. Some firms payout the capital account and the value of the hard assets upon departure or over a relatively short payout period and they have a future payout formula for the cases in progress as the cases are concluded.

Click here for our blog on partnership matters

Click here for our blog on financial management

Click here for articles on other topics

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

 

Apr 23, 2013

Law Firm Succession – Client Transition

Question:

Our firm is a 24 attorney firm in Chicago West Suburbs. We have 10 partners – five of which are in their early 60s. We represent small to mid-size business clients. Recently we have been discussing the eventual retirement of the senior partners and approaches to client transition. We would appreciate your thoughts.

Response:

Client transition involves different challenges that have to be overcome in order to successfully transition client relationships. Consider the following challenges and hurdles:

  1. Relationships take an investment of time and must be nurtured on behalf of the parties making the introductions and connections as well as the parties trying to form the  new relationship. Attorneys often want immediate gratification and the "quick fix" and are unwilling to invest time needed for longer term results. More than a "one-shot" simple introduction is required.
  2. Clients hire lawyers not law firms.
  3. Client transition requires trust on the part of all parties (introducers and new players). A high level of trust must exist within the law firm organization between the attorneys involved and within the client organization between the parties there as well.
  4. There is potential risk of embarrassment for all concerned. The transitioning attorney in the law firm could risk losing the client if the other attorney does poor work for the client. Another issue is the loss of control over the client. The individuals in the client organization could also risk criticism (or even their jobs) if the new relationship does not pan out.
  5. Many law firms are "lone ranger" rather than "firm first" or "team based" firms. As a result there is no inclination or incentive to invest the time and effort nor take the risk to refer work to others in the firm.
  6. Lack of knowledge regarding other partners' practices.
  7. Fear of losing clients.
  8. Fear of losing client control.
  9. Compensation systems in many law firms encourage hoarding of work and discourage the referring of work to others.
  10. Communication systems in  some law firms do not facilitate relationship building among attorneys. Effective client transition is simply not possible without strong relationships and high levels of trust among attorneys in the law firm.

Effective client transition is not a one-time lunch or introduction event – it most go deeper to bind the new relationship. This takes time. Start early and allow ample time for an effective partner winddown.

I generally suggest five year client transition programs.

Click here for our blog on succession/exit strategies

Click here for articles on other topics

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

 

Archives

Categories

    Subscribe to our Blog