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Jul 17, 2019

Law Firm Succession – Pros and Cons of Hiring an Associate as My Succession Plan

Question: 

I am a sole practitioner in San Diego, California. My practice is mostly general practice with some emphasis on commercial real estate. I am 64 years old and am looking for a way to transition and exit my practice in the next three to five years. I am the only attorney in the firm however there are three legal assistants that work for me. I have been considering hiring an associate so that I have someone to sell my interests to in the next three to five years. I have never had an associate so I would appreciate your thoughts concerning the wisdom of hiring an associate at this stage of my career.

Response: 

In general I prefer an internal succession strategy when the firm has an attorney or attorneys in place that are willing to step up to ownership and take over the firm. Often this is easier said than done. Issues you will face will include:

  1. Unless you are loaded with work that you are unable to handle or you hire an attorney that can bring work with him or her you will be increasing your expenses and reducing your income/compensation.  Since you have operated all these years with just one attorney I assume that there is only enough work to support one attorney. If you are ready to slow down to a reduced work schedule and take less compensation that is another matter. If not, you may want to look for an experienced attorney with some business rather than hiring a lawyer fresh out of law school or wait a little longer till you hire someone.
  2. Associates require care and feeding – in other words training, mentoring, etc. A certain amount of training and orientation will be required even with an experienced attorney. Revenues may lag from one to two years and your will be saddled with their compensation and other related expenses. You have no experience with mentoring attorneys and this may be something that you are ill equipped to do or don’t want to do.
  3. You may end up hiring and training in an associate only to have them leave the firm in a year or so to join another firm and possibly take clients with them.
  4. The associate you hire may only be looking for a 9-5 lawyer job and have no interest in owning a law firm.
  5. The associate you hire may expect to have you hand them your practice for free and he or she may be unwilling to pay you for your practice.

Many firms have had positive experiences with transitioning their firm to associates. Just be aware of the possible pitfalls. You may be better off going a different direction.

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

Dec 13, 2018

Law Firm Marketing – Using an Outside Public Relations Firm

Question: 

I am a partner in a three partner five attorney estate planning firm in Seattle. While we have a very active marketing program we would like to do more. We try to do two presentations at seminars/workshops a month. We have a first class website and a proactive SEO program as well as an aggressive social media campaign. The firm is listed in all of the key directories. Our attorneys are active in the legal and local community and are or have been chairpersons on bar association committees and have written extensively and been published. While many of our clients come to the firm via referral from referral sources and past clients, we are noticing that we are receiving much more business from the internet. Recently we have been discussing whether we should consider using a public relations firm. We would be grateful for any thoughts you may have.

Response: 

A public relations firm (or person) can be very helpful especially if your firm does not have a point person for marketing – a marketing coordinator, marketing director, etc. You have to decide how  you will use such a person and what role you would like them to play. I suggest that you avoid the larger firms and stick with a smaller firm – a three or four person firm – or better yet might be a solo practitioner or freelancer. You might use public relations professional in the following ways:

Several years ago I retained a public relations firm for two years on a ten hour a month retainer. A few of their accomplishments included:

Our firm found such services very helpful and from what we learned from them we now are able to handle many of these tasks ourselves.

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

Dec 06, 2018

Hiring an Associate Attorney as a Solo’s Exit Strategy

Question: 

I am a solo practitioner in Central Illinois. I have been in practice for 30+ years and I just turned sixty. I have two staff members and no other attorneys in the firm other than myself. I plan on working another five years and then I would like to gradually exit from my practice and then retire. I want to have a home for my clients and employees and I would prefer to be able to sell my interest to an associate attorney working for the firm. I think we have the work to justify hiring an associate and this is the route I would like to go. I have never had an associate so I am not sure what I should look for. Your thoughts would be most appreciated.

Response: 

I believe that an internal succession/exit strategy is your best option if you can find the right associate. Unlike years ago, there are many associates today that just want a job and work/life balance is more important than taking on an ownership role in a firm. They simply are not interested in the work, stress, and risk that it takes to own and manage a law firm. So it is important when searching for an associate that you really vet out this interest to insure that you are hiring someone that will be willing to buy out your interest when you retire and take over your practice.

I have worked with a lot of firms that think they have an exit plan via an associate only to be told no when approached with a proposal to acquire their practice.  When you interview candidates look into their history and their family history to see if you can find a hint of entrepreneurship. You may want to hire a more seasoned attorney that has a small practice that could expand his or her practice by becoming part of your practice. Hire someone that has an interest in the business of law as well as practicing law.

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

Nov 08, 2018

Selling an Owner’s Law Practice to an Associate Gradually

Question: 

I am the owner of an elder law firm in Phoenix, Arizona. I have one full time associate, one part-time associate, and three staff members. I am earning around $300,000 a year from the practice and my full time associate’s salary is $100,000 a year. I am sixty and would like to retire and be out of the practice in five years. I would like to begin phasing down and working part time in the next year or two. My full time associate has been with the firm for ten years and she is an excellent attorney and has an excellent relationship with our clients and referral sources. While she has not brought in many clients through her own referral sources she has done an excellent job signing up new clients from the firm’s referral sources, website, and seminars that she has conducted. I have talked with her in general terms about her buying my practice when I retire and she has expressed an interest.

I feel that I should be entitled to some sweat equity from the practice in the form of retirement compensation or buy-out. With this said I would prefer that my practice “stay in the family” and be sold to my associate rather than selling my practice to an outside buyer. I would appreciate your suggestions.

Response: 

One of the issues today with many associates is they have large student loan debt and have little in the way of capital and little or no borrowing capacity. As a result many firm owners in your situation have to get much of their payout from future earnings after their retirement if they wait too long. Your best bet is to start selling shares as soon as you can based upon a valuation method that you determine. You have five years remaining – ten years would have been better. In essence you determine the value of the firm, determine the price per share, determine how many shares that associate will acquire, and then calculate the price for the number of shares being acquired. For example, let say you practice is valued at $600,000. Divide by 100 = $6,000 per share or percentage point. For an initial twenty percent interest or twenty shares the buy-in price would be $60,000. Then over the next five years gradually sell the associate additional shares. Upon your retirement you would have sold all of your shares.

Typically the problem is the associate does not have any cash or ability to borrow on their own. You may be able to help the associate borrow the money from your bank. If you can – this would be the preferred approach. If the associate cannot raise the capital they you will have to finance the buyout. For a $600,000 buyout a five-year timeline will be impossible for you to have all your cash by retirement. How you structure your compensation as you begin working part time and your associate’s compensation as a partner will have a bearing on capital that your associate will have available. Be careful that you are not funding your own buyout. You will more than likely have to get a large portion of your payout after retirement via a secured promissory note with the associate for the balance.

The sooner you start the better your chances for a successful outcome.

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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:

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.

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

Jun 12, 2018

Law Firm Strategic Planning – Culture as an Essential Ingredient

Question: 

Our firm is a twelve attorney firm – eight partners and four associates in Phoenix, Arizona. The firm was founded by the present partners twenty years ago. We are an eat-what-you- kill firm – partners are allocated their fees, overhead is allocated, and their compensation is their individual profit. While we have a firm administrator that handles the day-to-day management of our operations, we have done a poor job of long-term management and planning. One of our partners has suggested that we develop a strategic plan. However, I believe this would be difficult for us given that we never meet, have different ideas of our future, have never been able to agree on any major decisions, and unwilling to be accountable to each other and have a general attitude of mistrust. I don not believe we even have a firm culture – in essence we are eight separate practices operating under the guise of a partnership. Your comments are most welcomed.

Response: 

It is very hard for partners in an eat-what-you-kill firm to come together and implement a strategic plan when the partners have no common values, goals, or objectives. Eat-what-you-kill firms more often than not have no culture at all. Three components that are linked, reinforce each other, and must be balanced are strategy, compensation, and culture.

Culture is the outcome of how people are related to each other in a law firm, thrives on cooperation and friendship, and defines the firm’s sense of community. Culture is the glue that holds a firm together and is built on shared interest and mutual obligation. A firm’s culture boosts a firm’s identity as one organization and prevents disintegration and decentralization. Without a common culture a firm lacks values, direction, and purpose.

You firm is a fragmented or confederation culture and as such will find it difficult to even get started on a strategic planning process unless you are willing to change. You might want to spend some time addressing the question of whether you want to continue operating as lone rangers or whether you want to become a firm-first law firm. This will require that the partners give up some independence and be accountable to each other.

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

Jan 31, 2018

Law Firm Leadership – Profile for a Legal Administrator for an Eight Attorney Firm

Question: 

Our firm is an eight attorney estate planning firm in the Chicago area. Our firm has grown from two attorneys to our present size in four years. We have five partners and three associates. Currently management is handled by a managing partner. The partners have been discussing hiring a legal administrator. We were thinking of hiring someone with experience in managing law firms and a solid background in human resources and bookkeeping/accounting. One of our clients suggested that we hire someone with a strong academic background, MBA, CPA type that has served as the CEO of a mid-size corporation. What are your thoughts?

Response: 

I think you are too small to justify hiring a person with this background that is currently employed in such a role. Such a person would be unaffordable and if you could locate such a person your firm would probably be a stepping stone until they find a position elsewhere. If you were able to find someone that is retired and willing to work in a small firm setting that could be a possibility. Another option would be to hire someone that has served as CEO, COO, or CFO of a smaller company – with or without MBA, CPA designation. You could also look for an experienced legal administrator that has worked in a larger firm – possibly with a CPA or MBA. Again affordability will be an issue as well as long term retention. Personally, at your current size I think you should look for someone with BA or MBA degree in business, with a strong background in accounting and human resources, and experience as an administrator in a law or other professional services firm such as an accounting firm, consulting firm, engineering firm. Look for someone that has worked in a firm with 15-35 attorneys/professionals. Be careful of applicants that have worked in very large firms – i.e. 50+ attorney firm for example, as they may only stay a short while in a firm your size and move on to a larger firm when a position becomes available. They may also not be the “hands on jack of all trades” administrator that you need in a firm your size.

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

Dec 06, 2017

Law Firm Partner Compensation – Dealing with an Overpaid Partner

Question: 

I am a founding partner of a two partner firm in Springfield, Illinois. We are finishing up our third year since we started the firm. We have six associates and our practice focuses on health law. My partner and I each have a fifty percent interest in the firm and our compensation is based on our ownership percentages. We split firm profits fifty-fifty. Ever since starting the firm I have been bringing in substantially more fees that my partner. This year I will bring in sixty-five percent of firm fees. I am getting frustrated and feel that our compensation system is not fair, not working, and needs to be changed. I would appreciate your thoughts.

Response: 

It sounds like you are referring to origination of client business and referencing fees resulting from business that you brought into the firm. Most firms do not consider fee origination as the only partner compensation variable. Working attorney fee collections as well as other contributions such as firm management, mentoring and developing associates, developing firm systems, etc. are also considered when determining partner compensation. Many firms actually give more weight (credit) to working attorney production that to origination while others may give no credit at all.

I think you need to keep in mind overall contributions of each partner – not just client origination. Pull working attorney statistics and include these in your analysis as well as firm overhead consumed. Consider other contributions that each of you have and are making and see where the data takes you. Don’t look at just one year – look at the data over the long term – say three year trends. If you still feel that the compensation arrangement is no longer fair, you and your partner need to sit down and have a heart to heart discussion.

The best approach may be to simply realign your compensation percentages after you have come to terms with the compensation factors that you consider important to the firm and the metrics you are going to use going forward.

If you and your partner can’t sit down and have such a discussion consider getting outside help.

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

Sep 27, 2016

Law Firm Marketing – Client Development for an Insurance Defense Firm

Question:

I am the managing partner of a thirty attorney insurance defense firm in Arlington, Texas. While we are still in our first generation – several of our partners are approaching retirement and some of our relationships in our insurance company clients are also retiring. We are looking for ways to shore up and expand our client base. We would appreciate your suggestions.

Response:

You need to get on more "approved lists" of insurance companies. Once you are on these lists you have to entice claims manager to use you as opposed to other law firms that are on their approved lists. In other words establish relationships with numerous claims managers throughout the company. This is harder than it used to be due to policies that many companies now have prohibiting various forms of networking such as dinners, gifts, ball games, etc. Now days it seems that educational venues is one of the few formats that is not frowned upon. 

Here are a few ideas to get started:

  1. Become involved in every possible organization that involves insurance claims, ACCA, and other such groups.
  2. Join and become actively involved in these groups.
  3. Offer to give speeches and presentations to these groups.
  4. Develop relationships with news reporters and have an effective public relations program that insures that you get all the PR you can when you have successful outcomes in your cases.
  5. Speak at ACCA and RIMS (Risk Insurance Management Society) conferences.
  6. Form alliances with bigger regional and national insurance defense firms.
  7. Research target companies and make application to get on their approved lists.
  8. Obtain listings in A.M. Best and Martindale.
  9. Get on the speaker list with seminars groups that target the insurance industry client industry – for example Perrin Conferences.
  10. Have a quality website that demonstrates expertise and a e-newsletter that provides information that will help claims managers and adjuster be more successful.

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

Jul 20, 2016

Law Firm Compensation – Moving From an Eat-What-You-Kill System to a Totally Subjective System

Question:

I am a partner in a 20 attorney firm in San Francisco. We have five partners. Two of the five partners are founders and the other three were made partners five years ago. Our firm was started twenty years ago by two partners of our existing partners. From day one our compensation system has been an eat-what-you-kill compensation system based on a formula with two factors – working attorney collections and client origination. While the system worked okay for the founders, it is not working for the present firm. The newer partners are unhappy with the system and believe that it does not consider other factors that a partner contributes to the firm. Some of the partners are hoarding work, refuse to serve on committees, and don't want to do anything but bill. A couple of my partners suggested that we move to a totally subjective system. I would appreciate your thoughts.

Response:

More and more firms are moving to more subjective based systems for some of the reasons that you have outlined – especially larger firms. Success of such a system is dependent upon the compensation committee that is put in place (typically a three- member committee elected by the partnership) and the level of trust that partners have in the partners serving on the committee. With only five partners you don't have a large enough partnership to put in place such a committee. It would have to be a committee of the five which would probably not be feasible. In addition, your culture may not be conducive at this time to such a system. Your founders have grown up under the present system and will more than likely resist such a formidable change. I suggest that you make some changes to the existing system and see how that works. For example:

  1. Include responsible attorney as well as working attorney and originating attorney fee collection in the equation with a possible weighting of 60% working attorney, 20% responsible attorney, 20% originating attorney.
  2. Factor in overhead or if not have a reduction provision for attorneys that are consuming un-fair share of overhead.
  3. Factor in effective rate/realization and reduce compensation for realization that is below a certain threshold.
  4. Setup a bonus pool (15% – 25% of firm net income) for exception performance decided by the five partners. If there is no exceptional performance or the partnership cannot agree the funds are cycled back into net income and distributed in accordance with the formula.
  5. Provide production credit or paid special compensation for serving on management committee or as managing partner.
See how modifications to the present system work and consider a subjective system down the road as the firm's partnership ranks gets a little larger.
 

 

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