Law Practice Management Asked and Answered Blog

Category: Equity

Jun 05, 2019

Law Firm Partnership Tiers – Different Qualifications For Equity and Non-Equity Partners

Question: 

I am the managing partner of a six lawyer firm in Nashville, Tennessee. There are two partners in the firm, myself and another partner, and we have four associate attorneys. Two of our associates have been with firm for over ten years. We are trying to put in place a career progression policy for them and we are thinking about having a non-equity and equity tier which would serve as a prerequisite to equity partnership. What are the differences between the expectations and requirements for non-equity and equity partner?

Response: 

The main difference between an equity partner and non-equity or income partner is that the equity partners assumes a higher degree of capability in a lot of areas, not just good lawyering. Equity partners are expected to develop business, to manage large client relationships, and to have a level of commitment that allows them to do all of that and maintain a very full practice load at the same time. Non-equity or income partners are generally lawyers that are excellent lawyers in his or her field but doesn’t satisfy the other requirements required of equity partners. In addition, equity partners usually invest capital in the firm and assume the risks of the office lease, credit line, and other liabilities. Non-equity partners usually have guaranteed salaries and equity partners do not.

Here are a few of the typical hurdles that are required to move up to equity partner:

• Attorney has demonstrated a high level of competence and skill in the designated practice
  area.
• Attorney provides quality client service and has the ability to nurture and expand client
  relationships.
• Attorney demonstrates an ability to develop a self-sustaining practice or client base.
• Attorney commits to marketing the Firm, not just self, and shows the potential of producing business for other lawyers in the firm.
• Attorney acts in a collaborative, team-orientated manner, complying with Firm policies, systems and procedures and treating all lawyers and staff with respect.
• Attorney commits to the training and supervision of others.
• Attorney demonstrates a high level of commitment to management and shows potential for making a positive contribution in some aspect of the Firm’s management.
• Attorney puts the Firm’s interests first, ahead of one’s individual interests, and
• Attorney is willing to contribute capital and make a financial investment in the firm.

The primary difference is non-equity partners focus is on lawyering and the focus of equity partners is on lawyering and being a businessperson as well – practicing law and managing a business.

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

Oct 25, 2017

Law Firm Equity Partner Succession – Transition in a Multi-Partner Firm

Question:

I am an equity partner in a thirty-six attorney firm in Miami. We have seven equity partners, eight non-equity partners, and twenty one associates. Our practice limited to civil litigation defense and our clients are institutional clients consisting of business firms, governmental agencies, and insurance companies. The ages of our equity-partners are: 64 62, 60, 58, 54, 48, and 44. The firm does not have a succession plan for the senior partners and has not even discussed the matter. I am not sure what the partnership agreement provides. I am concerned about our future if we don’t start addressing this. I would appreciate your thoughts.

Response:

With three members already in their sixties you are going to have some retirement bunching issues before long and I agree that you should start planning and deal with this sooner than later.

The partners as a group need to start talking and the senior partners should begin sharing their ideas and plans concerning their retirement goals. There should be an ongoing dialog with your senior partners. Review the firm’s partnership/operating/shareholder agreement. After reviewing these documents, determine how the firm’s policy regarding retirement, if there is one, will affect various partner’s retirement timelines, compensation, and payout. Does the policy require mandatory retirement at a certain age? Ascertain whether the policy provides for phase-down. How does the phase-down handle management and client transition? Is there an “Of Counsel” provision after retirement? The firm needs to reach an agreement with its senior partners nearing retirement concerning their retirement timelines, client and management transition, and retirement payout or return on invested capital.

The initial challenge in a larger firm is to determine who the successor or successors will be to transition clients and management responsibilities. This may be no easy task especially if the firm is in first generation and the retiring partner is one of the founders.

Client Transition

In firms your size, clients are more likely to be large sophisticated clients, possibly Fortune 500 companies, which refer many matters to the firm during the course of a year. Often such clients may be both a blessing and a curse for the firm. A blessing in that their business provides the firm with huge legal fees during the course of a year. A curse in that their business represents a large percent of the firm’s annual fee collections and a significant business risk if the firm were to lose the client. An effective client transition is critical, takes time, and must be well planned.

Successful client transition – moving clients from one generation to the next – is a major challenge for larger 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:

• The firm’s complacency regarding the relationship between the responsible attorney and the client;
• Clients who are uncomfortable with other lawyers in the firm doing their legal work;
• Other lawyers in the firm not being familiar with the client’s business;
• Senior attorneys who do not include younger attorneys in meetings with clients; and
• The point lawyer not identifying the appropriate lawyer successor to the client.

Management Transition

In larger firms, partners may have management responsibilities as well as client responsibilities. A retiring partner may be a managing partner, executive committee chair or member, or serve as a chair or member on other firm committees. Retiring partners will have to transition these responsibilities to other partners in the firm.

Transitioning client relationships and management responsibilities effectively can and where possible should take a number of years – preferably five years – typically not less than three years. For this reason, many firms use five-year phasedown programs for retiring partners. These plans provide detailed timelines and action steps for transitioning client relationships and management responsibilities.

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

Feb 21, 2017

Law Firm Equity Partnership/Admission Requirements

Question: 

Our firm is a sixteen-attorney business law firm in Cleveland, Ohio – six equity partners and ten associates. We the equity partners have been discussing putting in place an associate attorney career advancement program and outlining equity partner admission requirements. Can you share your thoughts on what we should be considering and how we should get started.

Response: 

You might want to consider developing a competency model. Rather than using a timeline – how long an associate has been with the firm – base career advancement to senior associate, non-equity partner, and equity partner upon achievement of competencies at various levels. These include:

• Core competencies and success factors which are the traits required to be successful at your firm.
• Performance factors or criteria which are the specific skills, traits, and behaviors, that together describe the full behavioral dimensions of the core competency.
• Behavioral elements which are the phrases that offer descriptions of distinct, observable behaviors, that would be exhibited by lawyers who have mastered a performance factor.
• Levels or stages. For example, Level 1, Level 2, and Level Three. Level three might be the level that would be required to be considered to be eligible for equity partner.

Examples of core competencies might be legal excellence, client orientation, leadership, career commitment, etc.

In addition to competencies typically required to be  a Level Three attorney equity membership has additional requirements and obligations. For example:

1. Equity owners will be sharing in the risk and reward of ownership and will invest their time and capital in the firm. They will have a firm-first orientation and they will share the vision and core values of other equity owners in the firm.
2. Equity owners must add value to the firm. They must not just be good worker bees – they must pay for themselves, cover their cost and their share of the firm overhead, and generate enough work to keep other attorneys busy.
3. Equity owners must be client finder, minders, and grinders.
4. Equity owners must act like owners of small businesses.
5. Equity owners must contribute to management and marketing of the firm.
6. Equity owners must mentor younger attorneys.
7. Equity owners must follow firm policies, system, and procedures – no lone rangers.
8. Equity owners should contribute capital and sign for the office lease, firm credit line, and share in other financial obligations of the firm.
9. Finally, future equity owners must be good marriage partners considering the other equity partners in the firm.

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

Oct 19, 2016

Law Firm Governance – Executive Committee – Non-Equity Member and Procedures

Question:

Our firm is a fourteen attorney firm in Orlando, Florida. We have Two equity members, five non-equity members, and seven associates. We are currently managed by the managing member. In order to be more inclusive we are thinking about eliminating the managing member position and moving to a three member executive committee with one of the three members being a non-equity member. I would appreciate your thoughts?

Response:

I have several client law firms that have taken this approach. Here are a few suggestions:

1. Draft a charter (position descriptions) for the equity membership and the executive committee outlining the specific responsibility and authority for each.
2. If the firm has a firm administrator draft a job description for that position outlining his/her responsibilities and authority.
3. Since there are only two equity members there will be no election for those members on the executive committee until such time in the future when there are more equity members. At that time the two equity members should stand for election by the equity membership for staggered three year terms.
4. Have the non-equity members elect a representative non-equity member annually for a one-year term on the executive committee. 
5. Suggest that each member have one vote including the non-equity member. The goal of the executive committee should be to manage by consensus but when they can't a vote should be taken.
6. Have the non-equity member sign a non-disclosure agreement and advise him/her as to the content that can be shared with the non-equity members and content that cannot be shared.
7. Elect a chair of the executive committee.
8. Have regularly scheduled meetings.
9. Use agendas and prepare minutes or notes after each meeting.

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

Jun 28, 2016

Law Firm Succession – What to do When No One is Interested in Equity Ownership

Question:

I am the owner of a fourteen attorney insurance defense practice in Baltimore. I started the firm twenty years ago after leaving behind my partnership in another firm. Of the other thirteen attorneys there are four non-equity partners and the rest are associates. I am sixty three years old and beginning to think about retirement and how I am going to transition out of the practice. Two of the non-equity partners are well seasoned attorneys, have major case responsibility, and have developed solid relationship with clients. I have discussed equity partnership vaguely with two non-equity partners but their interests seem lackluster and they have been non-committal. I would appreciate your thoughts and advice on what my next steps should be.

Response:

It sounds like your non-equity partners are on the fence as a result of the "vague" nature of your discussions. It is hard for non-equity partners or associates to commit to equity and taking on the risk of ownership when they don't know what the deal is. This is a scary proposition for them and they need detailed information so they can evaluate and make an informed decision. A vague discussion doesn't cut it. I suggest that you put together an equity partnership proposal that includes:

1. Profit and loss statements for past the five years.
2. Balances sheets for the past five years.
3. A current accounts receivable and unbilled work in process report.
4. Tax returns for the past five years.
5. Malpractice insurance application.
6. Building and other leases.
7. Proposed Partnership Agreement
8. Proposed Equity Partner Compensation Plan
9. Planned date of admission
10. Governance and management plan
11. Ownership percentage being offered
12. Capital contribution or buy-in requirement

May 17, 2016

Law Firm Equity Partner Capital Contribution

Question:

I am the sole owner of a twenty-five attorney litigation boutique firm in Los Angeles. I am the only equity partner with nine non-equity partners and fifteen associates. I am concerned that if I don't provide a path to equity partnership some of my senior talent many gradually defect to other firms or split off to create their own law firms. I also believe that providing a path to equity partner for deserving non-equity partners is the right thing to do. Therefore, I am planning on admitting two non- equity members this year. Should I require capital contributions?

Response:

I believe that all new partners should be expected to contribute capital and have some "skin in the game." Whenever a firm admits a new partner, the firm should require the new partner to contribute capital. Increasingly, a partner's capital requirement should bear a relationship to the partner's share of profits. You may want to allow new partners a reasonable period of time to fund their capital accounts – say one or two years via a capital note or help them arrange favorable terms at your bank to finance their capital accounts. Usually capital accounts are tied to working capital needed to operate the firm and the percentage of ownership/income that each partner will have.

While capital contributions are all over the board ranging from zero to $100,000 in firm's your size I often see capital contributions ranging from $25,000 to $50,000. 

There are only three ways to increase a firm's working capital to cover cash flow requirements and fund growth:

1. Have partners put more money in
2. Have partners take less money out
3. Borrow

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

Jan 06, 2016

Law Firm Managment – Do Your Non-Equity Partners and Associates Really Want to be Equity Partners?

Question:

I am a member of our firm's executive committee. We are an 18 attorney firm in Baltimore with four equity partners, five non equity partners, and nine associates. Recently we asked one of our non-equity partners to join the equity ranks and he said no. We were shocked and taken by surprise. Is this a common occurrence? We would like to hear your thoughts.

Response:

This is becoming a more common occurrence and this is causing havoc with growth, succession and transition plans. Many law firms are seeing a growing sense of disillusionment from young lawyers that may not want to be an equity partner. While they want to be lawyers they do not want to take the financial and other business risks nor make the other work commitments such as working nights, weekends, and the 24-hour commitment that has historically been the requirements for equity partners in law firms. Work-life balance has become a priority for more younger lawyers.

I believe that you should through performance reviews, survey questionnaires, and other tools gather information sooner than later to get a feel for where your non-equity partners and associates stand as far as attitudes toward business and financial risk, desirability of being an equity owner, and willingness to invest capital and time in the firm. This will give you a feel for your mix. If it looks like you have too many worker bees – revamp your recruiting strategy – new attorneys or laterals – accordingly and look for attorneys that have an interest and the mindset that it takes to be an equity owner.

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

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