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Aug 27, 2020

Law Firm Partnership – How to Admit Associates to Equity Partnership

Question: 

I am the owner of a six-lawyer law firm in San Diego, California. Our firm is a business litigation boutique firm. I founded and formed the firm nineteen years ago. The other attorneys are all associates of which one has been with me for over ten years, one over five years, and the other three less than two years. I am 56 and still plan on working another ten to fifteen years. However, I don’t want to lose my senior associates and I want them to be around in ten to fifteen years to take over the firm, I also believe that they should be partners. The firm is presently a sole proprietorship. I would like to extend an offer to the senior associate now and possibly to the other senior associate in a a couple of years. How do I get started? What are some of the issues that I should be thinking about?

Response: 

If you have never had a partner in this firm or another firm in the past this will be a new experience for you. Law partnerships are like marriages and choosing the right partner is essential. Not only should the lawyer be an exceptional lawyer as far as legal skills, client satisfaction, fee production, and client origination, he or she should have similar values and goals for the firm that you do. Will you mesh well? At least the associate is somewhat of a known quantity since you know the associate and have worked with the associate for several years. However, the experience will be different. Being a partner with someone is different than a boss-employee relationship.

Here are a few ideas you might consider:

  1. Outline you goals and expectations for the relationship.
  2. Meet with your associate and identify his/her goals and expectations for the relationship.
  3. Determine how much control over the practice and decision-making are you willing to give up? Share?
  4. Determine how much and for how long you are willing to make less?
  5. Determine if the associate will be expected to bring in business? When/Timeline?
  6. Think about the firm you want to build – firm-first or lone ranger (team based or individual practices)?
  7. Decide on firm name – will it change? Should it? Impact on image, clients, etc.
  8. Decision as to capital contribution or buy-in? Yes or No? How much? Timeline for payment?
  9. Ownership percentages
  10. Voting
  11. Compensation
  12. Withdrawal arrangements

I suggest you think about your succession and eventual exit from the firm and what, if anything, you are looking to receive (goodwill value) in monetary terms when you leave the practice. Rather than having a large buyout upon your retirement/exit from the firm tie this to the value per share or unit of ownership interest and establish this is the purchase price as ownership shares are acquired.

Since you are a proprietorship you will need to change the structure of the firm to a multi-owner structure such as PC, APLC, or LLP. (LLC’s are not permitted in California for law firms).

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

 

 

Apr 16, 2020

Law Firm Planning During COVID-19

Question: 

I am the managing partner of a fourteen attorney business law transaction and litigation firm in St. Louis, Missouri. Our area is in lock-down as a result of COVID-19 and everyone in our firm except for our receptionist has been working remotely. We had planned on putting in place a strategic plan this year and completed a couple of initial meetings. As we move forward how do we plan in this environment or should we even try?

Response: 

These are definitely uncertain times and the legal profession will be facing an uncertain future. I believe that COVID-19 will leave a lasting imprint on the legal profession and will change and accelerate law firms into the digital age. This digital transformation will effect law firm clients, law firms, and the judicial system. Status quo will be altered permanently and new operating procedures will be developed. Entrenched legal service delivery methods will be abandoned. The following practices that we are seeing now will become commonplace:

Competition for legal talent will intensify and commodity work competitive will be greater than ever.

I believe that long range/strategic planning will be more important than ever but more difficult. However, right now everyone is in survival mode with a focus on the day to day. While these are unusual times with a very uncertain future, short and long-term planning will be more critical than ever. Right now I believe your focus should be on short-term tactical operational planning with three month planning horizons. The following are just a few of the topics that you should focus on:

You will need your short-term planning to be flexible as the current situation changes.

Once you have a handle on the short-term you can continue working on your strategic plan. I suggest that it initially be for a five year time period. You should incorporate some degree of scenario planning with different strategies for different future scenarios. While the future may be uncertain an uncertain plan is better than no plan at all.

Finally, if you have people in your firm that are casual users of technology I suggest that this is a good time to push them to get up to speed. Recently I was speaking with the partner of law firm that advised me that he wished he was more comfortable with technology and he is severely handicapped since his IT skills are limited to checking email and browsing the web.

Good luck!

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

 

 

Apr 08, 2020

Law Firm Succession and Exit Planning in the Era of Covid-19

Question: 

I am the owner of a general practice firm in the Southwest Suburbs of Chicago with four associates and four staff members. I am 66 and was planning on beginning to work on my retirement plan this year and approach two of my senior associates regarding acquiring my practice. I was hoping to retire and exit the practice two years from now. Now with the Covid-19 situation I am not sure what I should do. Is this a good time to even think about approaching my associates? While business is slow we are doing fairly well working remotely. I still want to retire and be done in two years. I would appreciate your thoughts.

Response: 

One thing is for certain, you will continue to age regardless of the virus and unless you needed higher income in your last year or two, your retirement goal and timeline has not changed. While I would not suggest approaching your associates for the next few months I believe you could begin some of the preparatory work. When I work with law firms on succession planning projects there is a sequence of work steps that take place that take time and often the process can take several months. For example:

  1. Initial call with owner or partners.
  2. Document request to law firm.
  3. Law firm collecting and gathering documents (financial and other) and sending to us.
  4. Financial and document reviews.
  5. Telephone with owner or partners.
  6. Telephone interviews with associate candidates that you are thinking of transitioning the practice.
  7. Preparation of opinion letter (valuation, approach, etc.)
  8. Telephone call with owner or partners re discussion of opinion letter and next steps.
  9. Preparation of proposal to be presented to associate candidates.
  10. Conferences calls.
  11. Presentation of proposal to associates.
  12. Execution of legal documents.

So as you can see there is a lot of pre-work that needs to be done before you even approach your associates. Slow times are a good time to work on non-billable administrative and management projects and unless you have changed your mind on your retirement and exit goals this might be a very good time to begin working on your succession and exit planning.

Since legal skill, client, and management transition takes times you don’t want to wait too long otherwise you may have to move your retirement timeout out further.

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

 

Mar 04, 2020

Law Firm Short-Term Succession Planning

Question: 

I am the owner of a six lawyer business transnational law firm in South Florida. I have been practicing law for twelve years and I started my present practice nine years ago. I am 42 years old.  The five attorneys that work for me are all associates of which two are very experienced seasoned lawyers and three have less than five years experience. Since I am still a young attorney I am not concerned about retirement or long-term succession planning, maybe I should be, but I am concerned about the short-term. What would the firm do if I got hit by a bus?

Response: 

Your concern is the concern of many solo practitioners and sole owners of firms that have several associates but no equity partners. In fact many state bar associations are beginning to require attorneys in private practice to have written succession plans or in the very least a designated representative authorized to act on a limited and short term basis to protect the rights and interests of lawyers and lawyers’ clients in the event of an attorney’s death, disability, disappearance, practice abandonment, or any other similar event.

At the personal level a concern would be your personal income. If you are a major producer of revenue in the firm, which I assume you are, there would be a major impact on revenue and your personal income as well. Covering firm overhead would be an issue as well. Part of this can and should be covered with insurance. You might want to consider:

The second level of concern will be at the firm level, particularly if you were to become disabled either for an extended period or permanently or die. In this situation a key question would be whether or how the firm would sustain itself or even continue. Will the work continue to come in and who would do the work? If you have a firm administrator he or she would be there to manage the business-administrative side of the house but who (lawyer) would manage the client/project side (client service side) of the firm? This would generally fall to the other partners, but until such time as you have partners another attorney in the firm needs to be identified and groomed for such a role. If you decide that a non-equity partner tier is appropriate for your firm this role might fall to a non-equity partner until such time in the future that you have, if you have, other equity partners.

You would want a succession plan or what I call a practice continuation arrangement. A practice continuation arrangement is an arrangement – typically in the form of an agreement or contract -made between you and an attorney or attorneys in the firm or outside lawyer or law firm. The arrangement would describe a course of action to manage and cover and possibly transfer your practice and sets payment for its value. In the event of temporary or permanent disability, or death, a practice continuation arrangement protects the practice, the your business interests or your clients and your and your family’s financial interests.

Your plan should include records pertaining to client identity and financial records as well a list of passwords and other security protocols necessary to access the attorney’s electronic business files, calendar, and other law office related records in a location known and accessible by the attorney’s designated representative or office personnel.

Click here for our blog on succession

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

 

 

Feb 13, 2020

Law Firm Marketing – Internet Strategy Crucial to Retail Practices Such as Family Law and Estate Planning

Question: 

I am a family law practitioner in the western suburbs of Chicago. I have been in practice for thirty years. I have two associate attorneys and two staff members. In the past I had other partners but that was many years ago. Over the last few years our business has been declining. Our financial performance last year was terrible and I made less than my associates. If this continues I may have to lay off an associate or two. Recently we have made some improvements to our website but I am not sure we have not done enough. I have noticed that more business seems to be coming from the website and less through referrals. I would appreciate any thoughts your may have.

Response: 

We are finding that law firms that serve retail consumer clients in practice areas such as personal injury, family law, elder law, and estate planning are becoming more and more dependent on the internet for their business. Family law firms especially are becoming more dependent on the internet for business and a sound internet strategy and investment is crucial for success. This is especially true in the larger cities and metropolitan areas. Less business is coming from traditional referral sources and more from the internet. I have family law clients in your area that tell me they are receiving ninety percent or more of their business from the internet.

A few suggestions that you might want to consider:

I hope this helps and good luck!

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

Jan 08, 2020

Law Firm Partner Compensation and Performance Reviews

Question: 

Our firm is a fourteen partner firm in the northern suburbs of Chicago with ten partners and four associates. We are a general practice firm with different partners focusing on specific practice areas. Our partner’s compensation is determined by a three member compensation committee.  The compensation committee uses a combination of quantitative data based upon working attorney fee collections and client fee originations and makes a subjective determination regarding other contributions that a partner has made to the firm. The problem that we have is the compensation committee does not have a way to effectively measure the other contributions that are being considered subjectively. We would appreciate your thoughts.

Response: 

Your problem is a common problem. While it is easy to measure working attorney, responsible attorney, and originating attorney fee collections, billable hours, realization rates, and other hard measures of short-term financial performance, (it is hard to capture the subtler aspects of partners’ contributions such as mentoring new lawyers, firm management, idea development) and its virtually impossible to measure the long-term present value of each partner’s work and contribution.

The key is to make the subjective considerations more measurable. Many firms are supplementing the easily measured economic contributions per partner with additional measurements to determine the actual value per partner and incorporating into their compensation systems. Some firms:

Partner performance reviews are often avoided like the plague by many firms. They are time consuming and it is hard to give candid feedback to colleagues. However, without partner performance reviews neither the partners nor the firm will reach full potential. When partner performance reviews are used not only to review performance but to set measurable goals this data can be incorporated into the compensation system and provide additional hard data for providing a true measure of partner contribution and value.

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

Dec 31, 2019

Law Firm Management – What Will Be Keeping Owners and Managing Partner Awake at Night in 2020

Question: 

I am the owner of a twelve attorney business litigation law firm in Northern, California. I started the firm fourteen years ago after practicing ten years in a large law firm. While the practice has been fulfilling both professionally and financially, the management side is often a challenge. As I sit here on December 31, 2019 thinking about management challenges that I may face next year I was wondering what you envision the challenges will be in 2020.

Response: 

The following were the common challenges that owners and managing partners advised us that they faced in 2019:

  1. Talent Management – Attorneys and Staff
    1. Hiring
    2. Training
    3. Motivating
    4. Compensating
    5. Keeping (retaining)
  2. Firm Succession and Transition
  3. Getting and Keeping Clients and Additional Sources of Business
  4. Managing Cash Flow
  5. Satisfying Hard to Please Clients
  6. Balancing Time Between Servicing Clients and Managing the Firm
  7. Getting Paid
  8. Competition from Other Law Firms and Non-Law Firm Service Providers
  9. Proving High Quality Legal Services at an Affordable Price and Avoiding Malpractice Claims
  10. Finding Time for Personal Life and Family

In 2019 the number one challenge was talent management and I believe this will continue to be the case in 2020. The other challenges that I have listed will continue to be the major concerns of owners and managing partners in 2020.

Here are some links to a few of our resources that you might find helpful:

Click here for our blog on strategy

Click here for our blog on profit improvement

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

 

 

 

Dec 11, 2019

Law Firm Financial Management – Financial Red Flags

Question: 

Our firm is a twelve lawyer firm in Chicago and our practice is a business litigation firm. We have eight partners in the firm and we are managed by a three-member management committee that was just formed this year. I am a member of the committee and I am responsible for the general financial oversight of the firm. I am trying to get a handle on law firm financial metrics and especially what are the financial warning signs that I should be aware. If you have an outline or list that you would be willing to share we would appreciate it.

Response: 

Here is a short list of what I call financial red flags that you might find helpful:

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

Oct 03, 2019

How to Handle the Messaging and Public Relations When a Law Firm Partner Leaves

Question:

Our firm is a twelve attorney litigation defense firm in Phoenix, Arizona. We have eight partners in the firm and I am a member of our executive committee. Yesterday at a partner meeting we were advised by four partners that they were leaving, would be starting a new law firm, and would be taking several key clients that they handle with them. A couple of associates and staff members will be going with them. What do we tell people and how do we go about it? You suggestions are most welcomed.

Response: 

My first suggestion is to move very quickly otherwise the rumor mill will get started and rumors will get ahead of you. You must get in front of the message to all audiences. The remaining and the departing partners should meet immediately, come to terms and agreement with the message, and be prepared to answer the following questions:

  1. Who is leaving
  2. Why following
  3. Whether the relationship is contentious or amicable
  4. How the departure is going to effect clients
  5. Whether the departing partners are named partners
  6. Future name of both firms
  7. Where the two firms will be located
  8. Contact information

I further suggest that you:

  1. Plan and advance and drill
  2. Identify your audiences and appropriate messages for each
    1. Clients
    2. Employees
    3. Legal community
    4. General public community
  3. List anticipated questions that your audiences will have
  4. White out the answers to the questions
  5. Write out the message for each audience
  6. Designate a single spokesperson to respond to the press and others so that messaging remains consistent from firm management.
  7. Identity clear lines of authority.
  8. Ensure that you follow the rules of professional responsibility in regarding client communications.

Situations such as this can be very stressful for all concerned. Try not to let your personal feelings cloud your vision and get in the way of a properly planned transition. There will be a lot of work to be done on the part of the remaining partners and departing partners. A well designed project plan will be helpful in managing all the tasks that will have to be handled and managed. The public relations should be at the top of the list.

Click here for our blog on marketing

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

Sep 25, 2019

Succession-Exit Options for Law Firm Solos

Question: 

I am a solo real estate practitioner in Long Beach, California. I have one paralegal that works in the firm. I am 70 years old a would like to retire in the next couple of years. What are my options?

Response:

Solo practitioners have the greatest challenge since they have no associates or anyone in place to transition the practice. Therefore, the practitioner must both hire and groom an associate that could buy the firm or become a partner and buyout the owner’s interests, sell the firm to another firm, or merge with another firm. Other options would be to become Of Counsel with another firm or simply close down the practice. This takes time.

Hiring and Grooming an Associate

Hiring and grooming an associate can be problematic for the solo. If he does not have sufficient business and the associate does not originate business, the associate will be an expense and the owner’s net earnings will suffer. Other issues include:

Sell the Firm to another Lawyer or Law Firm

The owner can sell the firm to another lawyer or law firm. This option works best when the practitioner is actually ready to retire and quit practicing. Often this is not the case and the restrictions on sale of law practice levied by a state’s rules of professional conduct, in particular Rule 1.17, may make this option undesirable. Locating desirable candidates will take time and a well-planned search process may have to initiated. Our experience has been that this can take a year or longer.

Solo practices are often very personal practices with little annual repeat business. Clients of law firms advise us that they hire the lawyer and not the law firm. This makes buyers very cautious due to their concern that the clients and referral sources will not stay and the revenues will not materialize after the owner sells the practice. Therefore, many buyers are not willing to pay cash for a law practice. Our experience has been that most of these practices are sold with payouts over time based upon a percentage of revenues collected over a certain number of years. Usually, the seller stays on in a consulting capacity for a year to help insure that clients and referral sources stay with the new owner.

Merger with another Firm

Merger with another lawyer or law firm is another option. This is often a better option for solos that want to gradually phasedown yet continue to practice for a few more years. In essence, they join another firm as either an equity or non-equity partner, member, or shareholder and subsequently retire from that firm under pre-agreed to terms for the payout. The odds are improved for clients and referral sources staying with the merged firm and the merged firm is more committed that a buyer might be under a payout arrangement based upon collected revenues. The solo practitioner has more flexibility with regard to the ability to continue to practice longer, reduced stress, additional support and resources, and gradual phasedown to retirement.

Of Counsel with another Firm

Forming an Of Counsel relationship with another firm is an option that many solos are taking. Sometimes it is a final arrangement where a solo winds down his or her practice and then joins another firm as an employee or independent contractor. He or she is paid a percentage of collected revenue under a compensation agreement with different percentages depending upon whether the practitioner brings in the business, services work that he or she brings in, or services work that the firm refers to the practitioner. In other situations, an Of Counsel relationship is used as a practice continuation mechanism that provides the solo with additional resources and support if needed. An Of Counsel relationship can also be used to “pilot test” a relationship prior to merging with another firm. We have had several law firm clients that has taken a phased approach to merger with Phase I being an Of Counsel “pilot test” exploratory arrangement and Phase II being the actual merger.

One option is not necessarily better than the other – much depends upon “fit” and individual circumstances as well as a little luck.

Click here for our blog on mergers

Click here for our blog on succession strategies

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

 

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