Law Practice Management Asked and Answered Blog

Category: Firm

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Jun 23, 2014

Law Firm Decision-Making and Governance – Two Partner Firm

Question:

Another attorney and I are planning on starting a law practice together. He has a larger book of business and he has ten years more experience that I have. Initially he will have a 60% ownership interest and I will have 40%. Compensation will be determined based upon these ownership percentages. How do you suggested that we structure our decision-making and governance?

Response:

I would not recommend using ownership percentages for decision-making and governance. I suggest that you be equal partners in this regard – one head – one vote. Of course this would mean that if you actually took a formal vote you could be deadlocked. Hopefully, the two of you have similar goals and a common desired sense of direction for the firm. If so, you should be able to come together most of the time using a consensus approach. When you can't – some give and take will be required. If you can't the firm may not last.

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

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.

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

 

Jun 11, 2014

Law Firm Accounting – Structure of General Ledger Chart of Accounts

Question:

I am the newly elected managing partner of a twelve attorney business transactional firm in St. Louis. The firm is trying to implement a more disciplined approach to financial management. I have been charged with developing our first budget and I am having difficulties due to the overall structure of our general ledger. Our system was setup by our outside accountant and the expense accounts lump too many expenses into too few categories. Do you have any suggestions?

Response:

This is a typical problem that I see in many firms. Accountants often setup law firm accounting systems to facilitate preparation of income tax returns as opposed to systems designed to facilitate internal management accounting, budgeting, etc. Often too many expenses are lumped into single categories or are not assigned to categories based up cost behavior. The attached sample general ledger chart of accounts has been a standard recommended for use in law firms for many years by law firm management consultants, the Association of Legal Administrators, and others. Click here for a sample general ledger chart of accounts

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

 

Jun 03, 2014

Law Firm Policies and Procedures

Question:

I am a solo practitioner in Central Illinois. As my staff seems to expand, I feel a need to become more formal.  I have a question about nondisclosure agreements with staff?  Also office procedures or rules?   Also in hiring I am finding less and less candidates that lack any experience in a legal setting. The Illinois State Bar Association Law Practice Management Section may want to consider a half day program that is internet based to acquaint staff who have office experience but no legal experience with some of the basic issues including nomenclature, confidentiality, basic legal drafting, etc.

Response:

Our committee has not addressed this of late – we may have years ago and if we did there might be an article in the dark past in the Bottom Newsletter which is the newsletter of the Standing Committee on Law Office Management and Economics. 

Most of my law firm clients are addressing the topic usually in their office policy handbook as opposed to a separate document. You might want to begin to put together both an office policy (employee handbook) as well as a "how to procedural manual" as well.

Suggest that the office policy (employee handbook), in addition to other topics, cover policies on:

Have a sign-off page in the Policy (Employee Handbook) and have each employee acknowledge that they have read said policies and file a copy in each employee's personnel file.

ABA has a book on Office Policies and Procedures that can be purchased that you might find helpful: 

http://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=218026

Thanks for the suggestion regarding the CLE. I am the CLE coordinator for our committee – so I will bring up the topic and see what the group thinks.

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

 

 

May 27, 2014

Law Firm Merger – Merger of a Solo with a Two Attorney Firm

Question:

I am a solo in Bloomington, Illinois. I have just completed my third year in solo practice. I have one full time secretary, a paralegal, and I office share with a group of attorneys. My overload is low and my margin is 61%. I have been approached by a two attorney (2 partners) firm regarding merging with their firm. One of the partners is relatively new (joined the firm 3 years ago) and the other is the firm founder and is planning on retiring in the next year. On average the other firm's revenue per attorney and partner earnings is on par or even less than mine. Their overhead is much higher. The two partners have been operating on a handshake with no succession/transition plan for the senior partner and no understanding of retirement financial arrangements (buy-out). While I have some concerns and fears about merging I believe that merger would provide me access to mentoring, additional resources and staff, and ability to improve my competencies and handle larger more complex cases. I would appreciate your thoughts.

Response:

I would be concerned that you have been approached to help with the buy-out of the senior partner. In essence this may be a large unfunded liability that you and the other partner will be saddled with for a number of years. It sounds like, based upon past performance of the other firm, that if there is a substantial buy-out of the senior partner you could end up making less for several years. Other than your rent there will be marginal cost savings as a result of the merger. Improvement in your earnings will be dependent whether you and the other partner can in fact generate larger cases, larger revenues, and increased leverage. 

If I were you I would ask the firm to work out the details concerning the senior partner's retirement as to timeline, the mechanics, the cost/funding of the buy-out, and put same in writing. Once this is accomplished factor this into the rest of your due diligence and analysis.

If the firm is unable to get their arms around the retirement of the senior partner issue I would stay clear.

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

 

May 20, 2014

Law Firm Compensation – Bringing in an Associate with a Small Book of Business

Question:

I am the sole owner of a law firm in Walnut Creek, California. I have three associates and five staff members in the firm. I am looking to hire another associate. The associate I am considering has been out on his own for five years – no office and no employees. He would bring around 30 active matters with him. I was thinking of paying him a salary with a discretionary bonus based upon performance. Fees originated and generated would be a major component of the performance determination that would impact future salary increases, bonuses, and eligibility for partnership. However, I believe that I must do something with regard to the business that he brings with him. I would appreciate your thoughts and suggestions:

Response:

I agree with your general approach with regard to his compensation. Payments for originations for associates gives me pause.  However, I believe you have to treat business that he brings with him differently. Here are my thoughts:

  1. Create a list of the pending matters that he will bring with him. The list should list the A/R and WIP for time bill matters. For flat fee matters whether the fee has been collected and spent, whether there will be any more fee, the amount of work that remains to be completed (percent), and the estimated hours required to complete the work. For contingency fee work – a list of the expected fee - low and high – for matters in progress.
  2. He should get 100% of A/R and unbilled WIP earned but not billed or paid before he joins the firm. 20% of the work done after he is with your firm.
  3. I would pay him 20% of the fees earned (prorated) for flat fee matters while the matter is with your firm if a fee will be due and paid. If not – your firm should be entitled to an offset for the overhead servicing his work for which there will be no fee forth coming.
  4. Once the matters on the list are concluded any future work that he originates would be "firm accounts".

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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

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

May 06, 2014

Law Firm Overhead

Question:

I am the managing partner of an 8 attorney firm in Carbondale, Illinois. Recently I was talking with the managing partner of a firm in the area and we were discussing overhead ratios and we seemed to have different definitions of overhead and I am wondering if we were trying to compare apples to oranges. Can you share your thoughts?

Response:

I consider overhead to be the operating cost required to support the producers in the firm. This is a different statistic than expenses. Typically in a law firm overhead is all expenses except for attorney salaries (associate and partners) and benefits. Often overhead is used is various benchmark surveys. However, when determing net income or profit (the profit pool) expenses would include associate salaries and associate and partner benefits. In a professional corporation where officer salaries are expensed we typically add shareholder salaries back to the net income figure to determine the profit pool for benchmarking purposes.

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

 

 

Apr 29, 2014

Law Firm Associate Training and Mentoring – Ideas for Reducing Spin Time and Increasing Profitability

Question:

We are a three attorney personal injury plaintiff firm in Moline, Illinois. There are two partners and one associate in the firm. We handle a large volume of small PI files – currently we have 700+ open files handled by three attorneys and 5 assistants. We recently hired our fourth attorney – second associate – that came to us with 20 year's experience as an associate in several large firms (100 plus attorney firms). The attorney, who has been with us for about 8 weeks, has never handled personal injury cases and is having some problems getting organized. Do you have any suggestions?

Response:

I am a believer that time invested in orientation, training, and mentoring upfront can dramatically reduce a new associate's spin time, help them get online quicker, and improve overall profitability. Even though your associate has 20 year's experience in a large law firm – the work and the case management challenges are different. The associate may never have had overall management responsibility for cases or client relationships. The associate may have been assigned tasks to be completed with the partner having the case and client management responsibility. If the attorney did manage cases there is a major difference between managing say 25-50 large cases versus managing 150 small cases. There are new case management and client management skill sets and practices that will have to be developed and practiced in addition to the new area of law.

Invest time training and mentoring and share case and client management tools that can help your associate get off to a faster start.

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

 

Apr 08, 2014

Law Firm New Business Development – Finding New Startup Companies Before They Startup

Question:

I am the managing partner of a 17 attorney law firm located in Rockford, Illinois. While we have an active business law practice representing small companies we are planning on beginning to work more with entrepreneurial and startup companies. How can we go about finding and identifying these companies earlier in their development – possibly even before they have actually launched their businesses?

Response:

Many of the larger law firms are developing entrepreneurship and startup practice areas as a means of beefing up their business practices with new sources of business. So, I believe that your plan to reach out to entrepreneurs is a worthwhile strategy if you can learn to think like an innovator rather than being trapped by precedents of the past and become part of their network. Here are a few ideas:

  1. Learn to think like an innovator, embrace opportunity, and react quickly. Precedent can be the enemy of innovation.
  2. Go where entrepreneurs go – don't just hang out with lawyers.
  3. Join business/entrepreneurial trade associations.
  4. Speak and present at entrepreneuria trade conferences.
  5. Attend entrepreneuria trade conferences and go to the educational sessions.
  6. Write and publish in entrepreneuria trade association publications.
  7. Get a booth and exhibit at small business trade shows. For example – in St. Louis we have the Small Business Expo – http://www.stlouisbusinessexpo.com/
  8. Become involved with (possibly sponsor) startup incubators in your local community or universities.
  9. Scan public documents (i.e. Secretary State, etc.) concerning new business startup filings.
  10. Become active in your local chamber of commerce.

You will increase your odds if you can develop relationships with entrepreneurs before they have launched their businesses – this may be when they need a trusted advisor the most.

Good luck!

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

 

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