Law Practice Management Asked and Answered Blog

Category: High

Jan 26, 2016

Law Firm Merger – Initial High Level Summary Financials to Provide

Question: 

I am the managing member of an 14 attorney firm in Miami. We initiated discussions with a large firm in Boston concerning the possibility of our firm merging with their firm. We met with one of their partners recently at their offices and he presented our interest to his other partners. He has advised us that there is an interest in having us meet the other equity partners and taking discussions to the next level. He would like some initial financial information from us. We feel that we must provide them with some financial information at this point but unsure as to what to provide them with at this stage. I would like to hear your thoughts.

Response:

Law firms exploring possible merger partners often move to quickly to financials and I try to hold on providing financial information until after three get acquainted meetings. I like to see the initial focus on the people, culture, and general fit. Poor fit causes more merger failures than practice economics. However, in your situation the door has been opened and the large firm is going to want to see some initial financial information to "qualify" you and determine whether further discussions is worth their time investment.

I suggest that both firms sign a non-disclosure statement and that you initially provide them with the following high-level summary information in a spreadsheet in columns for the last five years of history. The per lawyer/equity partner calculations can be calculated in the spreadsheet based upon the headcount data inserted in the spreadsheet.

• Headcount by the number of equity partners, non-equity partners, associates, Of Counsel and other attorneys, paralegals, secretaries/assistants, and admin staff.
• Fee Revenue
• Total Revenue
• Total Expenses
• Net income available to equity partners. (Add back guaranteed payments and other income that equity partners received)
• Profit Margin
• Fee Revenue per Lawyer
• Fee Revenue per Equity Partner
• Expense per Lawyer
• Net Income Per Lawyer
• Net Income Per Equity Partner
• Schedule of billing rates (current only)
• Compensation ranges by Equity Partner, Non Equity Partner, Associates – past five years
• Current malpractice insurance coverages and with whom.
• Current Lease obligations – office space and equipment

Mar 25, 2014

Law Firm Associate and Non-Equity Partner Compensation: Is There a Cap or Ceiling?

Question:

I am the managing partner of a 16 attorney insurance defense law firm in Kansas City. We have two equity partners, four non-equity partners, and ten associates. Only the two equity partners bring in client business. Since our clients are insurance companies most of our work is new business from existing clients. Unlike other firms doing insurance defense work our billing rates are low and we have to put in a lot of billable hours and maintain a high ratio of associates and non-equity partners to equity partners.

In the past our associates stayed for a while and left after several years. As a result about the time they reached the higher compensation levels they left and we replaced them with lower cost associates. In the last few years – with the economy and the oversupply of lawyers – they are staying much longer. While we – the equity partners – want to be fair and are willing to share – we are concerned about our reducing profit margins and at what point an associate or non-equity partner's compensation is "maxed out." We would appreciate your thoughts.

Response:

Law firms of all types of practice are experiencing this dilemma. The problem is even more evident in insurance defense firms where much of the work is routine discovery work that can be handled as well by an attorney with two years' experience as by an attorney with ten years' experience at lower cost. Here are a few thoughts:

1. Use the formula – 3 times salary as a general guide to determine where you are regarding working attorney fee production from each of your attorneys. If you are paying an associate or non-equity partner $100,000 a year salary you should be collecting $300,000. The goal is that 1/3 of each fee dollar goes to association of the attorney, 1/3 to overhead, and 1/3 to profit – this a 30% profit margin.
2. Dig into your financials and determine your contribution to profit from each of your attorneys. Allocate all direct expenses and indirect overhead and calculate profit margin. Click here for an illustration on how to allocate overhead
3. Profit margin should be between 25%-30%.
4. Use the margin to establish a theoretical salary limit in absence of other contributions such as management, client origination, additional business from existing clients, etc.
5. Cap salaries with the exception of periodic cost of living adjustments.
6. Use a client or referral commission bonus, production/hours bonus, and bonus pools to reward exceptional performance.

 Click here for our blog on compensation

Click here for articles on other topics

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

Copyright © 1996 - 2024 Olmstead & Associates, All Rights Reserved

Home – Resource Center – News Releases – About Olmstead – Services Provided – Contacting Olmstead – Sitemap