Law Practice Management Asked and Answered Blog

Category: Injury

Apr 03, 2019

Valuing a Personal Injury Law Practice

Question:

I am the owner of a three attorney personal injury practice in Columbia, South Carolina and I am contemplating retiring in seven years. I have an associate on board that I would like to sell my practice over the seven years. How do I go about valuing my practice and determining how much I should ask for?

Response: 

A few of the various methods used solely or in combination with other methods for valuing a law firm include:

  1. Asset Based – ignores the importance of a firm’s earnings and cash flow (Goodwill Value)
    1. Book value – adjusted to accrual-based financials
    2. Replacement cost
    3. Appraised value
    4. Market value
  2. Comparable firm transactions
  3. Discounted cash flow – based on projected future financial performance of the firm.
  4. Rule of thumb using multiples
    1. Multiple of gross revenue
    2. Multiple of net profit or earnings
    3. Multiple of EBITDA (Earnings before interest, income tax, depreciation, and amortization. (EBITDA is a measure of a firm’s operating performance)
    4. Multiple of SDE – seller discretionary earnings after owner compensation adjustments (expensing appropriate salary)
  5. Rule of thumb variables
    1. How much repeat business is expected
    2. Number and type of clients
    3. The transfer-ability of client and referral source relationships
    4. Dependence on only a few large clients
    5. Whether the firm has been institutionalized or is a personal practice and uniquely the firm owner
    6. Other attorneys and staff
    7. Firm infrastructure and systems
    8. Historical reputation of the firm
    9. Contingency fee practices

Personal injury firms are difficult to value due to the variability in cash flows that are often the case with many firms.  Some personal injury firms have relatively predictable cash flows and others have very large swings. When this is the case the typical solution is cash-based book value plus a percentage of case fees as they are concluded with a percentage of completion factor applied.

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

Jun 27, 2018

Elder Law Firm Expanding into Personal Injury and Other Areas

Question: 

I am a partner in a four attorney law firm in a small town south of Waco, Texas. We have two partners and two associates. Our practice is limited to elder law, estate planning, and estate administration. The practice was formed thirty years ago by the  two partners. The firm has built a strong brand in elder law and estate planning/administration and does a significant amount of business in several other counties. The firm is doing well financially. Our main problem is that we are overwhelmed with work and we need to hire an additional attorney. We have interviewed an attorney that is a partner in another two attorney law firm in the area that has some limited experience in small business corporate work and estate planning. However, most of his experience is in personal injury plaintiff, criminal, and family law.  If he joins our firm he wants to continue to develop these practice areas as well as bring his personal injury, criminal, and family law cases with him. Bringing him on board could solve our lawyer staffing issue as well as increase our business. Should we bring him on board?

Response: 

It sounds like the attorney you are considering is a trial lawyer and has limited experience in your practice areas and he wants to expand his personal injury, criminal, and family law practice. You need help in your core practice areas.

This would cause your firm to become more of a general practice firm rather than the specialty firm that you are presently. While there are general practice firms that handle elder law and estate planning/administration, more of the successful firms your size are specializing in these practice areas. Bringing these practice areas into your firm would totally change the firm’s brand, image, culture, and strategy. Marketing will be more complex. The firm will have to fund client advances for the personal injury cases. You need to revisit your strategy and ask whether you want to go this direction. Personally, I think you should pass. If you want to expand into other practice areas you might consider real estate and corporate. I have several elder law/estate planning firms that handle real estate and corporate work.

I would cast a wider net and look for additional candidates. I would start by looking for an experienced elder law/estate planning attorney. However, these attorneys are hard to find. You might have to hire and train a recent law school graduate.

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

Jan 10, 2018

Increasing Case Volume in a Personal Injury Law Firm

Question: 

I am a partner in a two partner personal injury firm in Tampa, Florida. We do not have any associate attorneys. Our firm only handles personal injury work. We have been in practice for thirty-five years and have been very successful over the years. However, the last few years have been terrible. Adjusters are not settling cases and the days of three times specials is over. Our case volume is down, the quality of cases that we have in our inventory is far below what we had in previous years, and our revenues are down substantially. Cash flow is awful. We have had to live off of our credit line for the past year. Our main source of business over the years has been referrals from past clients and other lawyers, yellow pages, and our very basic website. We would appreciate any thoughts and suggestions that you may have.

Response: 

This is a common complaint that I have hearing from personal injury firms across the country. In some states tort reform is having an impact and insurance companies are getting harder to deal with. Extensive advertising by other law firms is having a major impact. Larger personal injury firms that are doing extensive television and other forms of advertising are doing well. Here are a few thoughts:

  1. Your ages may be having an impact. I would guess that the two of you are at least in your sixties or later. Your market may be gradually retiring each of you based on your age. You may want to consider your succession strategy and finding a way to bring is some younger attorneys. When I chose my last doctor and dentist I asked the receptionist at their offices how old they were. Attorneys doing insurance defense work often find that their insurance company clients often begin sending them less cases (or none) as they get into their 70’s and 80’s.
  2. TV advertising works for personal injury but requires a major investment and commitment. In order to be successful with a TV campaign you would need to commit to one year. I doubt that you are in a position to do this.
  3. Work your referral sources – particularly attorneys. Many attorneys as they get older stop or reduce their networking and as a result are not getting the attorney referrals that they used to receive. In fact, many of your attorney referral sources may have retired themselves.
  4. Traditional marketing using “push” or outbound techniques such as TV, radio, and print advertising are giving way to “pull” techniques as people are using the internet to shop and gather information. Pull techniques involve internet search engines, blogs, and social media such as Twitter, Facebook, LinkedIn, YouTube, and others. Your website should be your marketing hub and it should be more than a basic webpage. It should be loaded with content and information and designed in a way that search engines place you well in their rankings – especially Google. Suggest that you consider the following:
    1. Create lots of content people will want to consume and place on your website.
    2. Add a blog to your website and post new content at least weekly.
    3. Focus on where the action is – Google, blogs, social media sites.
    4. Setup Facebook and LinkedIn accounts for the firm and the individual attorneys and post content to Facebook weekly.
  5. Have your website reviewed as to how well it ranks as far as searches in Google. Consider having your site optimized for Google if necessary.
  6. Personal injury firms, due to the internet advertising by personal injury firms, have a hard time standing out in Google search ranking without paid ads. Consider a pay-per-click add on Google if you are not ranking well in Google.
  7. Client leads coming in through TV and the Internet require quick response. The biggest mistake that many law firms make is making investments in TV advertising or pay-per-click internet advertising and then not responding to inquiries after hours or weekends. Have someone monitoring internet inquiries and getting in touch with prospective clients after hours and weekends.
  8. Measure and track which marketing sources your leads and cases are coming from.

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

 

 

Oct 04, 2017

Personal Injury Law Firm Strategy & Strategic Planning

Question: 

I am a partner in a four attorney personal injury plaintiff in downstate Illinois. Three of us are partners and we have one associate attorney. We handle run of the mill slip and fall, vehicle and premises accidents, and products liability cases as well as workers’ compensation cases. We have a very aggressive advertising and marketing program. We are having issues with reduced case flow and dwindling and diminishing profits and earnings. For the past year the partners have been living off our credit line. We believe that we need to be thinking about doing something different and are not sure as to what that should be. However, we have agreed to start doing some long term planning. We would appreciate your thoughts.

Response: 

I believe that the very process of developing a strategic plan would be very helpful, beneficial, and enlightening. Strategic planning does not need to be the involved and complicated process that sometimes it becomes. It a nutshell it is nothing more than a series of logical steps. The process is often more important than the written plan. Most workable strategic plans are put in writing at the end of the process, and then often in summary or outline form. Generally, the steps include:

  1. Develop the mission statement
  2. Develop the vision statement
  3. Develop the long range goals statement
  4. Develop specific objectives
  5. Gather information – internal and external – identify the firm’s strengths and weaknesses
  6. Identify key issues
  7. Formulate strategies
  8. Develop detailed action plans
  9. Write-up the plan
  10. Implement the plan and monitor

Your first step will be the mission statement – you should take a hard look at who are you as a firm and who are you serving as clients? Many of our personal injury law firm clients across the country are facing similar problems that you are and they have been forced to take a hard look at their their practice and geographic area segments. Some firm’s have tried to balance the cash flow ups and downs of contingency fee work by adding time billing practice areas that provide consistent cash flow such as employment, family law, criminal, and bankruptcy. Other firms are extending their geographical reach through additional offices and some are getting involved in mass-tort cases.

I think this is the most important step if you don’t do anything else. You may have to consider expanding and diversifying your practice.

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

Feb 28, 2017

Personal Injury Law Firm TV Advertising – Prerequisites to Launching a Program

Question: 

I am the owner of a plaintiff personal injury law firm in Arlington, Texas. I have three associate attorneys, six non-lawyer case managers, and three other staff members. Our marketing consists of our yellow pages program and our website. I am considering TV advertising and I would appreciate your thoughts concerning venturing into this arena.

Response: 

This is a big step. TV advertising does work for personal injury plaintiff firms and can take your firm to the next level if you can afford it and are willing to stay the course. A few years ago the managing partner of a a very successful personal injury plaintiff firm stated to me “if I could only afford to do one marketing thing it would be TV advertising.” You can’t dabble with advertising – you must invest for the long haul and have the proper infrastructure in place to process new client inquiries, book appointments, and handle new client intake appointments. If this foundation is not laid you should not invest in a TV advertising program. Here are a few thoughts and observations:

  1. Establish your advertising goals and objectives.
  2. Retain a top notch media consulting firm with law firm expertise.
  3. Establish an advertising budget for at least six months – one year is better.
  4. Secure adequate capital to finance your advertising budget.
  5. Be prepared for borrow money.
  6. Develop your operational infrastructure. This consist of everything from your advertising tracking database, case management system, website, call center/telephone system, call scripts, documented intake process and procedures, dedicated intake call operators, designated people to take in new cases, and case evaluation protocols.
  7. Have a process in place to handle and respond to new case calls after hours and on weekends including attorneys on call able to meet with prospective clients during these times.

We have all seen personal injury plaintiff firms that dabble in TV advertising – on TV today and off-air tomorrow. They spent a lot of money and were hoping for immediate gratification. When after running ads for a month or two and they have few or no new cases they concluded that TV advertising does not work. The truth is they were not prepared to stay in the game long enough. This does not work.

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

 

Jan 24, 2017

Law Firm Practice Sale – Selling a Personal Injury Plaintiff Practice

Question:

I am the owner of a personal injury plaintiff practice in downtown Chicago. I am the only attorney in the firm. I have two legal assistants. I am sixty-six years old and am starting to think about retirement and how to exit my practice. I would like to sell the practice to another law firm or practitioner. Does my practice have any value and can it even be sold?

Response:

After you pull out all the cash and pay down any liabilities the general the value of your practice will be the value of your fixed assets, goodwill (if any), and the value of your contingency fee cases in process. The largest asset of value is your cases in process and often that value cannot be determined until the cases are concluded. If you are an advertising type firm and have   built a sustainable brand beyond your individual reputation there could be a goodwill value. However, since you are a solo I doubt that there is a goodwill value beyond the value of your cases – it all depends whether you end up farming out your cases to another firm or whether you can find someone to come in and take over your practice.

If you have to sell your practice to another firm they will probably not have a need for your fixed assets. You will have to sell or otherwise dispose of them. More than likely you will not be able to come to an agreement with the other firm on a specific sale price for the cases in process. Therefore, you will have to agree on a fee split formula where you are paid as the cases are concluded. This formula will need to consider a percentage of completion factor based on how much work was done while a case was in your possession and while in the possession of the new firm.

Your best bet would be to find an attorney that would come in and take over your practice. He or she would have a need for the fixed assets, your employees, and if you transition properly could benefit from the goodwill that you have generated. In this situation you could receive payment for fixed assets, goodwill, and cases in process. This would also provide continued employment for your employees.

Click here for our blog on succession

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

Oct 11, 2016

Law Firm Management – Valuing a Personal Injury Practice

Question:

I am the firm administrator for a small personal injury five attorney practice in Des Moines, Iowa. The firm's owner is approaching retirement and is planning on approaching other law firms regarding sale of the practice or merger. He has asked me for reports in order that we can value the practice. QuickBooks is the only software that we use. What reports should I use to establish a value for the practice?

Response:

You will want to start by generating a profit and loss statement and a balance sheet from your software. I would run five years of profit and loss statements and the most recent balance sheet. The profit and loss statements will help you illustrate the revenue, expenses, and profit picture for the past five years. The balance sheet will provide a current financial snapshot of the firm's cash-based financial position. However, since most law firms keep their books on a cash-based basis the largest asset – contingency fee cases in progress – is not reflected on the balance sheet. Neither is any value for practice goodwill. Since you do not have a case management system you will have to setup a spreadsheet with columns for the name of the case, date opened, estimated settlement, estimated fee, client costs/advances, and projected date of receipt of fee. You will have to have the attorneys managing the cases help you with the estimates. These will be the key reports you will need initially.

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

Feb 16, 2016

Law Firm Acquisition – Acquiring a Personal Injury Plaintiff Practice

Question:

I am a partner in a two owner personal injury plaintiff firm in Los Angeles. We have four other attorneys. We do traditional personal injury work with a high volume of medical practice and products liability. One Hundred percent of our fees are contingency fees. My partner has expressed an interest in retiring and selling his interest to me. How do I go about determining a fair price to offer him for his shares? I would appreciate your thoughts.

Response:

It would be nice if the two of you could agree on a fair price. However, often it is not possible in a contingency fee practice. Often the primary value of a practice such as yours is the value of the pending cases on the books and those values are unknown until the cases are concluded in the future. It all depends on the extent of fluctuations in the annual revenue stream. I just completed two assignments where a dollar amount was agreed to based upon a gross revenue multiple. However, in both cases the revenue streams were fairly consistent over a five-year period. When there are extreme swings in revenue over a three to five year period there often is no choice but to base the acquisition price upon a payment arrangement as cases are completed. A percentage of completion ratio (how long the case was opened before the acquisition and when the case is concluded) or other method will have to be considered as well as overhead paid.

While cases in progress may be the major asset you also should expect to purchase your partner's cash-based capital account or shares of stock as well.

There are a variety of other approaches. I have never seen the same approach used twice.

Click here for our blog on succession

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

 

 

Jul 15, 2014

Law Firm Advertising – Should Our PI Firm Consider TV Advertising

Question:

Our firm is a three attorney personal injury plaintiff located in Los Angeles. We started the firm fifteen years ago. Two of the three attorneys are equity owners. Our firm is a high volume/low case value practice – we currently have 500 open cases. A high percentage of our cases are settled without a law suit ever being filed. We are an advertising driven practice. While over the years we have effectively used a variety of advertising vehicles we have never ventured into TV advertising. We are considering venturing into TV and would appreciate your thoughts regarding TV advertising.

Response:

I have personal injury plaintiff law firm clients that have had great success with TV advertising and other clients that have had poor results. High case volume/low case value firms such as yours have had the greatest success. In order to be successful you must have the budget to be able to stay the course and the infrastructure to support and manage the advertising effort and to support the work and cases. The worst thing you can "dabble" with TV advertising. Here are a few thoughts:

  1. Be prepared to invest in TV advertising for a least six months – or don't do it.
  2. TV advertising can be scary from two vantage points. If it is not successful you will have invested a great deal of money without receiving an adequate return on your investment. I have client firms spending one to two million dollars a year on TV advertising. You could easily spend $100,000 to $200,000 before you find out that the investment is not paying off. If your campaign is successful you may not be prepared to handle the volume of work that could result – either in the form of infrastructure or working capital. (Cash Flow)
  3. Be prepared to respond to client inquiries 24/7.
  4. Prepare your infrastructure scalability plan. Do you have the facilities, communications system capacity, staff and other resources to handle an immediate dramatic increase in case volume if it comes? If not, how quickly can you scale up? Do you have access to the capital to finance such expansion?
  5. Measure and monitor ROI from your program and fine tune adjust your program.
  6. Use a placement agency that has experience with personal injury law firms. Solicit law firm references from other markets and call each one and discuss their results in-depth.

Like any other business venture – if you do the proper due diligence and do your homework – TV advertising can be a great investment – if not it can be a nightmare. I have seen it go both ways.

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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.

Click here for our blog on succession

Click here for out articles on various management topics

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

 

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