Question:
I am the chair of the finance committee for our firm – 17 attorney firm in Chicago. We have 6 equity partners in the firm. We are in the process of admitting a new equity partner and are reviewing our capital accounts and trying to determine our capital needs. I would appreciate your ideas and thoughts.
Response:
There are two categories of capital – short-term or working capital which is used to fund daily operations and long term capital which is used to pay for capital assets such as furniture and fixtures, computers and other office equipment. I guess I am old school but I believe that short term working capital should be funded as much as possible with partner capital and long term capital funded with bank borrowing or leases. I have more and more clients that are funding working capital with partner capital and have no bank debt at all. I have other clients that finance all working capital with their bank line of credit – these firms could find themselves in dire straits if bank credit should tighten in the future.
The amount of working capital needed by a firm depends upon your practice, billing and collection cycles, whether you do contingency fee work, and whether the firm is growing and adding attorneys and staff. As a rule of thumb I suggest that a firm have three times one month's expenses excluding draws in working capital. This would need to be increased if the firm has lengthy billing and collection cycles, does contingency fee work, and is in a growth mode.
Partner capital contributions are usually made proportionately based on partner earnings or ownership percentages.
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John W. Olmstead, MBA, Ph.D, CMC
Question:
I am the owner and founder of a 7 attorney personal injury plaintiff firm in the southwest. Over the years we have become the "go to" PI firm in the area. We have an extensive advertising program including TV, radio, and other mediums. I bring in all the business and the other six associate attorneys are primarily worker bees. I have discouraged business development by the associates and now as I approach my retirement years I am realizing that this may have been a mistake and it make take more than a "firm brand" for the firm to transition to the next generation. I would appreciate your thoughts.
Response:
While I believe that a solid firm brand is important and can provide practice value when you transition and retire from the practice of law the failure of your attorneys to develop their own brands or identities will make the transition more difficult and could even result in your firm becoming a "one generation law firm". Clients of law firms tell us they hire lawyers – not law firms. Even through you advertise – your reputation and rainmaking skills have had a lot to do with your success. Your associates must develop their reputations and hone their rainmaking skills as well and you need to help them do this. Here are a few ideas:
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John W. Olmstead, MBA, Ph.D, CMC
Three weeks ago I was asked by the managing partner of a 16 attorney insurance defense firm about staffing and growth models for an insurance defense firm and I listed the following models and discussed the first model – grow your own associate staffing. Over the past two weeks in other posts I have discussed models 2-5.
Attorney staffing/growth models include:
This week I will outline the pros and cons for number 6 and 7 – Mergers and Branching.
Mergers (or small firm acquisitions)
PROS
CONS
Branching
The appropriate strategy is often a mix or combination of the above approaches. Need to drill down into the financials and review past experience concerning breakeven point for profitability of your attorneys, costs/overhead, fee collections, time, and profit margin.
Often the WHO dictates the WHAT (specific strategy)
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John W. Olmstead, MBA, Ph.D, CMC
Two weeks ago I was asked by the managing partner of a 16 attorney insurance defense firm about staffing and growth models for an insurance defense firm and I listed the following models and discussed the first model – grow your own associate staffing.
Attorney staffing/growth models include:
This week I will outline the pros and cons for number 4 and 5 – Lateral Partners (Equity or Non-Equity) and Of Counsel.
Lateral Partners (Equity or Non-Equity
PROS
CONS
Of Counsel – Various Approaches and Purposes
Other models to be discussed in upcoming posts.
Click here for our article on hiring associate attorneys
Click here for our law firm management articles
John W. Olmstead, MBA, Ph.D, CMC
Last week I was asked by the managing partner of a 16 attorney insurance defense firm about staffing and growth models for an insurance defense firm and I listed the following models and discussed the first model – grow your own associate staffing.
Attorney staffing/growth models include:
This week I will outline the pros and cons for number 2 and 3 – Lateral Associate Staffing and Contract – Staff Associate Staffing
Lateral Associate Staffing
PROS
CONS
Contract – Staff Associate Staffing
PROS
CONS
Other models to be discussed in upcoming posts.
Click here for our article on hiring associate attorneys
Click here for our law firm management articles
John W. Olmstead, MBA, Ph.D, CMC