Law Practice Management Asked and Answered Blog

January 2016

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

Jan 20, 2016

Law Firm Partner Compensation – Setting Up an Eat What You Kill System

Question:

I am a solo practitioner in Orlando, Florida with two secretaries and I am planning on merging my practice with another attorney in the same office location. He has three staff members. We have both been on our own for twenty years and have enjoyed our independence. We have decided that we want to setup an eat-what-you kill type of compensation sytem. We would appreciate your thoughts.

Response:

While I am not found of such systems as they lead to separate silos – separate firms within a firm - there are situations where they are appropriate. In some situations, the approach is to simply allocate revenue and use the percentage of fee revenue collected to determine a partners interest in the profit for the year. A determination must be made as to what the firm means by revenue collected for each attorney – working attorney allocated dollars, originated attorney dollars, or responsible attorney dollars, or a weighting of all of these. This only works if each consumes overhead at the same level.

If you are not consuming overhead at the same level some form of cost allocation must be made and included in the mix. Direct overhead items such as bar dues, auto expenses, CLE seminars, etc. could be allocated directly to each partner with each sharing equally in the rest of the indirect overhead. Then a net figure would be calculated to determine each partner's compensation based upon their share of the profit.

If you want to really get detailed your can setup a separate profit center for each of you in your accounting system, allocate all revenue and expenses using an agreed to allocation formula, Click here for sample allocation guidelines and then have the ability of generating a separate profit and loss statement for each of you. If you are using QuickBooks Pro you can setup classes to accomplish this. Your compensation would be the profit from your profit and loss statement. 

Good luck with your merger.

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

Jan 12, 2016

Retaining Key Law Firm Talent Through Remote/Virtual Work Arrangements

Question:

I am the owner of a five attorney firm in Austin, Texas. My accounting/office manager has just advised me that she is resigning her position as a result of her husband's job being relocated to another city on the west coast. She is the best employee that I have had the pleasure of working with and I am not sure where to start regarding finding her replacement. She will be hard to replace – – not just her skills – but her manner, relationship with me and other members in the firm, clients, etc. She is truly a class act. I would appreciate any thoughts that you may have.

Response: 

Maybe you don't have to lose her. Why not consider a remote/virtual arrangement. I know – it sounds crazy but I have several law firm clients that were in similar situations and decided rather that lose a key employee to have them work remotely.

The first situation occurred several years ago in Chicago. The firm was going to lose a key paralegal that had been with the firm for fifteen years when her husband was relocated to Washington state. The firm was already paperless and had an excellent computer system that facilitated remote communication. The missing link was the telephone system and how to handle client calls coming in for the paralegal. The firm installed a VOIP phone system that could seamlessly transfer a call as if the paralegal were down the hall. An office was setup in the paralegal's home in Washington state, procedures and protocols put in place, and other practices such as joining her in via Skype on the weekly firm meetings. The arrangement has worked out exceptionally well for five years.

The second situation occurred six months ago in Chicago. The firms accounting manager's husband was transferred to Florida and she tendered her resignation. The owner asked me to help him find a replacement and I asked what he thought about a remote arrangement. We discussed how the various accounting tasks would be handled and coordinated remotely from running pre-bills, making bank deposits, recording client payments, billing, paying bills vendor bills, etc. and he decided to give it a try. A virtual private network was installed, her home office was outfitted, and procedures, protocols, and checks and balances put in place. The arrangement has worked out well. Four months after the arrangement was implemented the firm merged with another firm and now has two office locations and the accounting manager is effectively handling the billing and accounting for both offices from her Miami Florida remote location. The owner is very happy with the arrangement.

So, before you accept her resignation and begin looking for a replacement – you might want to consider a remote/virtual arrangement.

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

Jan 06, 2016

Law Firm Managment – Do Your Non-Equity Partners and Associates Really Want to be Equity Partners?

Question:

I am a member of our firm's executive committee. We are an 18 attorney firm in Baltimore with four equity partners, five non equity partners, and nine associates. Recently we asked one of our non-equity partners to join the equity ranks and he said no. We were shocked and taken by surprise. Is this a common occurrence? We would like to hear your thoughts.

Response:

This is becoming a more common occurrence and this is causing havoc with growth, succession and transition plans. Many law firms are seeing a growing sense of disillusionment from young lawyers that may not want to be an equity partner. While they want to be lawyers they do not want to take the financial and other business risks nor make the other work commitments such as working nights, weekends, and the 24-hour commitment that has historically been the requirements for equity partners in law firms. Work-life balance has become a priority for more younger lawyers.

I believe that you should through performance reviews, survey questionnaires, and other tools gather information sooner than later to get a feel for where your non-equity partners and associates stand as far as attitudes toward business and financial risk, desirability of being an equity owner, and willingness to invest capital and time in the firm. This will give you a feel for your mix. If it looks like you have too many worker bees – revamp your recruiting strategy – new attorneys or laterals – accordingly and look for attorneys that have an interest and the mindset that it takes to be an equity owner.

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

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