Olmstead & Associates Law Practice Management Asked and Answered Blog

Law Firm Buyout Arrangements in a Contingency Fee Practice

Question:

I am a partner in a four partner law firm in Cleveland, Ohio. Our firm does class action contingency fee cases and all of our fees are contingency fee. We do keep time of our time expended on these cases even though we don't bill by time. One of our partners has announced that he will be withdrawing from the firm. We each have 25% ownership interests. How do we value the firm and determine his buy-out. Our partnership agreement does not address this nor do we have any precedent. Do you have any suggestions?

Response:

The real value component is the value of your unsettled cases and it will be difficult - if not impossible - to determine the value of these cases until they are concluded in the future. Some firms payout the capital account and the value of the hard assets upon departure or over a relatively short payout period and they have a future payout formula for the cases in progress as the cases are concluded.

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

 

Problem Law Partners

Question:

Our firm has been discussing how to handle one of our partners. We are are 12 attorney firm in Houston. One of our partners who is one of our highest fee producers and best business getter's simply won't follow firm policy or play by the rules. He won't turn in time-sheets in a timely manner, he is argumentative with others in the office, and not a team player. He is "me first" while the rest of the partners in the firm are mostly "firm first". We are trying to build a team based practice and this one partner is holding up our progress. Do you have any thoughts or suggestions on how we should handle this?

Response:

Dealing with "maverick partners" is always a challenge. Of course they seem to always be the heavy hitters and this makes it that much more difficult as often there are major clients and large sums of money at stake - at least in the short term. This can also be major issues and large sums of money at stake in the long term if you don't deal with the maverick partner as well. In addition you won't be able to achieve the vision and goals the firm is trying to achieve.

• For starters - if you have not already - create a well understood set of firm core values or code of conduct that governs behavior in the firm. For example, in most firms people are expected to work hard, be honest, and treat each other with respect.
• Partners as well as all other attorneys and staff should behave in a collaborative, cooperative, and team-orientated manner.
• Partners as well as all other attorneys and staff should comply with all firm policies and procedures.
• Enforce firm policies for all - no exceptions.
• Consider coaching, counseling or other forms of outside assistance if they could prove helpful.
• Lay down the law - confront and deal with the problem partner sooner than later - even if it means he or her leaving the firm.

Many firms have had to deal with the problem of a maverick "huge business generator" who just wouldn’t cooperate with firm policies and caused conflict and tension in the firm.  It is an unplesant task - but in the end - worth the investment. In the end he or she either conforms or leaves the firm. We have been advised by our clients that even though they may have struggled in the short term as the result of the loss of a major fee producer - in the long run the firm was better off and should have done it earlier.

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

 

Partner Compensation - Two Attorney Start-up Firm

Question:

I am a solo practitioner in Chicago. I've been offered by another solo to join him as a partner, and was wondering if you could suggest any articles or books I could look at to think about how to structure the partnership.  We bill about the same number of hours, but his rate is 50% higher than mine (300 v 200) and he has 20 years on me in age and experience.

Response:

I am a believer in true partnerships as they seem to work best and the compensation system that seems to work the best is where the partners share and share alike the profits based upon their ownership percentage. Initially a percentage is agreed upon based upon the revenue/profit
history and experience that each brings to the firm. If the level of contribution changes over time you talk about it and the percentages are adjusted. You may want to start by looking at your fees and profits over the last five years and compare them to his and use this as a starting point. Consideration should also be given to his experience. Hours don t matter as much as dollars. Then determine that ratio. Often in an arrangement such as this, depending on the ratio, it might be a 60%/40% split. If this is what you agree to then establish your capital accounts in accordance with that ratio (initial firm investment in the form of cash or other assets) and then split profits according to this split. Over the years adjust as needed. If you have a healthy partnership you will be comfortable discussing this subject.

Other approach if you want to be lone rangers would be a formula eat-what-you kill approach.

Here are my blogs on this topics generally:

http://blog.olmsteadassoc.com/olmstead_associates_law_p/compensation/ 

Here are a couple specific blogs:

 http://blog.olmsteadassoc.com/olmstead_associates_law_p/2009/05/index.html  

http://blog.olmsteadassoc.com/olmstead_associates_law_p/2010/07/law-firm-eat-what-you-kill-partner-compensation-systems.html

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

 

Law Firm Partner Conflict: Ideas for Resolution

Question:

We are based in Kansas City, Missouri. We have two partners, two associates, 5 staff members, and have been together for 6 years. The firm is the result of a merger of each of the two partner's practices a few years ago. The integration has not gone well. We are quite polarized. Each partner operates as a separate island, does his own thing without regard for the other partner, and staff follow suit. Each partner has very different practice values, approaches to practice, and goals. Conflict has escalated to the point when productivity and profitability has suffered and everyone is miserable. Would you share your thoughts?

Response:

Conflict is not always bad - sometimes conflict can actually be productive if it can be effectively managed. Destructive conflict on the other hand can destroy a small law firm. I often try to look at conflict from both a micro and macro point of view.

From a micro perspective I would look at the individuals themselves. Are their personalities compatible? Do each of the partners have the same vision for the firm and share similar core values, propensity for risk taking, need for control and tolerance for ambiguity?

From a macro perspective I would look at some of the organization and structural characteristics of the firm. This might include internal communications systems, interdependence of work tasks, clarity of job roles and responsibilities in the firm, decision-making, resource sharing, etc. Often people are stepping over each other and if we change some of the structural elements we can resolve the source of the conflict.

It is easier to fix and resolve macro level conflict than micro - individual - personality caused conflict. Your situation sounds like micro - individual - personality caused conflict and general incompatibility. Unless your firm wants to operate as a "long ranger" firm operating essentially as independent practices you may want think long and hard if it makes sense to continue the partnership.

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

Law Firm Owner Considering Bringing in a Partner

Question:

I am the sole owner of a law firm in Tucson, Arizona. I have 7 associates working for the firm. I have one very senior level associate that I want to consider for partnership. I want to do this to keep him interested (he has been approached by other firms) and I envision him being a cornerstone of my succession plan - 10 years out. How should I start the process with him?

Response:

It sounds like you have found the person - or whom you believe is the right person for partnership. However, just because he has been a good associate does not mean that he will be a good partner - the relationship will be different. But at least he is somewhat of a known quantity since you know him and have worked with him for several years.

Here are a few ideas of where you might start:

1. Outline you goals and expectations for the relationship.
2. Meet with your associate and identify his goals and expectations for the relationship.
3. Determine how much control over the practice and decision-making are you willing to give up? Share?
4. Determine how much and for how long you are willing to make less?
5. Determine if the associate will be expected to bring in business? When/Timeline?
6. Think about the firm you want to build - firm-first or lone ranger (team based or individual practices)?
7. Decide on firm name - will it change? Should it? Impact on image, clients, etc.
8. Decision as to capital contribution or buy-in? Yes or No? How much? Timeline for payment?
9. Ownership percentages
10. Voting
11. Compensation
12. Withdrawal arrangements

Once you can come to terms with some of the above issues craft a suitable partnership or operating agreement that you can both live with.

Good luck!

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

Developing a Law Firm Associate Career Progression/Partnership Admission Program

Question:

Our firm is a 14 lawyer firm in Phoenix, Arizona. We are a new firm (formed 8 years ago) and we have 5 equity partners and 9 associates. Several of the associates have been with us since day one (8 years) and are asking us about partnership. We want to be fair and keep our top talent. What are your thoughts on this topic?

Response:

A common complaint that we hear from our interviews of associates is lack of feedback on short term performance and what is takes to "make partner" and how they are progressing toward eventual partnership. During a recent interview an associate told me - I would like to know:

1. What does it take to become a partner - consideration criteria? What do I have to do?
2. What is the timeline for consideration?
3. How am I doing - am I partnership material?
4. What does partnership mean in this firm?
5. What are the mechanics of admission? (Is there a buy-in)

I suggest that you and your partners consider developing what I call a Law Firm Associate Career Progression/Partnership Program and put it in writing. Here is an approach you might take:

1. Determine if you want more partners? How many - evaluate the appropriate ratio.
2. Consider non-equity partners as a first step and determine what that means.
3. Establish a minimum number of years for consideration - i.e. seven years.
4. Determine competencies and expectation for associate development and document.
5. Develop an associate performance evaluation form and conduct formal annual evaluations.
6. Develop partner admission criteria (associate to non-equity and non-equity to equity partner) and document.
7. Write-up an overall program document and include as attachments the competencies document, the performance evaluation form, and the admission criteria document.
8. Present the program to associates in a live meeting format to launch the program.

Regarding equity partnership - make the criteria tough - and require a buy-in or capital contribution. Business development and a client following should be required by most firms for the equity tier. 

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

 

Law Firm Governance and Structure - Impact Upon Competitiveness

Question:

Our firm is in Nashville TN and we currently have 12 attorneys - 7 partners and 5 associates. We are an eat-what-you kill law firm. In essence we operate as separate profit centers and operate in our own silos. We all have to come together and agree on any and all management decisions. Our management team consists of "all partners". We do not have a office administrator, office manager or even a managing partner. We all have the freedom to do as we please and there is very little accountability to each other. Recently we have been discussing the pros and cons of why we might want to change our governance and overall structure. I would be interested in your thoughts.

Response:

I believe that law firms that are "firm first" team based firms and organized along these lines have (or will have) a competitive advantage with respect to clients, legal talent, and merger partners. As law firms grow the "lone ranger" confederation approach no longer works. Decision-making is too time consuming, partner time is wasted, and opportunities are missed. Synergy (where one plus one equals three or four) is not achieved and the firm achieves little more than any one of the attorneys could achieve in solo practice.

Recently I was working with a similar size firm in Chicago that was looking for a merger partner. When the other firm learned that my client was a "lone ranger" firm they discontinued discussions. Larger firms that are "team-based" are not interested in merging with "long ranger" firms - they tend to cherry pick key talent from these firms rather than pursuing mergers or combinations.

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

 

Hiring Entrepreneurial Associates That Can Eventually Become Equity Owners or Partners in a Law Firm

Question:

We are a Toledo, Ohio law firm with ten attorneys. We have four partners - all of which are in their 60s and approaching retirement. While our six associates are great lawyers - none bring in business nor do any of them seem to really be interested in partnership. It seems that we hired a bunch of folks that just wanted jobs and have no interest in owning a law firm. I would be interested in your ideas and thoughts.

Response:

Years ago it seemed that all the associates working in law firms wanted to eventually become a partner in the law firm. This has changed as a result of the new mix of women and men graduating from law schools and entering the legal profession, changing attitudes toward work life balance, other opportunities outside law firms, and other variables. While partnership/ownership is still important to many - don't assume that all the associates that you hire will even want to be equity partners - especially if it means a hefty capital contribution and signing personal guarantees for a large amount of firm debt.

A question that I would ask - have you really discussed with your associates their interests in equity ownership? As a group? Recently an associate, whom the firm had written off, advised me that while he was not interested now due to his present situation in life, he would be in maybe five years - especially if others also were brought in as well - in other words he did not want to have the responsibility alone and be an equity owner by himself.

I suggest that you talk with your people and see where they really stand. Help them to begin developing client development skills. Depending on you and the other partner's retirement timeline - you may have to consider other options such as laterals or merging with another firm.

A key suggestion is to look for entrepreneurial associates when you hire. The desire for ownership of a business if often in a person's blood. Don't start the interview with a discussion from law school until the present. Dig deeper into hobbies, family, etc. that will provide clues as to whether you may be hiring someone that just wants a law job or someone that eventually wants to own or be a partner in a law firm.

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John W. Olmstead, MBA, Ph.D, CMC 

 

Admitting New Law Firm Partners

Question:

Our law firm is located in San Antonio, Texas. We have a total of eighteen attorneys which includes me and two other equity owners that founded the firm and contributed capital, three equity partners that were made partner that did not contribute any capital, two non-equity partners, and ten associates. The original three partners control the firm and make all of the decisions with little involvement or input from the others. They are not provided with financial statements or reports. The original three partners bring in virtually all of the business. We are faced with some hard decisions concerning partnership admission - non-equity to equity, associates to non equity, etc. Our compensation cost for attorneys is eating away at our earnings for attorneys that are worker bees and don't bring in any business. Your thoughts?

Response:

You may want to ask yourselves whether you want employees or partners. It sounds like the other three equity partners are not part of the inner circle and are not really functioning as part of the partnership. What is the criteria for becoming an equity partner? Is client development part of that criteria? Should they contribute capital? If they are not adding value to the firm - growth - you are diluting the earnings pool and reducing the size of the pie for yourselves. Personally, I think in a firm your size criteria for becoming an equity partner should, among other things, include client development and a capital contribution. They should have some skin in the game, contribute capital, and signup for their share of the liabilities. I also believe they should then be included in the inner circle.

I would start here by addressing these issues with the three equity partners. They I would develop non-equity and associate career progression plans - associate to non-equity partner and non-equity partner to equity partner - outlining timeline for consideration, the consideration process, the criteria, and the respective and expectations for each. (What it means)

Make the criteria tough and resist the temptation to make everyone a partner.

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

Structuring and Running Your Law Firm Like a Business

Question:

Our firm is a 34 lawyer litigation boutique based in San Antonio, Texas. We have 20 partners and 14 associates. I serve as managing partner at the will of the partnership and spend 35% of my time on firm management matters and the remainder of my time practicing law. A legal administrator and accounting manager assist me with managing the firm. While I have the general support of the partnership, maybe because no one else wants the job, I serve more as a filter and still find that I have to run most of the firm's management decisions before the full partnership. Often I feel that my staff and I are second guessed, management decisions take too long to make and are diluted and watered down, and the firm has missed out on opportunities due to our structure or lack of structure. Other law firms that we have competed against for years have passed us by and have grown while we have stagnated. Do you have any suggestions concerning our approach to managing the firm?

Response:

You firms has reached a size where more structure is usually required. The democratic system of all partners being involved in virtually every management decision might have worked when you were five or six attorneys but has now outgrown this structure. Think about how some of your business clients are organized and structured. Ask around and talk with other law firms and accounting firms your size. I think that you will find that they have put in place more structure to support their business models.

I suggest that you:

1. Put in place a structure consisting of the full partnership that weighs in on matters pertaining to firm policy/strategic direction, size of firm, partner admission/termination, merger, dissolution, etc.
2. Appoint a three to five member executive committee that serves as a board of directors that is charged with planning the firm's future and submitting plans to the partnership, budget approval, general oversight of the CEO or managing partner.
3. CEO or managing partner that implements firm plans, oversees the budget, oversees practice group chairs, and supervises the firm administrator. CEO or managing partner reports to the board of directors.
4. Firm adminstrator and practice group chairs.
5. Put in writing a management or governance plan. Start by adopting a list of decisions
   which require a vote of the partners. Charters and job descriptions should be established
   to clarify roles, authority and expectations for the partners, board of directors or executive committee, managing partner(s), the firm administrator, and practice groups heads. Mechanisms should be put in place to insure conformity and accountability.
6. The partners should delegate full authority for decision making to the board of directors, except for those decisions specifically reserved to the partners, the board should delegate
   appropriate authority to the CEO/Managing Partner and he/she should delegate appropriate authority to the firm administrator.
7. Partnership, board of director, staff, and practice group meetings should be chaired by the appropriate officials. Agendas should be prepared in advance and permanent minutes should be
   typed up and maintained. Unfinished business should be reviewed at each meeting. Follow-up and implementation mechanisms should be developed.

You should start with general partnership discussion on how the members would like to work together and the kind of firm they want going forward. Are the partners willing to be managed and willing to be accountable to each other and to what extent? Then go from there.

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