Best Practice Tips

Asked and Answered

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

Q. I came across your firm while researching law partnerships. The short story is as follows: I am a sole practitioner and have been practicing for over 35 years. I have a high volume practice and employ 7-8 people. Business is good and actually on the rise. I have a great office manager and outstanding loyal staff. The practice is on semi-autopilot for me. I have a young associate lawyer in my office that shares space and is learning my practice but actually seems to be making his own way in a different practice area. He wants to buy into my practice.

Asked and Answered

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

Q. I am with a 17-attorney general business firm located in Boston and chair of the firm's three-member marketing committee. At this year's planning retreat we discussed the concept of niche marketing and whether we should focus on a specific niche. Your thoughts would be appreciated.

Asked and Answered

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

Q. John, where do you begin to get a value on a family law practice? It seems that one times gross revenue is unfair since it is usually one time business. I saw you speak at an ISBA event and this question was not addressed.

A. Regarding your question - it sort of depends on whether you are buying or selling and where you want to start. In general, I agree with you that a multiple of one times gross for a family law practice is probably high. It depends on whether the practice has built up more of a firm brand vs. an individual brand. In other words institutionalized the practice. Also on where and how the firm gets business - advertising, referral sources, etc. A firm that has practice (institutional) goodwill might very well start at a multiple of one whereas a practice where the goodwill is personal goodwill the multiple might be .75 or less - in some cases even zero. I know of a few family law practices in the Chicago area that have been sold for .33 of gross revenue. 

Often the initial asking price has little to do with regard to where you end up. Often, due to the concern that the clients and business might not materialize for the new buyer many firms are sold on various forms of an "earn-out" or a small payment at closing with the remainder paid and based on a percentage of revenues collected over a period of time - 3 to 5 years.

I have seen PI and other one shot matter firms sell for one times gross revenues but this is a best case scenario. CPA firms fare much better.

Asked and Answered

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

Q. I am the managing partner of a nine-attorney firm in Cincinnati. We have four equity partners and five associates. Partners are compensated on the basis of their ownership shares which are currently 25% each. In the past the system worked well - but now we are having problems. The two senior partners are working and contributing less and are taking out half of the compensation which is causing dissatisfaction and division within the firm. We have been discussing alternative approaches. Should we consider a system total focused on individual partner performance and production - an eat-what-you kill if you will?

A. I agree that personal production and performance should have a relationship and a tie to compensation. However, a move to a total eat-what-you-kill system might be a drastic first-step move. Eat-what-you-kill approaches can often destroy teamwork in firms that desire to be team-based firms. For firms that want to be lone ranger firms eat-what-you-kill is fine.