Best Practice: Law firm buyout arrangements in a contingency fee practice

Asked and Answered

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

Q. I am a partner in a four partner law firm in Cleveland, Ohio. Our firm does class action cases and all are on a contingency fee basis. We do keep track of 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 buyout? Our partnership agreement does not address this nor do we have any precedent. Do you have any suggestions?

A. 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,(www.olmsteadassoc.com) is a past chair and member of the ISBA Standing Committee on Law Office Management and Economics. For more information on law office management please direct questions to the ISBA listserver, which John and other committee members review, or view archived copies of The Bottom Line Newsletters. Contact John at jolmstead@olmsteadassoc.com.