Best Practice Tips: Acquiring a Personal Injury Practice

Asked and Answered

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

Q. I am a non-equity partner in a four-attorney personal injury plaintiff law firm in Newport Beach, California consisting of the firm owner, two associates, and myself. The owner is planning on retiring and has provided me with a proposal to sell me his practice. How do I determine whether this is an opportunity or a potential curse? Your advice would be appreciated.

A. I would start by asking yourself if you have the desire, inclination, and ability to manage a law firm as a business. Do you have the self-discipline required? Do you have the needed capital or access to appropriate level of credit line? A personal injury firm will have to fund client advances as well as operations until cases are brought to conclusion and this will require capital or a credit line. I would check with the firm’s bank and other banks to see if you will be able to obtain the same credit line that the firm has enjoyed in the past.

Ask the owner for the following documents:

1. Income tax returns for the past five years.
2. Profit and loss statements for the past five years.
3. Balance sheets for the past five years.
4. Headcount expressed as full-time equivalents for the past five years by year for attorneys, paralegals, legal assistants, staff. 
5. Firm lease if the firm leases office space.
6. A spreadsheet listing of all open cases providing the name of the case, the date opened, type of case, expected value of the case, expected referral fees due others, expected fee due firm, client advances invested in the case, and date the case is expected to conclude and fees will be received.

I would then prepare a firm financial profile spreadsheet spreading the revenue, total expenses, net income, owner earnings, and balance sheet summary over the five-year period. Using the headcount data calculate fee per lawyer, expense per lawyer, and net income per lawyer and compare to general benchmarks. Hopefully fee revenue is in neighborhood of $400,000 or more per lawyer. Examine what the owner’s earnings have been over the five-year period as well as the assets and liabilities on the balance sheet. Keep in mind that accounts payable and the firm lease are not usually reflected on a case-basis balance sheet. Consider the information that you have gathered and ask yourself the following questions:

1. Has the firm been successful and well managed?
2. Are revenues in line with what a four-attorney personal injury firm should be generating?
3.  Is the firm’s overhead in line?
4. How much additional income can I expect over the next five years?
5. What is my “payback” period – in other words if I pay X for the practice how many years of extra income as an owner will it take me to pay for the practice?
6. Considering what I have to pay for the practice, could I do better by starting my own practice?
7. Where are the firm’s cases coming from and what is the quality of the existing cases in process?
8. What level of case flow can I realistically expect when the owner is no longer here?
9. Using the open case listing, what do the future cash flow projections look like?
10. When the owner leaves will you have to hire another attorney? What level?
11. How much debt does the firm have?
12. What is the remaining lease obligation – term and amount?

This review will give you a good idea of whether this is a deal that makes sense for you.

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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 and author of The Lawyers Guide to Succession Planning published by the ABA. 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.