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One of the greatest aspects of practicing law is that it offers many alternatives in terms of substantive areas, workplace environment, and lifestyle. For example, an attorney interested in securities law can work in private practice, in-house, or in government. Even in this one practice area, it’s possible to work in a transactional, regulatory, or litigation sub-area. Beyond these options, it is also possible to choose whether to be part of a large firm, company, or agency or part of a smaller, possibly more congenial, group. For many of us with the entrepreneurial spirit and grit, the lure of creating, building, and running our own firm, either with partners or solo, is the most desirable path. If you have chosen such a path or are contemplating it, the opportunity to have more control over your workday, lifestyle, and practice style is a paramount concern. While the challenges associated with this endeavor are great and include having to wear a number of hats, the personal and professional freedoms are well worth the toll. However, an entrepreneurial attorney operating in a small firm environment will pay a price for this autonomy. The art of juggling all the issues associated with running such a practice can easily escape practitioners who, for the most part, have no formal business experience or training. Those who survive and thrive must find a way to overcome the obstacles. While the successful small firm practitioner (SFP) may not excel in performing all these tasks, he or she must be proficient in and attentive to each of them. What does not work is merely focusing on one’s personal or professional preferences and strengths while neglecting other issues that will impact on the bottom line. Let’s look at some of the more essential challenges facing today’s SFP and the mechanisms to deal with them. The SFP’s goal is not merely to realize a greater degree of autonomy for its own sake, but for the opportunity to remain excited about work and to create a better workplace than others would have created for you. MARKETING “Marketing” and “rainmaking” are the terms that lawyers most frequently use to describe — without cringing — “sales.” And most of the advice offered by marketing consultants is really just a watered-down version of something professional salesmen have known and practiced since the dawn of time. If you take a careful look at the methodology of successful rainmakers, what you would likely find is that had they chosen another profession, they would have thrived in generating business there as well. While the small firm practitioner of prior decades may have relied solely on “word of mouth” referrals, due in large part to rapid increases in the costs of living and doing business, the successful SFP knows that just to survive, he or she must be out there daily developing relationships and leads. This constant marketing activity is necessitated, inter alia, by this dramatic rise in overhead. The challenges of marketing the services of a small firm include the awkwardness of: 1) marketing yourself as a service provider; 2) not being able to provide clients with all of the types of legal services that they may require; and 3) limits on the personnel and resources readily available. Successful rainmakers in small firms have, however, learned to turn these limitations into virtues. It should be pointed out that your firm is not a cookie-cutter operation and that: 1) your personal and professional stamp and impression is on every file; 2) what you do, you do well, and that you are able to easily bring in co-counsel appropriate to your clients’ needs, and not just because he or she happens to be your law partner who is relying on the intra-firm referrals; and 3) technology, professional staffing companies, and the advancement of vendors related to the legal profession have served to help level the playing field. Moreover, clients have become more savvy and less intimidated when engaging attorneys. More and more, clients no longer buy into the tiered project staffing and inefficient results that often come from the big firm paradigm. Clients want results in the most efficient manner. Thus, successful rainmakers do not go out there conscious of their limitations and stick their heads in the sand, but rather proudly demonstrate that their smaller, more team-oriented firms can more easily customize their methodology and billing arrangements to each client’s particular needs. Moreover, such practitioners are smart enough to realize that the best way to satisfy clients is by understanding their factual or business situation, working closely with them, and coming to be viewed not merely as the legal functionary, but rather as a trusted adviser who takes a personal stake in the outcome of their case. BILLING Billing, collections, and cash-flow management are another primary concern of the attorney entrepreneur. Successful SFPs have learned that they must evaluate prospective clients, their legal needs, and their ability to pay timely and completely. Oftentimes, this evaluation means rejecting representation of clients or cases that might be interesting and that you would otherwise like to bring into the firm. Put bluntly, cash flow is one of the greatest challenges for any firm administrator. Indeed, SFPs who are not properly capitalized or are not managed effectively often need to resort to taking out firm credit lines to subsidize clients’ untimely payables and ensure the financial viability of the firm. A first step is to take the proper form of retainer as well as, where appropriate, an initial retainer (which to some extent demonstrates the client’s ability to pay for legal services). Then you should sit down with your clients to make sure they understand that favorable results cannot always be achieved. (After all, if one party is to win a litigation or get the better business terms in a transaction, the reciprocal holds true as well.) Clients should know that the legal process typically does not always allow for immediate gratification, and that the legal and related or collateral costs must be factored in when making legal strategy decisions. This upfront and direct approach can help keep clients satisfied, and, even when the results are less than hoped for, maintain the glue in your relationship with them. We all know that accurate hourly billing requires recording time almost on a real-time basis; that bills must go out to clients promptly after the end of the billing cycle; that reminders and constant contact with their accounts payable personnel is necessary to keep funds flowing in the right direction. Many of us unfortunately learn too late that almost every dollar written off in collections comes right out of profits. Consider that employees, landlords, equipment lessors, consultants, vendors, etc., must be timely and fully paid. If a firm operates at a 50 percent profit margin, then a 90 percent realization rate on receivables or a 10 percent “loss” in receivables (which consultants tell us is roughly the industry standard), actually results in a loss of 20 percent of profits! Now consider if your firm (as with many midsize firms) operates with a 33 percent profit ratio. Then, a 10 percent loss in collections equals a 30 percent loss in take-home profits! How many businesses can weather and sustain a recurring 20 percent-to-30 percent loss in take-home profits? In a small firm, this hits your bottom line quickly and with a loud thud! Remember, unlike other businesses that are regularly sold, because law practices are difficult to sell, transport or otherwise “cash out” of, what you leave on the table every month in lost profits is irretrievable. What we should learn from this is that a law practice cannot afford not to be more efficient than other businesses. Financially well-positioned SFPs have working capital funds in reserve, equal to their mean billing-to-collections cycle. Thus, for a firm that bills on an hourly basis, if its clients typically are paid up within 60 days from receipt of the invoice and the firm bills monthly, that firm should have three months of overhead in working capital (the additional month covers the month in which the services are being provided, but not yet billed). As the firm’s overhead increases or decreases or as accounts receivable become questionable, the amount of this reserve should be adjusted. Such firms also constantly re-evaluate the receivables to measure the likelihood of full and timely payment. Another good practice is to look back over the last 12 months and see if prior quarterly estimates have been accurate. If not, make the adjustments immediately. A firm that does not maintain an adequate working capital reserve typically finds itself falling behind in the payment of its accounts payable, and the principals often end up personally guarantying a firm credit line that ultimately can reduce the value of the firm’s equity. Also, a small practice, like any other smaller business, needs to take advantage of its size, efficiency, and ability to avoid the red tape of larger firms and adapt to change more quickly. PERSONNEL Recruiting, managing, and, when necessary and appropriate, discharging staff is a primary concern to any service business. In a law practice, this is even more true. Today’s clients require an attorney who will be accountable for properly handling their situation. That attorney, in turn, must ensure that the entire staff observes a uniform standard of service and dedication. For most firms, the employee expense is the single largest. In the context of a small firm (fewer than 10 employees), this could be more than 50 percent of the firm’s overhead. For SFPs who try to save dollars here, the consequential cost (through loss of clients as well as other employees) can be far greater than the pennies saved. Thus, ensuring the treatment of clients in a manner consistent with your high degree of service and efficiency is paramount. Law firm employees also properly expect to be treated fairly, not only in salaries, but in terms of workplace culture, growth, and attention to their concerns. Firms that understaff either quantitatively or qualitatively pay the price. Good employees tire of carrying weaker or less-committed ones, and clients are fast to detect an employee who falls short of their expectations. The result can be irreparable. Employees leave and clients move on to other firms. As a result, one should involve key employees in the staffing decisions and interview process. Oftentimes, employees are in the best position to recognize where the firm is weak and needs additional or different personnel. Moreover, employees are often the best placement agent, as they know, from prior work experience and from interacting with other firms daily, potential candidates who would be a good fit within the firm. Furthermore, staff members who are involved in this process will sense that they are closely involved in the operation of the firm and can see their imprint on the firm. In my experience, employees know, well before the principals, what the staffing needs of a firm are and whether other employees are falling short. Thus, constant interaction with the staff is essential in proactively maintaining the best mix of employees. MERGING PRACTICES Attorneys who spend a career living vicariously, in a sense, through their clients’ transactions and litigations may be intrigued by the prospect of themselves being “in play.” We have all witnessed a dramatic rise in law firm mergers over the last few years. Now we are also seeing many of these mergers unravel, often through litigation and with significant collateral damage to a practitioner’s client base and, inter alia, employee longevity. A firm that is currently contemplating merging its practice should be working with a professional with expertise in this area. At a minimum, the following must be considered: 1) Perform the same analysis of your firm that you would perform of the other firm (i.e., be prepared to address the questions that you would ask of them). 2) Identify your and the other firm’s strengths and weaknesses. 3) Ask yourself and the other firm what is driving the desire to merge. 4) Consider whether clients, billing and accounting practices, employees, and operational systems are compatible. 5) Examine the tax returns and bookkeeping reports (accounts receivable, accounts payable, profit and loss statements) of the other firm and review them with your accountant or adviser. 6) Examine the ongoing contracts of the firm (leases, both real property and equipment, service and consultant agreements, etc.) as well as retainer agreements on pending and new matters and whether the firm has incurred any debt. 7) Perform a staff productivity analysis of hours billed per attorney/paralegal, time written off, blended hourly rate per biller, average realization rate, etc. This cursory analysis should help flesh out many of the underlying issues, but always address the following: 1) What exactly do you expect from this merger, in terms of workplace environment, monetary advancement, increased marketing resources, staffing, and personnel? 2) What is the reputation of your future partners and their firm within the legal community and the client-specific industries in which the firm has a niche practice? 3) When the honeymoon is over and difficult decisions must be made with these new partners, will they be as willing to reach compromises? 4) What are the mutual expectations for billings, time commitments, originations, direction of the firm, investment upfront and over time, and compensation? 5) Which vendors will the firm engage? 6) And, most important, do you have a well-crafted, highly specific, and fully executed “partnership” agreement that addresses exit scenarios, and that ensures that you can leave with what you brought to the firm? This last point can be the most essential consideration, often overlooked by the parties who, during the courtship period, are uncomfortable with the necessarily adverse discussion and negotiations regarding how to split up the firm. The process of negotiating this agreement, however, can offer insights into your prospective new partners’ negotiation methodology, degree of self-interest, and willingness to reach compromises. Consider the following post-merger situation. One partner has developed significant business, brought in highly valuable employees, implemented effective operational and management systems, and worked long hours. Yet other partners, in contrast, spend their time contemplating how to best manipulate a favorable exit situation for themselves by drawing upon what the first partner brought to the firm. In this fashion, these individuals use the first partner’s focus on the best interests of the firm to their advantage, and either the first partner can be left with less than he or she brought to the merger, or the other partners can end up with something they did not otherwise earn. Like any business, a law practice has high and low aspects and periods. It is essential to recognize change, quickly adapt to it, move smartly and proactively, and think of the clients as “patients” in order to operate your practice like a well-run “business.” If you succeed, the rewards will far outweigh the cost. The result will be the creation of equity in your firm as well as the feeling of pride that comes from having created a workplace and lifestyle that keeps you excited about practicing law for years to come. Christopher J. Gulotta is the founder of the Gulotta Law Group in New York City. This article first appeared in the American Lawyer Media newspaper New York Law Journal.

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