Demanding Payment When a CA Lawyer Can’t Withdraw From a Representation

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What can California lawyers do when they haven’t been paid, but they can’t withdraw from a representation?  For example, suppose that the lawyer is representing a client in litigation and is being paid by the hour.  The client owes the lawyer money on the eve of trial.

California Rule of Professional Conduct 3-700 provides the starting point for analyzing when a lawyer may withdraw.  The Rule distinguishes between mandatory and permissive withdrawal.  The Rule expressly indicates that disputes about fees are a valid reason to seek withdrawal.  But as every California lawyer should know, you can’t withdraw from a representation even if you are owed money if such withdrawal would cause prejudice to the client.  And withdrawing from a representation on the eve of trial is pretty much the text book definition of causing prejudice to a client.  Thus, a court is extremely unlikely to allow the lawyer to withdraw on the eve of trial.

So what is a California lawyer to do when you can’t withdraw but still want to get paid?  Be very careful.  You need to be mindful that this is a very sensitive area and there are many ways to run awry of the ethics rules.  Lawyers understandably resent being forced to work for non-paying clients.  It can feel like the client is holding a gun to the lawyer’s head.  It can therefore be tempting for the lawyer to use the leverage associated with the upcoming trial to threaten withdrawal because many clients don’t know that their lawyer can’t withdraw from the representation under these circumstances.  Many clients assume that their lawyer could withdraw from the representation just as almost all service providers can stop providing services for lack of payment.  Your client may be misinformed about your ability or right to withdraw, but the State Bar isn’t, so don’t withdraw or threaten to withdraw from the representation.

But the fact that you can’t withdraw or threaten withdrawal doesn’t mean that you can’t discuss fees with your client.  Specifically, when lawyers are paid by the hour, are owed money, and are facing a situation where they can’t withdraw, they should consider changing to a flat fee.  For example, in the example discussed above, you could suggest to your client that you will accept a single payment or a series of closely-spaced payments to handle both the trial and outstanding balance.  If you do accept a series of payments, you will have better luck collecting the last payment if it is due before the trial concludes.

There are additional ethical considerations.  One is that any fee agreement you reach can’t be unconscionable.  Rule 4-200 prohibits a California lawyer from “enter[ing] into an agreement for, charg[ing], or collect[ing] an illegal or unconscionable fee.”  The Rule lists more than ten factors that are relevant to determining when a fee becomes unconscionable.  Thus, if you receive a flat fee to handle the trial work, you will need to monitor that the ratio of value provided is reasonable relative to the fee.  For example, if the flat fee is based on the assumption that the trial would last three weeks, and the case  settles after the first day of trial, you need to examine whether the flat fee is unconscionable.  Likewise, in this example, it would be prudent to keep track of how many hours you actually worked on the trial and determine whether the sum total of those hours is worth less than the flat fee paid by the client.  If the sum total of the hourly fees would be substantially lower than the flat fee paid by the client, you should at least consider refunding a portion of the flat fee.

This example illustrates the potential pitfalls of continuing a representation when you can’t withdraw from it.  Contrary to what some lawyers believe, you can and should discuss payment terms, even if you can’t withdraw from a case.  Don’t assume that you have to continue a representation for free because you can’t withdraw.  If this arrangement is ever reviewed by a fee-arbitration panel, a jury, or by the State Bar, you should assume that any ambiguities will be interpreted in favor of the client.  You should therefore carefully document any financial arrangement you reach and secure the client’s written agreement to it.  Moreover, if you find yourself in this situation and have to continue a representation with a non-paying or slow-paying client, you could do a lot worse than consulting with folks who are experts in legal ethics and collections issues involving law firms.

Why Law Firms Mismanage Their Profit Margins

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Too many lawyers don’t know how much profit they generate from different kinds of work they do on behalf of clients. When I ask potential clients questions about their margins, most say that they can track that information down for me. And most lawyers don’t understand why I think that they should know that number on a pretty much weekly basis. The basic reason is that business owners and margins should at least be aware of their profitability. You can’t begin to manage your profit margins and make appropriate management decisions if you don’t know them in real time.

The billable hour is partly to blame. Almost every lawyer can tell you their annual billable hour requirement. And even lawyers who work on a contingency basis tend to be focused more on revenues than expenses or profit margins. This focus is understandable. For many small firms, and for a majority of individual lawyers, the most common complaint is that they don’t generate enough of a book of business. But an excessive focus on revenues can be debilitating to law firm growth and to proper law firm management.

In my experience as a business consultant, I often see that law firm leaders tend to under invest in infrastructure and marketing. This is in part a result of insufficient attention to profit margins. Companies that properly understand profit margins are steeped in understanding the potential return of an investment. This in turn leads companies to conclude that certain substantial investments are justifiable. Well-run companies take calculated risks.

Too many law firms, however, take an unnecessarily restrictive approach to investing in projects that would substantially grow their margins. They tend to focus on the absolute level of expense rather than its potential return. They are often reluctant to spend much more on a specific budget item than they did before. But such a backward-looking approach can be fatal to growing a practice. For example, a solo practitioner with whom I started working about five years ago initially sought to generate $20,000 in monthly revenues. At the time, he was essentially a solo practitioner. Now four lawyers work for him and his monthly payroll expense exceeds $50,000. A hallmark of any rapidly growing enterprise is that its present expenses dwarf its past revenues. And that is desirable so long as the enterprise’s margins remain healthy.

Moreover, you can’t make intelligent and strategic decisions about potentially profitable investments if your financial information isn’t current and accurate. This is another benefit of focusing on margins. It will help lawyers and their key staff members collect and maintain more accurate financial records.

So how about you? What expense that you have been reluctant to incur would generate the highest return over the next year or two?

How to Evaluate a Lateral Partner Move

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Attorneys are changing law firms at an unprecedented rate. Many of those who are changing employers are of counsel, non-non-equity partners, and even associates with a relatively modest book of business. As a result, law firms need to evaluate a wider array of lawyers. Too often, neither the law firm nor the lawyer has a solid basis for evaluating whether it is advisable to change firms or bring someone on board as a lateral hire.

Here are ten observations and tips for evaluating the financial aspects of a potential lateral move.

1.  Most lateral moves have been disappointing financially relative to the initial expectation of the law firm.  Firms should therefore be skeptical when deciding whether to hire a lateral lawyer.

2.  Lawyers who seek to make a lateral move tend to exaggerate their books of business and even more so how they expect that book to grow as a result of the move to a new firm.  This is not to say that lawyers are committing fraud regularly. In my experience consulting on this issue, I see that both the firm and the lawyer overestimate the benefit of moving firms.

3.  To counteract the tendency to be unduly optimistic, the law firm should ask for detailed and historical data about the revenues generated by the lawyer. Moreover, the firm should assume the actual results will be less favorable than the projections they receive.

4.  Revenue projections are especially suspect when they materially exceed the lawyer’s recent historical performance. In one egregious example, a lawyer whose billings had decreased for two straight years projected a 50% increase in the first year at the new firm. Could this happen? Yes, but no factor, including a significant reduction in the lawyer’s hourly rate, is likely to generate such a large increase in revenues.

5.  Just as lawyers tend to overstate the revenues they will generate, they tend to underestimate the costs associated with the move. This is especially true for estimated marketing costs. I have seen lawyers project increased revenues exceeding $100,000 while only incurring $1,000 in additional marketing costs.

6.  Law firms should require detailed marketing plans of lateral partner candidates. Those plans should identify the lawyer’s current clients by name as well the names and job titles of individuals they intend to contact to pitch business at the new firm. The marketing plan should also include the costs associated with acquiring such clients. Sometimes the lawyer has an unrealistic expectation of what the new firm will be willing to invest to promote their practice. For example, a bankruptcy lawyer expected that their new firm would spend $40,000 a year for the lawyer to attend a dozen or so industry-specific conferences. The firm was willing to spend about ten percent of that amount. This is a conversation that should have happened before the lawyer changed firms.

7.  Law firms should be especially wary of bringing on attorneys whose book of business is wrapped up in a single client.  Law firms rarely take into account the added risk associated with having a lawyer who has an undiversified portfolio of clients, and too often the compensation provided by the law firm doesn’t adequately take this risk into account.

8.  Law firms need to explore risks associated with client conflicts sooner in the process. Many firms focus on the issue of conflicts only after they have essentially decided to bring a lateral partner on board. This on occasion has led to embarrassing situations where the lawyer notifies their employer of their departure only to find out that they can’t immediately move to the new firm because of a client conflict.

9.  When evaluating potential risks associated with a lateral move, firms need to look at conflicts broadly—beyond the relationships that would violate the applicable ethical rules. For example, a firm that represented a company in a specific industry was in deep discussions with a lawyer who represented a company in that industry. The two companies were not legally adverse; they never had sued or did business with each other. In the context of a lateral hire, however, it would be prudent to know whether the leaders of the firm’s client would object to having the firm represent a competitor through the newly hired lateral. Again, the best time to have this conversation is before the law firm agrees to hire the lateral.  Sadly, this doesn’t happen nearly as often as it should.

10. Firms often underestimate the cash flow effects of hiring a new lateral. This is because the expenses pile up from the very first month, often in the form of salary, benefits, and some marketing-related costs. But the revenues that the lateral hire generates don’t hit the firm’s bottom line for several months. Thus, it is not unusual for the lateral hire to have a negative impact on cash flow for a few months or sometimes longer. Firms should therefore create a monthly profit and loss projection that shows the effect of bringing on the lateral hire. When they do, they often see that hiring lateral lawyers for their book of business is a riskier enterprise than most firms originally realized.

When to Walk Away From an Uncollected Attorney’s Fee

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In my experience consulting with law firms, almost every attorney knows what the rules say about collecting unpaid fees from an existing client.  That’s because the applicable rules and regulations are relatively straightforward.  Generally speaking, a lawyer may end a representation if the client isn’t paying the lawyer.  But the ethics rules sometimes prohibit a lawyer from firing a dead beat client if doing so would prejudice the client.  In addition, lawyers are aware that pursuing an uncollected fee may cause the client to retaliate by filing a malpractice action or pursuing a complaint with the disciplinary authorities.  That’s why it is customary for lawyers to wait for the statute of limitation on malpractice actions to pass before filing a collections action against the client.

Taken together, the regulatory framework governing collection of unpaid fees causes lawyers to pursue deadbeat clients less aggressively than other service providers.  Some lawyers, however, mistakenly conclude that the ethical risks are so great that pursuing collections is almost never justified.

Despite knowing the applicable rules, too many lawyers do foolish and potentially career-threating actions when faced with an existing client who owes them money.  The frustration is understandable, especially when lawyers have good reason to know that the client has the money to pay their invoice.  Because it’s easy to get emotionally involved and act rashly, it’s important to develop a systematic approach to collections issues.

Lawyers are more likely to get into trouble when their cash flow is poor.  And collections can and do often play a role in improving a firm’s short-term cash flow.  But lawyers need to understand that being motivated by cash-flow concerns is a red flag.  Focusing too much on cash flow risks causing lawyers to overreach when pursuing the client’s money,

The most common collections-related mistake that law firms make is failing to balance the amounts involved with the time needed to collect and the risks associated with pursuing clients.  This has to be an individualized determination.  Certain clients are more likely to cause problems than others, and too often the lawyer who is owed the money is too close to the situation and too emotionally invested to make a sound decision.  Law firms should therefore set up a process where a small committee of impartial partners has the authority to decide whether and how to pursue a specific unpaid debt.

In addition, it is helpful if the discussion of what to do with a specific client begins with an evaluation of the extent to which the client will be prejudiced if the firm withdraws from the representation.  Starting with the applicable ethical requirements increases the chances that the firm won’t focus too intently on the money it is owed, without regard to the firm’s ethical risks.

One of the ironies of collections for law firms is that focusing too much on the client’s money is often problematic.  Law firm collections are yet another example of where discretion is the better part of valor.

How Lawyers Should Determine the Amount of a Flat Fee

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Most lawyers approach the process of quoting a flat fee in the wrong way. They often determine how much the flat fee should be based on an estimate of how many hours it would take to perform the work. Thus, for example, if a law firm believes that it will take 200 hours to represent a client in a real estate transaction, and $350 is an acceptable hourly rate, the firm may quote a fee of $75,000. That amounts to $375 an hour, which is slightly higher than the corresponding option of billing by the hour.

Calculating a flat fee on an imputed hourly rate shifts to the law firm the burden of being wrong about the scope of required. If in the example above it turns out that it takes 300 hours to handle the transaction, the firm is likely to have better off charging an hourly rate. Thus, when quoting a flat fee, lawyers should not focus solely on the estimated number of hours.

If you want to excel at fee setting, you need to understand the importance of the psychological and emotional aspects of being retained. Most clients feel their way through the process of hiring a lawyer as much or more than they think through the process. And if, for example, a law firm wants a client to write a single check for $75,000 (or some other flat fee amount), it needs to appreciate how that client is likely to feel about writing a check of that size. A vast majority of individuals never write a check that big, with the possible exception of when making a down payment on the purchase of the home. And even many institutional clients will find a check of that size to be something other than routine.

This is just one example of how the amount of the quoted fee may carry a distinct psychological impact. There is a reason why gas prices end with nine-tenth of a cent. That tenth of a penny can impact the perceived cost. Likewise, some flat fees, such as a $10,000, can be psychological breakpoints. For some people and organizations a flat fee of $9,750 often has a different psychological impact than quoting $10,000 or $10,500. Depending on the nature of the work, the same is likely to be true of fees that are just below $25,000, $50,000, $100,000, 0r $250,000.

In my experience consulting with law firms, lawyers often struggle with the concept of psychological breakpoints because it conflicts with our seemingly orderly and logical minds. We rationalize that quoting a flat fee of $9,750 is too salesy, or more broadly that it isn’t worth the effort to try understand something as squishy as psychological breakpoints.

Given the risks inherent in quoting a flat fee that is too low, attorneys ignore the significance of psychological breakpoints at their peril.

How to Avoid the Most Common Fee Setting Mistake Made by Lawyers

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A lawyer recently asked me whether she should accept an offer from a potential client to take on for $50,000 a lawsuit against a large entity that has a substantial and experienced in-house law department. When stated in these terms, one answer should become increasingly obvious. You don’t have enough information to answer this question intelligently.

There are dozens of things an attorney might need to know about the lawsuit and the client before deciding whether a flat fee of $50k is reasonable or appropriate. This includes everything from the procedural and substantive history of the case, the client’s potential success on the merits, the client’s ability to pay by the hour, and his prior history working with lawyers.

I know from my experience consulting about fee setting that many lawyers have a set way of setting and communicating fees. And they communicate that fee in almost all circumstances. Most commonly, this happens when the lawyer quotes a standard hourly rate.

It’s as if the governing rules forced lawyers either to refuse a representation or quote a single kind of fee. But those are not the rules. California, for example, permits lawyers in most circumstances to charge a variety of fee types including an hourly rate, a contingency fee, a flat fee, or a combination of these fee types. See California Business & Professions Code §§ 6147-48.

Too many lawyers cling to a single way of charging for their services, but this is not the most common fee setting mistake. Even more problematic and widespread is lawyers’ habit of quoting a fee before they have collected enough information from the potential client to assess the representation appropriately.

With respect to the lawyer who was asked to handle a law suit for a $50,000 flat fee, it took about 15 minutes to conclude that the lawyer should reject that offer. The lawyer shared public information that strongly suggested that this would be a high maintenance client. The lawyer was particularly concerned about the merits of the client’s position, and the potential that the lawsuit would be protracted and complex. I therefore advised the lawyer to offer to charge a flat fee to investigate the merits of the case and to give the client an assessment of his best options. This would have the added benefit of preventing the client from spending $50,000 needlessly, and would help both the lawyer and client determine if a flat fee was appropriate when they both had more information about the lawsuit and its potential risks and benefits.

Many cases present room for creativity in fee setting. Often there are a variety of ways that the fees for a single representation can be structured. But lawyers lose millions of dollars of fees and work with clients they should avoid because they don’t collect enough information from potential clients before quoting a fee. This is an expensive and avoidable mistake, which, in today’s competitive marketplace for legal services, is increasingly unforgivable.

Five Strategies to get Lawyers to Submit Their Hours on Time

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Leaders of firms that charge by the hour often complain that they can’t get their lawyers to submit their hours on time. This, in turn, causes the firm to delay when it sends out some of its invoices, and it may play a role in causing some lawyers to underreport hours. Here are five strategies to address this problem.

1. Define the timely submission of hours as a primary attorney responsibility.

Many law firms set billable hours targets, but relatively few explicitly connect the total number of hours with their timely submission. Too many lawyers view the process of doing the work independently from billing it. But in many cases the work performed by a lawyer at a law firm is converted into dollars only when the time is submitted. The act of submitting time converts the labor into something of economic value. Thus, it’ not a separate administrative step can that be postponed. Law firm leaders should make clear that failing to submit hours on a timely basis will to some extent be treated as if it wasn’t performed in the first instance.

2. Make lawyers aware of the chain of custody for invoicing.

Some lawyers aren’t aware that the process of submitting time impacts other people at their firm. If you are looking to motivate seemingly recalcitrant lawyers, avoid using threats as a first response. Lawyers have an independent streak and often don’t respond well to hostile-sounding messages. Research in a variety of fields has shown that people are more likely to be cooperative when they view their conduct as directly impacting other people who are likeable. This is why charities tend to raise more money when they show potential donors concrete examples of how their contributions will be used on behalf of sympathetic people. Thus, it might be helpful if lawyers met and got to know the people in accounting or others who are part of the billing and invoicing process. Lawyers are less likely to submit timesheets late if they know the person in accounting who will be inconvenienced and better yet the manner in which they will be inconvenienced.

3. Don’t just use a stick.

Too often law firms rely on increasingly coercive measures and harsh messages to try to force certain lawyers to submit hours on time. This is particularly problematic with salaried associates whose base pay can’t be withheld or reduced until the hours are submitted. Consider creating a reward or prize that is only available to lawyers who have submitted time sheets on time every month over the course of six months or 11 months out of the last 12.

4. Use discrete peer pressure.

In my experience as a large law firm litigator and as a consultant, I have seen first-hand that peer pressure can be a strong motivator for lawyers. For example, it can be useful to send a message letting three lawyers know that that everyone else but them has already submitted the prior month’s hours. The lawyers should receive individualized messages and the identity of the other tardy lawyers should not be disclosed to them. Letting them know that this is being handled discretely will often make them more cooperative.

5. Keep shortening the deadlines.

Different law firms establish different deadlines for when lawyers need to submit their hours. Essentially all require that time be submitted on a monthly basis. Others require that all time be entered into the system weekly, and a relatively few firms require daily submission of time. Generally speaking, lawyers bill more accurately when they minimize how much time elapses between when they performed the work and when they write it down for the first time. Thus, all things being equal, firms should strive to encourage lawyers to bill time on as short a timeframe as practicable. The easiest way to do this is to shorten the deadlines gradually. New lawyers will get used to whatever deadlines you establish, and most lawyers will adjust to shorter timeframes if firm leaders address this issue consistently.

And as with many aspects of managing a law firm, the ultimate power rests with the clients. Sophisticated institutional clients have their own reasons for not wanting to wait to the end of the billing cycle to see how many hours their outside counsel are billing. Law firms should therefore expect that some of their clients will want more transparency in hourly billing, including wanting to see daily billable hourly totals for attorneys working on their matters. Simply put, in today’s market for legal services, it is increasingly untenable for law firm attorneys to delay when they submit their hours.

Create a Six-Month Law Firm Budget

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It’s that time of year when we tend to think in terms of years. People create new year’s resolutions, even though there is a lot of evidence they don’t actually help reaching goals. And in the business world, we create annual budgets.

In my experience, however, too many law firms either don’t create budgets at all or create them badly. In particular the folks who run small law firms seem immune to seeing the following pattern:  almost every large organization that generates millions of dollars of revenues has a formal budgeting process and small less successful ones don’t. That might not be a coincidence, but trying to convince solo practitioners of that can be a tough sell. And that says a lot more about the business savvy of many law firm leaders than it does about the wisdom of budgeting.

So how can law firms create more effective budgets? The answer lies partially in trying avoiding a problem inherent in annual budgets. Law firms can often project expenses fairly well over the course of an entire year. But forecasting revenues for law firms is often more complicated. And too many law firms succumb to wishful thinking when projecting annual revenues. The first six months are realistic but fall short of some target, but revenues magically improve during the second half of the year.

Moreover, projecting revenues annually tends to reinforce marginal thinking. Lawyers are too influenced by precedent as it is, and they tend to forecast financial goals that largely recreate prior years’ results.  It’s stare decisis brought to the world of law firm finance.

A better approach is to force yourself and your organization to see what it can accomplish financially in a relatively short amount of time. A six-month revenue target can be a good way to get a law firm to focus on how it can grow quickly instead of incrementally. So on this the last week of 2015, try creating a budget that ends on June 30, 2016.

Have a happy and prosperous half-year!

Keep More Cash in the Register

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For too many law firms the holiday season is accompanied by an unfortunate tradition. It’s not the bad egg nog or the awkward silence that follows an inappropriate comment made by a lawyer who had too much to drink.

This law firm holiday tradition is financial in nature. Specifically, it’s when the equity partners of the firm take out virtually all of the firm’s cash to pay themselves at the end of the year. This is a practice that I have repeatedly encountered when consulting for law firms. The firm essentially starts every year as if it’s a brand new entity because it lacks a meaningful cash reserve.

This is particularly pernicious because, for many law firms that bill by the hour, January and February are their worst months in terms of revenues. The attorneys at such firms tend to bill fewer hours in November and December, and this in turn causes revenues to decline in the following January and February. Likewise, firms tend to incur more expenses in January, such as those related to payments for annual dues and subscriptions. Thus, the firm’s partners deplete the firm’s cash just before they are particularly likely to need it.

Why do law firms reduce their cash reserves at year end?

For some it seems to be a habit that they follow unthinkingly. Too often, however, the need for cash comes from the financial needs of one or more of the equity partners.  They may feel the need to support a lifestyle choice or to meet their personal cash flow crunch. This can lead to a race to the bottom, where the partners who are least responsible and stable cause the firm to make unwise financial allocations.

If you or your law firm is in this position, the first step to building an appropriate cash reserve is to determine how much cash the firm needs to save and keep on its books.  This amount is connected to the firm’s sales cycle and fixed costs. If, as in the example mentioned above, you bill by the hour and typically collect 2-3 months later, it can make sense to build a reserve that is equal to 2-3 months of billings. This will give you the security that the firm will still be on a solid cash footing even if collections drop precipitously.

And you probably should set aside a larger cash reserve if your firm predominantly charges a contingency fee and your pipeline of cases may not bring in money for many months at a time. For example, I consulted with a firm that had no revenues between January and October and then collected more than seven figures from two cases in November and December. This was a record year for the firm, but the cash flow pressures and need to maintain cash reserves were manifest.

In terms of fixed costs, it can be useful to use your payroll expenses (and multiples thereof) as targets for your cash reserve.  Thus, if you currently have a nominal cash reserve, set an initial target of saving enough cash (or collecting enough capital contributions from partners) to exceed the expenses generated for one payroll period. Once you have reached that target consistently, increase your savings goal to two payroll periods, etc.

A line of credit can of course also play an important role in helping a firm meet its cash flow needs. But credit lines often include complicating provisions, such as requiring law firm borrowers to pay back the entire amount that was borrowed plus accumulated interest by the end of every year. Thus, well-run firms maintain cash reserves that can be used as the first line of defense should something happen to reduce revenues or stymie collections efforts.

For many firms, meeting the cash reserve targets outlined above will require a sea change in how they think about cash flow and manage their finances. At a minimum, however, make this the year that you stop depleting almost all of your firm’s cash just because holiday music is filling the air.

A Law Firm’s Best Friend Can Be Its Banker

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When did you last talk to your banker? Do you even know them by name or are they one of countless vice presidents who work for Bank of America, Wells Fargo, or other enormous financial institution?

Your banker needs to understand your business well enough so that they can move quickly to help you if the need arises. And like any important relationship, it needs to be cultivated. If you haven’t spoken to your banker in years, don’t expect them to rush to loan your firm money or extend or increase a line of credit just because you feel panicked over cash flow. If you want to grow your firm strategically and cushion it from disaster in tough times, you need to have a solid banking relationship.

Five Steps to Make a Banker an Ally

1.  Establish a relationship with a business bank that understands law firms.

A business bank is one that makes most of its money from collecting interest payments on bank loans and lines of credit. Avoid retail banks that make most of their money from checking account fees and lending money to consumers. Over the past five years more banks have established departments that specifically service law firms.  Find out what kind of experience your bank has working with law firms.

2.  Cultivate an ongoing relationship with at least two key people at your bank.

It seems that every other person at a bank is a vice president, so it can be a bit tricky to find out just how much authority your contact actually has. Make sure that your primary contact has enough juice within the bank to approve a loan or line of credit that is sufficiently large to make a material difference to your firm. To find out how much authority they have within the bank, ask who at the bank has the authority to approve lines of credits and loans, and what role does the person you are talking to have in that process. Likewise, bank employees move and transfer jobs, so it is best to know more than one influential person at the bank.

3.  Find out what your bank specifically needs to provide certain services.

For example, different banks require different amounts of documentation to approve a line of credit. All require business tax returns for 2-3 years and most also want to see personal tax returns from at least some partners. Moreover, banks have different guidelines when determining whether to lend a law firm money. Find out what your specific bank requires and what financial indicators they use BEFORE you need the money. This is a conversation you should have months and perhaps years before you intend to borrow the money.

4.  Make your banker aware of your business plans.

I recently worked with a firm that wanted to elevate someone new to the ranks of equity partner. Given the size of her ownership share in the firm, she needed to borrow more than $750,000 to buy into the partnership. But the firm’s bank didn’t provide loans to support partnership buy-ins because the bank considered such loans to be personal loans. Moreover, when I called other local banks, almost all said that they wouldn’t make such a loan unless it was part of having the firm’s overall banking relationship. In other words, if the law firm changed banks, as part of such a move the bank would be willing to include individualized loans to folks who became partners and needed to fund their partnership buy-in. This is a conversation the firm should have had with the bank well before it decided to offer the equity partnership.

5.  Be aware of the covenants you have made to the bank.

Financial institutions impose different reporting and financial performance requirements on borrowers. Some may require a law firm to remain profitable in order to maintain the loan or line of credit. Some business banks require a line of credit to be paid back in full with interest every 12 months before opening up a new line of credit. Likewise, understand the risks that individual partners face should the law firm default on the loan or line of credit. In the event of default, the bank may make all partners jointly and severally liable. These are the kinds of terms that can sometimes be negotiated when you establish a new banking relationship or when you seek to obtain financing. But once you sign on the line that is dotted, your contacts at the bank are unlikely to be able to change these requirements. So at a minimum, review your documentation and make sure you understand what you have promised the bank in terms of financial disclosures and profitability in order to maintain your loan or line of credit.

A good banking relationship is instrumental to the growth of a law firm. And in difficult times your banker can be the difference between the firm surviving or closing its doors. Too often, however, law firm leaders treat the banking relationship as an afterthought. Don’t make that mistake.