What Law Firms Can Learn From Efforts to Pressure Justice Breyer

There have been numerous media reports describing how certain advocacy groups have been trying to pressure Supreme Court Justice Stephen Breyer to retire now, while the Democratic Party has nominal control of the Senate. The groups trying to convince Breyer to step aside have used a variety of strategies, all of which have proved futile. As consultants who have worked with law firms in connection with succession planning issues, this result is unsurprising.

Whether you’re negotiating with a business owner who has claim to a controlling share or attempting to persuade a law firm partner to call it quits, pressuring that person to leave is often counterproductive. This is particularly true when the decision to step down is entirely out of your control. Law firm partners do have the power to force someone out, but that often requires a majority or even two-thirds vote from equity partners. And unless a long-standing partner has demonstrated lack of capacity or some other major deficiency, brute force is rarely the best option.

Shaming someone or failing to listen to them carefully is not likely to help either. Following the death of Justice Ruth Bader Ginsburg last year, Breyer became the senior liberal on the Court. He will turn 83 next week and just received an unofficial promotion. He now assumes the power to decide who writes opinions when the Chief Justice isn’t in the majority. Justice Breyer, like many accomplished professionals, is enjoying the new dimensions of his job.

Describing Justice Breyer’s choice to stay as “about ego,” Brian Fallon of progressive advocacy group Demand Justice has been critical, saying in response to recent comments by Breyer, “This new report suggests [his] desire to stay is based less on a high-minded notion that he might somehow preserve the Court’s reputation for independence, and more on the fact that he finds it personally fulfilling to get the chance to serve in the role of the Court’s senior liberal.”

Dismissing the value that a Supreme Court Justice or law firm partner might find in their job is a sure way to increase resistance. And law firms have an option that our constitutional system doesn’t offer for Supreme Court Justices. Law firms can provide the equivalent of “senior status.” Reducing a person’s role at a law firm doesn’t necessarily mean that they’ll have to turn the dial down to zero. But even if the firm’s managing partner and executive committee do want to sever ties completely with a law firm partner, they shouldn’t do what some advocacy groups have tried with Justice Breyer.

Sharing Financial Information with Junior Lawyers

When you’re ready to elevate a junior lawyer to the partnership level, you’ll likely have to handle the delicate process of sharing financial information that this employee was not previously aware of. This is happening more often as more small and mid-sized firms are going through the succession planning process. Equity partners will increasingly need to educate an associate or Of Counsel being promoted to partner, for instance, on the organization’s revenues and expenses. This can turn into a sticky situation partly because those expenses include details on payroll and other forms of compensation.

The legal issues are fairly straightforward. If partners are worried about compensation and related data getting out, they should reconsider why they are elevating this person to the partnership. In any event, they can require that the prospective partner sign a non-disclosure agreement.

Many associates have little experience reading financial documents and may need some assistance parsing out the numbers. Law firms therefore need to set aside more time than they initially estimate to get young partners up to speed. This too is largely an issue of planning.

The emotional factors involved in sharing financial information, however, can be trickier. This process often marks the first time the junior lawyer finds out just how little they’ve been paid relative to what the partners have taken in. It also may make clear to them that they’ve been receiving less than some of their peers.

Most of the time, since they’re in the process of moving up the ranks toward higher levels of compensation, the associate overcomes the surprise that may accompany financial disclosures. But this shock can also be avoided in a way that fosters more good will between that employee and the firm.

The best practice is to communicate this kind of information more gradually, starting the transition earlier to allow time for these details to be discussed bit by bit. Verbally letting an associate know roughly how much partners make can give them time to adjust before seeing it on paper. Sharing this kind of information, even in general terms, signals to the more junior lawyer that they are being treating as a future equal. This level of transparency can also prevent valued senior associates and Of Counsel from leaving the firm prematurely.

Sometimes, succession planning forces firms to address issues related to sharing financial information on short notice. This happens, for example, when a partner decides to leave suddenly, announces that they won’t sign the existing lease when it comes up for renewal, or encounters unexpected health issues. In this case, it’s key to remember the importance of educating the person looking to take on a leadership role or equity stake. Establishing an understanding that goes beyond the financial figures is critical if the firm wants to educate more junior lawyers about a shared future that includes transferring equity interests and putting into place new firm leaders.

The Two Most Important Lessons Learned from 25 Years in the Law

I turned 55 this week. That still looks like a typo. And reaching this milestone – if it is one – reminded me of where I was 25 years ago.

On my 30th birthday, I deposed a building contractor in connection with a pro bono lawsuit. I was a junior associate at the L.A. office of Skadden Arps. The client was Covenant House California, a homeless shelter that focuses on helping runaway teenagers, and its director at the time, Fred Ali. Covenant House was involved in a real estate dispute with its landlord, who refused to return Covenant House’s substantial deposit when the organization vacated the premises. We were suing to recover the funds. The landlord countersued, claiming that Covenant House had substantially damaged the property before vacating.

The deposition was memorable. It mostly involved looking at dozens and dozens of pictures of soiled toilets and other bathroom fixtures. The contractor used the photos as the basis of his damage claims.  After a lengthy series of particularly gruesome pictures, I asked, “Your job isn’t all glamour, is it?” The building contractor laughed, as did the court reporter.

At trial, we were able to show that all the damage reflected in the photographs took place after Covenant House vacated the premises. I was the second chair. The lead attorney was Robert O’Brien, then a mid-level associate at Skadden. The judge ordered the landlord to return the security deposit and pay accumulated interest and awarded substantial attorney’s fees.

The landlord opposed the attorney’s fees awarded on the grounds that attorney’s fees shouldn’t be recoverable by lawyers working pro bono. In 1995, that wasn’t a settled issue in California. With the assistance of a few amicus briefs, the court issued a written opinion affirming the right of pro bono counsel to collect attorney’s fees if a contract provides for such fees. A few months later, as a token of Covenant House’s appreciation, Robert and I each received a replica of a sculpture (pictured here). Mine is one of the few objects that I have retained from my days as a practicing attorney.

Fast-forward 25 years, and as a consultant to law firms, my week has been focused on helping firms with succession planning, lateral partner questionnaires, speech coaching, and strategic planning. Many of these issues either didn’t exist in the law or would have been hard to predict even a short time ago. Fred Ali is now the President and CEO of the Weingarten Foundation. As such, he is one of the leading figures in philanthropy in Southern California. Robert O’Brien is now National Security Counsel to the President.

So what can be learned from this nostalgic look back? Some of you might be thinking that Fred and Robert have done more with their careers in the last 25 years than I have. Undoubtedly true, but obvious.

Two less obvious lessons stand out.

First, in a world that is rapidly changing, and where it is easy to get stuck in the minutiae of day-to-day work, including business development activities, what sticks with you over time are the causes you have pursued. If you seek to represent people and organizations that do things that matter to you or that you admire, you are far more likely to attract and keep the clients that you most want.

Second, embrace change. When I left large law firms to start a consulting firm, a lot of people thought that was crazy. And now, law firm partners are more likely to see leaving the law as a sign of intelligence. That is an oversimplification and gives far too much credit, but what is true is that the law and the world are changing too rapidly to tie your happiness and fortune to the status quo not changing.  Who knows, 25 years from now, and potentially a lot sooner, large law firms could disappear as independent entities, subsumed by even larger accounting firms.

Those who work as, and on behalf of, lawyers are fortunate to have careers that can span decades. Here’s to the next 25 years (or even more).

The Role of Business Valuation in Law Firm Succession Planning

When owners look to pass their business into new hands, potential buyers focus on identifying future revenues, and the role of the existing firm in transitioning clients plays a major role in determining the firm’s valuation. This is one reason why small and mid-sized law firms often don’t retain the services of a business valuation company to obtain a formal written valuation. This is in marked contrast to how comparably sized manufacturing companies often change hands. There, a formal valuation is likely to play a bigger role.

Here is an instructive example: a seven-attorney estate planning firm that generates two or three million dollars in annual revenues. The lion’s share of the revenues is generated by drafting wills, trusts, and associated documents. From the point of view of a potential partner or acquirer, these historical results won’t translate into much revenue in the near term, especially if most of the clients are middle aged. If, however, the client base is much older and the firm has the potential to generate fees from current or future trust administration work, its valuation will likely increase. And ongoing litigation being billed by the hour has the greatest potential impact on revenues in the near term.

With all of these factors, the value of the business doesn’t depend on the “comparable” estate planning firms that a business valuation firm might identify. The extent to which the firm is willing and able to transition existing client and referral relationships is more important. Likewise, as we discussed in this earlier post about an ethics opinion published by the American Bar Association last year, it’s always up to the client to determine who will represent them. Unlike the new owner of a manufacturing company who can step into the shoes of an existing contract to deliver goods, a new lawyer or law firm is less able to predict what percentage of revenues from existing clients will transition to the new firm.

For this reason, valuations of law firms (and other professional services firms) tend to be lower than those of manufacturing corporations with the same revenues. Typically, the arrangement between a firm and its departing lawyers is based on a multiple of revenues. And because the parties to a succession planning transaction have often known each other for a long time, it is not uncommon for the deal to include a compensation term based on the portion of the revenues that is actually transitioned to the new lawyer or firm.

The lesson here for those starting to think about succession planning is that valuation doesn’t drive this process the way one might expect. A better first step would be to consider who of the people you know would be capable of and interested in serving your current clients.

COVID-19 Will Hasten the Decline of Small Law Firms

Everyone knows that “small businesses are the backbone of the U.S. economy.” This notion is so widespread that it obscures what has actually been happening over the last two decades.

The Small Business Administration regularly promotes the idea that almost all jobs are created by small businesses. But the SBA defines small businesses as those that employ fewer than 500 employees. By that measure, more than 99% of workers work for small businesses.

But once you examine employment data at a granular level, a more interesting and complicated pattern emerges. According to a report from JPMorgan Chase, since the early 2000’s, small businesses have come to account for a minority of the U.S. workforce. Only 18% are employed at organizations staffed by fewer than twenty people, and the share of GDP represented by small businesses has fallen since the late 1990’s from over 50% to below 45%.

COVID-19 is likely to speed up this trend. It has been estimated that at least one million companies with ten or fewer employees will go belly up as a result of the pandemic. The effects of federal measures like the Paycheck Protection Program, designed on its surface to bolster smaller entities during this crisis, are actually likely to exacerbate the gap between organizations with fewer than ten employees and their larger counterparts.

So what does this suggest about law firms?

In many ways, law remains an industry dominated by small employers. The State Bar of California reports that approximately one in five of its members are solo practitioners and 42% work at firms with between two and ten attorneys.

But the same trends that have caused a reduction in employment by truly small institutions throughout the U.S. economy will almost certainly impact the legal services industry as well.

As the benefits of size continue to increase, boutique law firms may find themselves at a further disadvantage. Smaller firms, and especially solo practitioners, should therefore consider growing by either merger or acquisition. And for younger professionals, inheriting a practice is an increasingly relevant strategy. Being proactive in considering these options may make the difference between thriving and failing to survive in the coming years.

Succession Planning in the Age of Coronavirus

The increased importance of succession planning that preceded the onset of coronavirus may only ramp up as a result of the pandemic. The difficulties of running a law firm or other professional services company remotely may be the straw that breaks the camel’s back for some practitioners nearing retirement. And as many practice areas experience declines in demand, firm management may need to consider transitioning or acquiring new ones to pick up the slack.

With stiffening competition, we’ve already seen an onslaught of Big Law mergers over the past several years. At the same time, the attorney population has continued to age, resulting in a disproportionate number of practicing lawyers over the age of fifty. Recent losses in the stock market will undoubtedly motivate some more senior attorneys to push back their retirement date. But, as we’ve witnessed in just these first few weeks, the uncertainty of COVID-19 is leading others to expedite their decision to retire now.

It’s more important than ever to consider succession planning options in your business development strategy. In the coming months, there’s a very real likelihood for many firms that current clients will generate less revenue than they did a month or two ago. While some assistance is available to supplement these gaps and maintain payroll, the reality is that you will need to continue generating new business as the current situation unfolds. While adding new clients should be part of your plan, succession planning, mergers, and acquisitions present especially powerful opportunities to grow during this crisis.

Free Webinar on April 14th: How to Grow During a Crisis Through Succession Planning and M&A

We will be addressing this topic in depth during our next webinar on Tuesday, April 14th at 2 p.m. PST (4 CST/5 EST).

To join us for this no-cost Zoom webinar, please register using the link below:

https://zoom.us/webinar/register/5015863858625/WN_xTNdP3bMR5O8JDWYrzJa1g

We look forward to sharing ideas and best practices for this crucial aspect of business development in a crisis.

It’s Time to Create Your 2017 Org Chart

What kind of law firm are you building?

Whether you are a sole practitioner or the managing partner of a 200 attorney firm, that’s the question you have to constantly answer. You have to create the future in advance. That’s the essence of leadership. And one of the singular tasks of law firm leaders is strategic planning.

The phrase “strategic planning” gets tossed around a lot. It can be hard to define, but the idea behind it is unmistakable. You are more likely to grow and thrive if you follow a plan. Just as you can complete a jigsaw puzzle faster if you know what the finished product looks like, a law firm should know where it is going. And that is where an organizational chart comes into play.

But strategic planning requires a special kind of org chart. Unlike the chart that human resources departments churn out, you need to create the chart that reflects what you want your firm to look like in about 18 months. In fact, the best way to create the strategic organizational chart is to do it independently of the current chart. This is not an exercise in looking at precedent and extrapolating from there. That approach tends to generate incremental changes. And the whole point of this exercise is to see how far you can push your firm in the next 18 months. That is the best way to ensure that your firm will thrive in turbulent times.

In my experience the single most difficult aspect of creating an effective organizational plan of the future is visualizing evolving roles for existing partners. Most firms have some kind of process for identifying which associates are likely to become partners; that is an example of a more foreseeable change. But identifying a partner who would be willing to open up a new office requires an active and open-ended discussion of what’s possible. Likewise, too many firms fail to create succession plans for members of the leadership team. There seems to be an unspoken assumption that firm leaders will want to stay put, or that they won’t shift their responsibilities. That might be true, but the future of the leadership team is too important an issue to leave to chance.

A strategic organizational doesn’t have to be entirely accurate to be effective. The future can’t be predicted perfectly. But if you take the lead in creating the future you want, your firm is less likely to be the victim of circumstances.