You are a partner at a firm and are unhappy. There are many reasons why you can be unhappy. We are not going to go into that here. This article will give you practical guidance on operational formation.
Step 1 – Review Your Current Partnership Agreement
You will need to know how much notice is required. Could you start a business while being a partner at your current firm? Is a non-compete clause allowed in your state and stated in your partnership agreement? How has the firm handled other partners leaving the firm? Expect something similar. Expect to be asked to leave as soon as you give notice. Only in rare cases are partners allowed to stay with their firm once they have given notice to leadership.
Step 2 – Create a Pro Forma Budget
This may even be step one. Do not rely on a back-of-the-napkin calculation to determine the start-up and operating costs of your new firm. An accurate and realistic pro forma budget must be created. Not only is it good practice, but if you are looking for a line of credit or a loan, you will need it. It also gives you comfort knowing when you will break even, and when you will have paid off start-up costs. There have been situations where we have completed the pro forma budget for our clients, and they have decided to stay at their current firm or renegotiate their current compensation. As a partner with a book of business, it is important to understand the cost of your practice outside of what is being allocated to your cost center.
Most of the firms we are helping start are outsourcing HR and IT. This reduces the need for internal employees to handle these tasks. There needs to be a point person at the firm to interface with these companies, but it is often more cost-effective and reduces risk when these services are outsourced.
The pro forma budget should include all costs not just employee salaries. Some items not to forget:
- Cyber and EPLI insurance
- Merchant Fees
- Monthly Outsourced IT
- Professional Services like CPA and Attorney
- Reimbursement for Phone and Internet
Income should be what you and your team have collected in the past. This is not an attorney’s billable hour times their billable hour requirement. Be realistic about when you can expect to receive payments. If your clients are a 60-day pay, you will be without funds for 90 days. If you use LEDES billing, you will need to get everything set up with the third-party company and this can take quite a bit of time. You cannot start this process until after you give notice. We budget you will collect 80% of your past collections as a conservative number. Maybe everyone on your team won’t come with you. Maybe all your clients will not come with you – although this has not been our experience. Our experience is most often all clients move to the new firm.
Step 3 – Gather Your Team
Your team consists of those service providers you will be getting advice and services from.
- CPA & Bookkeeper
- Banker
- Business Attorney
- Insurance Broker
- IT Professionals
- Marketing Support (minimum web designer)
- Real Estate Broker if you are looking for brick-and-mortar space.
- Firm Start-Up Professional
When sourcing your team members, be sure to work with companies and people who support law firms (and not just one law firm). Attorney expectations are different than other professionals. I was working with a carpet company and the internet went down. I was running around trying to figure out how to get it up again immediately. The owner told me it happens all the time and they just have to wait. “It may be back tomorrow.” I do not have to say how you would react if the internet at your firm went down “all the time”.
These companies should be contacted early in the process. It will be important to get the advice of a CPA and business attorney to help decide on your business structure. Your business attorney should be able to file all the papers for licenses necessary in your state, county and/or city. Everyone else is going to need time to gather information and perform the services.
Be careful you do not overpay for services as well. We have seen some unreasonable quotes for services. At a minimum get 2-3 quotes to compare the costs in conjunction with the services provided.
Step 4 – Source Your Software
The software industry is all about selling software whether it is right for you or not. Be sure you choose what works for you. Remember that it is not that important how things look, it is important what and how you get information out of the software. Be sure reports will show you what you need for compensation distribution. Be sure you can do things that you need like LEDES Billing or split billing.
If you are coming from a large firm with high-end software, you may decide to go with a lower-cost product for a smaller firm. Understand that server-based software has been in the market since the 80s. The bugs have been worked out and it has been tested with all the software commonly used by law firms. Cloud-based SaaS products have only been on the market for about 10-15 years. They will not do everything that your high-end server-based software does. In five or 10 years it may, but we have not found anything that does it yet. Even if you choose something like iManage because your current firm uses it. If you choose cloud-based software vs. server-based software, it is a completely different program. To get the software to work on the cloud it needs to be completely rewritten and often in a different computer language. Be prepared. Have whoever is going to be doing your billing and payables try the software out if possible before purchasing.
Plan on the process taking at least three months to complete. This does not mean that you will not be able to track time and bill your first month, but the customization and importing of your information may need to take place after you start your new firm. If anyone tells you that you will have your software up and running in 30 days, question what they mean by this.
Step 5 – Put together your timeline and work through your checklist.
- Business Formation
- Insurance
- IT
- Software Licensing
- Hardware
- Telephone
- Internet
- Banking
- Finance
- General Ledger
- Deductions
- Time & Billing
- HR
- Insurance
- Payroll
- Benefits
- Policies
- Marketing
- Management
- Budget
- Engagement Letter Form
- Operations Manual
Special Notes:
- Never take on clients without having at the minimum, a business license and professional liability insurance.
- Never have employees work for you without workers comp insurance. In some instances, this can be secured through the payroll company.
- Learn the rules for IOLTA and Client Trust Accounts.
Opening a law firm is not brain surgery. Attorneys can certainly do some or all this work themselves but hiring a specialist will eliminate a lot of wasted time researching, meeting people, and spinning your wheels when you could be serving your clients. Plus, you will get help with best practices from a legal management consultant.
If it is time to strike out on your own, let us know. We are invested in your success.