(Note: This post references common business practices and structures in the United States. Practices and business law may vary in your jurisdiction.)
When you’re at the helm of a small law firm, you may at some point be faced with the question of whether or not you should take on a partner or acquire another firm.
Doing so may come with rewards—particularly, growing your business—and potential pitfalls, including not thinking through how changes will morph the long-term decision-making process at your firm. Below, we break down what you need to know when it comes to expanding your firm’s leadership.
Law firm partners
Law firms can have two tiers of partners: equity and non-equity.
Equity partners are financially tied to the firm’s finances, up or down. They also have a say in making decisions involved in running the firm.
Equity partners typically don’t receive a salary but instead receive a draw—or a portion of the firm’s profits—monthly or quarterly. In addition, they may be asked to “buy in” to the firm, or contribute capital to the firm, when they are made partner. They may also be asked to put personal capital into the firm if the business is going through a rough patch.
There are generally two ways of determining an equity partner’s percentage of the firm. The lockstep approach reflects the partner’s time with the firm. In this method, the partner’s percentages are determined according to how long they’ve been with the firm.
Alternatively, “eat what you kill” firms determine percentages according to how productive a partner is.
A second tier of law firm partner is the non-equity, or “income,” partner. As the name suggests, non-equity partners are still paid a fixed salary. They don’t receive a draw—though they may still have some voting say in the firm.
That said, non-equity partners are often understood to be on track for becoming full equity partners in a couple of years.
Acquiring another firm in a merger can be a smart, strategic move toward growing your business—or a grave financial mistake. To achieve the former and not the latter, it’s essential to do your research and make the decision from a perspective of adding depth or breadth to your practice—not as an attempt to improve either firm’s finances.
Conduct a thorough valuations process and review of both your own and the other firm’s finances. Leverage practice management systems to gather and review KPIs for a detailed understanding of how the firm is running.
Closely examine how the merger could complement your existing practice by expanding your practice area in a related field or specialty or by growing your geographic presence in step with how you currently operate.
What to look for
Whether you’re taking on a partner or acquiring another firm, there are a few things to consider.
First, is your business structure going to stay the same or change? If you are acquiring another firm, are your business structures different? You may have been a sole proprietorship, but what will you become now?
Common firm structures include:
- Limited liability company (LLC)
- Limited liability partnership (LLP)
- General partnership
- Professional association
Additionally, consider pay tiers. If you’re taking someone on as a partner, what will their pay look like now? How about in three years? Do you have reason to believe they will earn what you’re going to pay them through new business generation?
Culture and personality
An underappreciated but vitally important consideration is culture or personality—yours and the other firm’s or potential partner’s.
Are you seeking to create a highly competitive, individualized firm with an “eat what you kill” compensation structure? Or do you want to prioritize teamwork, collaboration, and referrals—and take the traditional lockstep approach?
Do your communication styles mesh? And, if you’ve been the sole owner of your firm for years, are you ready to share firm decision-making with someone else? Finally, do you two have the same vision and goals for growth?
Finally, whether you’re bringing on a partner or acquiring another firm, the potential for new business generation should be a primary consideration in making this move.
Many larger firms select partners not simply based on how long or hard they’ve been working at the firm but also on their ability to bring in revenue. So while nuances around personality and communication styles will be extremely important at a smaller firm, the potential for business growth will, of course, have significant implications, too.
Just as you would in a merger, consider how growing your firm with a new partner will expand your business.
How will “more” work for you?
Whenever you seek to bring other lawyers into your firm, it’s essential to consider the decision from many different angles. Changes to business structure, culture, and new lead generation will all effectively change your firm.
It can be tempting to think that growing your firm is automatically for the best—and this may well be the case. But any growth will also change what your firm is. So do your research and fully investigate how taking on more will improve your firm’s future.