Starting Up: If You're Hanging a Shingle in 2011, Financial Strategy Begins Now
Jennifer Knapp. Photo by Jason Wood
Good financial management is necessary to the success of small-business owners, and lawyers who start their own firms are no exception.
Whether the entrepreneurial spirit of solo practice was lit from the current economy or was burning since you passed the bar, here are five guidelines for better money management to help your firm thrive financially.
LOW OVERHEAD
Keeping overhead low is fundamental to financial success. For every dollar you earn, if you can reduce your overhead by one dollar, there’s your salary.
Distinguishing between a want and a need is key to controlling overhead expenses. Malpractice insurance coverage categorizes as a need. Similarly, a backup server is a need—ask anyone who has seen firm records, including clients’ files, vanish—as is a disaster plan binder and electronic folder that detail who does what, when, how and where in emergencies.
There are areas, however, where the line that separates need and want can become blurred, such as office location, staff and expansion.
Can you ditch the rent? If your days are spent at the courthouse or solitarily on a laptop, paying office rent may not be a need. Conference room rental and receptionist services are available via virtual office services.
Concerning staff, the use of virtual workers is also a possibility. Office-sharing arrangements can be found, or solicited, in your local bar journals’ advertisements. Or be creative in negotiating “space for legal services” with an established busy practitioner.
An often overlooked way to reduce client file storage expense is including in your representation agreement that closed files will be returned to the client or destroyed, consistent with the period specified in your state bar association’s retention guidelines.
Meanwhile, the problem with expansion, in either space or staff, is that it increases spending. When you can look at a roster of paying clients, then you know you are at a place to consider expansion. And never expand without factoring in how the additional expense could impact your overall economies of scale. Analyze whether:
• There are different areas where you can eliminate or reduce expenses to balance increases.
• The increased costs can be passed on by increasing client fees and still be competitive.
• An additional attorney who brings in equity, more paying clients or both could bolster your asset base to cover the increases.
• Client feedback supports expansion. In my experience, clients disfavor it if the result is that their work will be delegated to a different attorney.
An alternative is assuming an established practice in order to expand your client base. Occasionally lawyers, especially in small-town settings, will post ads when they are ready to scale back or retire. Jennifer Knapp discovered a 100-year-old, third-generation firm posted on Craigslist.
After conducting extensive due diligence, including whether and how she could accomplish a smooth transition, “the deal that the seller and I structured made sure that it was in both of our interests that everything work out and that the firm remained successful,” explains Knapp. Two years later, Libera Knapp continues to thrive in Winona, Minn.
Importantly, lawyers cannot “sell” clients. However, many state ethical rules permit an “earn-out over time” payment structure. Consult the state’s particular rules before proceeding.
Click link to continue reading “Starting Up” in the January issue of the ABA Journal.
