Law Practice Management

Is your law firm in trouble? These scenarios pose threats

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Does your law firm have significant long-term bank debt? Does it give minimum guarantees to lateral partners? Then it could be at risk of faltering or failing, according to a law firm consultant.

Altman Weil principal Ward Bower says that even one of these scenarios may put a law firm at risk:

1) Significant long-term bank debt. Longer-term loans can be a threat if they exceed the depreciated value of fixed assets plus cash on hand. When that happens, the firm is borrowing against future partner earnings. Reducing future partner income makes the firm vulnerable to poaching.

2) Expiring leases. Landlords are likely to seek individual partner guarantees in new lease agreements. Partners approaching retirement won’t want to give such guarantees, creating the risk of a fractured firm.

3) Unfunded retirement obligations. If more than 1 or 2 percent of revenues are being paid to partners who are no longer with the firm, current partners may be tempted to leave for a firm without such a drain on their compensation.

4) Minimum guarantees to lateral partners. Laterals with guarantees who don’t meet expectations for revenue generation end up draining income from other partners.

5) No succession plans for firm leadership. Firms can lose direction when a leader dies or retires.

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