Should I Stay or Should I Go? Managing Your Law Firm Separation by Gaetan J. Alfano and Leslie A. Mariotti
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he devastating financial fallout of the COVID-19 crisis has exacerbated law firm dissolutions and key attorney separations. Firms that were overleveraged, undercapitalized, poorly managed or otherwise unable to adjust to revenue slowdowns have failed outright or are struggling to adapt. Stakeholders, whether partners or shareholders, have been forced to consider their professional options, including voluntarily (or involuntarily) separating from their firms. We have counseled dozens of firms and attorneys with respect to professional transitions over many years. In our experience, our attorney clients who successfully forged new careers have followed these five suggestions.
Consider Your Options While Your Practice Is Vibrant The thought of uprooting your practice and starting over, either in another firm or on your own, is incredibly daunting. Attorneys, by nature, are creatures of well-honed habits. Consequently, you may find yourself succumbing to inertia and waiting until your firm literally is falling apart before planning your future. This inactivity is a huge mistake, as it is impossible for a practice to thrive in a failing environment. Instead, the consequences of business failure—e.g., working with limited and dwindling resources, dealing with professional and staff departures and the resulting impact on clients and cases, and attempting to manage a caseload despite the distraction of pressing administrative and financial issues—erode the time and energy required for an effective practice. While the icon of the “last man or woman standing” may play well in survival video games, it can be an unmitigated disaster in a failing law firm. If you have considered the issues facing your firm (and the impact on your practice) and have not been able to resolve them, then consider moving on before these issues degrade your career.
Know What You Are “Selling” and Sell Your Strength This next step requires a critical and honest self-evaluation: • What is the strength of your current practice? • How many clients are likely to follow you to another firm or take a chance with you if you choose to start your own firm? • Have you evaluated potential conflicts of interest if you affiliate with another firm? • How many other professionals and support staff will you need to service your clients and at what cost? • If you intend to start your own firm, how will you finance it? Do you have a rudimentary business plan? 22
Attorney Journals Orange County | Volume 180, 2021
Our most successful attorney clients all had one particularly important factor in common—a thoughtful plan to focus their practice in an area of strength serviced by as few professionals and staff as needed. They jettisoned marginal or declining practice areas and deferred plans to expand into others. This disciplined approach stresses focused practice analysis and business development while minimizing administrative expense. It also enhances opportunities for a strategic fit with a potential acquirer. Before considering you as a lateral partner or shareholder, a firm may impose this discipline by requiring you to complete a detailed questionnaire addressing important metrics such as historical billings and collections, portable business estimates, and staffing requirements. Alternatively, if you intend to start your own firm, this same exercise will provide you with a stronger, more analytical platform for success than a broad “let me see what comes in the door” approach to your career.
Understand These Three Fundamental Documents These are your firm’s lease, your firm’s operating line of credit, and your partnership or shareholder agreement. These documents inevitably will shape the circumstances of your departure. After payroll, a lease typically is a firm’s next greatest expense. Most attorneys, nevertheless, ignore the significance of the lease, blithely dismissing it as a “corporate” contract. Did you, however, agree to personally indemnify the firm for its lease and other corporate obligations through your partnership or shareholders’ agreement? If so, then you need to address it and any other “corporate” obligations that you may have overlooked. Did you also personally guarantee the firm’s operating line of credit or other credit facility? If so, will the lender agree to remove your guaranty if you leave? Is the firm in a financial position to satisfy the credit facility if you leave? Will the lender require new underwriting from the remaining partners/shareholders before agreeing to remove your guaranty? These too are critical questions that you must consider in any departure. Do you know your specific rights and responsibilities under your partnership/shareholder agreement? How much notice is required? Did you make a capital contribution and, if so, how/ when will it be repaid? Are you owed repayment of a loan to the firm and, if so, what are the repayment terms? If you are owed repayment of either a capital contribution or loan, did you agree in your partnership or shareholder agreement to stand behind other creditors, such as the bank and landlord? Finally, is your partnership/shareholder interest redeemable and, if so, under what terms? Older agreements tend to contain more lucrative separation terms for a departing partner/
