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January 15, 2009

Why Partnerships May Seem Good But Can Be Costing You Money

I am working with a very committed client at the moment who has been sharing stories with me of her partnership experiences and why she knows she will be leaving her firm and is working towards this goal very soon.  And her story is probably more common then most realize.

She is the partner in a five person law firm in a well-heeled town in Maryland.  She has been the partner in this firm for more than 8 years. She is the youngest partner and does very well in her two chosen practice areas.  She made partner because she was good, really good at rainmaking and handling her clients.  This is perfect.  However, as typical, her partners are second wave with extraordinary overhead, support-staff heavy and associates overpaid to the point they are disinterested in learning rainmaking activities themselves.  They are just very comfortable with their paychecks and she is just one voice.  And this typical partnership expects the younger partners to start buying out the older partners in a few years while pushing the associates up through the partnership track.  That's the model.

In 2007 she alone brought in $400,000 more in billables than any other partner.   She took home only an extra $106,000 from all her work.  The following year, believing she may have to go overseas because she is in the reserves, she wanted to spend more time with her family, took fewer cases. Yet her partners relied upon her to do all the heavy lifting.  When she didn't they responded typically not realizing they had an obligation to up their game as well and said, 'wassup?'.  They just depended upon her for their income and got lazy.

This was when the lightbulb went off. She realized if she can generate this type of revenue and is just giving it away because the others aren't pulling their weight, why should she be in a partnership?  And so she is breaking free.

If her partners weren't so archaic in their thinking, billable hours, high overhead, support-staff heavy, they would be more profitable.  But their behaviors aren't going to change.  She recognizes she needs to be out from under this way of thinking.  This is also the mindset of a solo - if I'm going to work this hard, I'm going to do it for myself.'

I bring this up now because as more and more people are being forced into going solo (I get at least two e-mails a day of stories of lawyers being laid off and frantic about what to do) they are also going to make decisions based upon fear.  And fear drives them to form unhealthy partnerships without understanding what partnerships really are.

So, I am going to resurrect an older post as it is timely today:

To Partner or Not To Partner - That Is The Question.

I remember reading years ago about a marriage prenuptial agreement that was so specific as to each spouse’s responsibilities, right down to the husband’s obligation to put the toothpaste cap back on the toothpaste tube, that most people thought it was a prenup on steroids. The spouses, however, clearly loved it because it laid out all the expectations each had of the other so neither one was in the dark about their responsibilities in the marriage.

Well, partnerships are like marriages. Half will last a lifetime, the whole being greater then the sum of it’s parts; growing together, getting stronger through adversity and filled with compromise. The other half will end up in a bitter and nasty separation and dissolution fighting over assets and the custody of the children (read "clients"). Therefore the burning question that’s always asked and must be answered is, "to partner or not to partner?"

Like marriage, partnering should be for the right reasons. However, most lawyers enter partnerships for the wrong reasons borne out of fear of the unknown, doubt about their own capabilities and a lack of understanding about what partnership truly means. Do you really need a partner and all of the emotional and financial entanglements it entails in order to assuage those fears? The answer is a resounding "no."

These are the wrong reasons to partner with another lawyer:

"I want someone to bounce ideas off of." As a rule, most lawyers are very generous with their knowledge and will give invaluable guidance if asked. It is important to maintain relationships with your peers, law school alumni, your bar associations and the like and you will get all the guidance and mentoring you need. Continuing legal education will provide a great base for practical knowledge and an opportunity to network with others in your area of concentration. Depending upon your office selection, should you choose a shared suite, you will have a built-in sounding board without the financial intimacy.

"I want to be able to take a vacation and know my clients are being taken care of." (And from the client’s perspective, "who will take care of my case if you are not available?") Any solo will tell you they have strong reciprocal relationships with other solos and cover for one another when necessary. It is very important you have a dialogue with your clients about a planned or unplanned absence even if the client never asks because it is a legitimate concern of clients who hire solos.

"I don’t want to take all the financial risk." If you are going out on your own, you are taking a calculated risk, period. If you wish to defray cost, how you set up your office, whether working in a suite of other lawyers with shared services or setting up shop by yourself, will determine your cash outlay and financial risk. If you’ve already invested nearly $100,000 in your education is a few more thousand any riskier?

"I’m not very good at (fill in the blank)" Sharing your profits with someone simply because they have an accounting background while you can’t balance a checkbook is not a reason to take on a partner. It is a reason to hire an accountant. If they don’t work out you get another. Not so easy with a partner.

"I want to partner with someone who can teach me." Again, sharing the profits in exchange for guidance you can pretty much get for free if you are properly networked, belong to the right associations and taking continuing legal education, is just giving away your hard-earned dollars.

Do not take on a partner out of fear. You will be living and breathing this partner morning, noon and night. You are depending upon this person for your livelihood while making them the caretaker of your professional reputation.

The short list of the right reasons to take on a partner is: You share a similar vision of where you want to go with your law practice and how you want to get there and are committed to being in it for the long haul. You respect each other's ability as a lawyer and trust the other to make decisions in your absence which will be binding upon you. Each of you has something of comparable value to bring to the partnership, skill sets which compliment and enhance each other. Both of you recognize your equal responsibility to develop business and bring in clients. You share a work ethic and morals. (Partnership brings both benefits and liabilities and you do not want to be vulnerable to the ethical missteps of a partner who does not necessarily share your values). You work well together.

Partnerships can be a wonderful experience when entered into for all the rights reasons and with the right partner. If you decide to partner, make sure you have a partnership agreement that clearly spells out all the financial agreements between the partners not just while you are together but also should you part company....right down to who puts the toothpaste cap back on the toothpaste tube.

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Comments

shg

While I agree with the basic premise of this post, I'm troubled by your dismissing out of hand some very real issues for solos, and giving a false assurance that these aren't real problems. They are and should be part of the consideration in deciding whether to take the leap.

For example, CLEs are hardly a substitute for being able to walk into the next officer to bounce an idea around. Similarly, every solo does not have a support system of other solos willing to jump ito the breech whenever needed. Some may, but to suggest these aren't problems is simply false. They are.

The better answer is that in the trade-off between working for the benefit of others, they do not offset the benefits of a solo practice. But then, solos will work harder, longer and better than lawyers in partnerships because they must. To suggest that these aren't problems isn't true and impairs a potential solo's ability to make a reasoned decision based on the reality of solo practice. It's unnecessary to make it appear that solos live a charmed career. It has its upside and its downside, and to suggest otherwise is simply false.

Jeena Belil

Your post is on-point, Susan. My entire legal department was laid off in September of '07. A colleague and I had lengthy discussions about a possible partnership. Ultimately, we decided not to go ahead, mainly because we had different visions of what we wanted our practice to look like. We have both gone solo and we remain each other's court back-up, idea bouncer and cheerleader.

Susan Cartier Liebel, Esq.

@Scott - This post isn't about the pros and cons of 'taking the leap.' It is presumed you are. The point is once you've decided to take the leap what are the pros and cons of creating a partnership, the thrust being don't take on a partner for the wrong reasons, do so for the right ones.

@Jeena - I'm glad you and your friend recognized marriage was not appropriate for the two of you and in this you preserved the friendship, professional and personal, and each benefits from the other without the financial intimacy.

Wes

In my mind, the question "To partner or not to partner?" is becoming outdated for "third wave" lawyers (nod to Chuck Newton and others championing the third wave concept). The question implies that there are two paradigms and we all must fall into one or the other. Susan's post begins to delve into the intricacies of potential partnerships.

I would offer that the question, from the beginning, should be posed differently by today's solo: "How can I utilize the benefits of partnership without taking on the added liability and baggage that is inherent to traditional partnerships?" Essential in today's challenging environment is the ability to parse old paradigms to gain understanding of their constituent parts and apply that newly refined knowledge.

Partnership is merely a tight set of agreements between you and another professional. Can you gain the same benefits from professionals without being forced to agree to the same type of restrictive terms? Of course, it's possible to structure a partnership loosely enough so that both partners have the room they need to breathe. But it seems illogical that partnership is the only relationship that can provide the wanted set of benefits.

Look around, consider your entire network of contacts, propose ideas to folks. If they have interest pursue it further. The under current of Susan's post is entirely correct--look before you leap and make sure it's the right place and time for you to jump. My only nugget to add: Don't build boxes where they don't exist--they will only hold you back.

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