Because your partners and associates leave, law firms are worth less than you'd like

One of the biggest risk items is the increasing free agency attitude of any partner with a book of business, says Ron Seigneur.  "Firms are overpaying for the talent, and in some cases taking extra lawyers they don't even want to get the deal done," he says.   His co-presenter on today's "Valuing Law Firms" webinar from Business Valuation Resources, Stephen "Pete" Peterson, agreed.  "The signing bonuses seem be getting bigger and bigger."

It's not only partners who are leaving.  "Sixty percent of associates leave by the end of the fourth year, and that's just a huge cost item for these firms," Peterson says.  For the top firms, billable hour targets continue to be above 2000 hours a year; "a recent Yale Law School study concluded these lawyers need to spend 3050 hours a year at work to hit 2200 billable hours."  The conclusion is that there's no sign law firms are willing to consider new models that don't cause both partners and associates to leave regularly.

Professional staff problems have existed as long as the legal profession has been around, but it's now critical because realization and collection rates have dropped below 90% for the first time in the last two years.   And, the slowdown has meant that less productive partners are now billing at rates below carrying their own weight.  "There are many partners at the AmLaw 200 firms that shouldn't be there any more," claims Peterson.   Since he worked at the leading law firm consulting practice (Hildebrandt

There might be some solutions, though few firms are using them:

  • Peterson mentions that Orick, the large San Franciso firm, has outsources a lot of their work to West Virginia, where they can have non-partner legal positions that save clients money and also reduce turnover.
  • Merging continues to be popular as a way to bind partners--and the mergers keep getting bigger.   There's a new 2500 lawyer firm now--Hogan Lovell, created by merging one of the leading Washington DC firms with a large London firm.  DLA Piper now has over 4000 lawyers internationally.
But, what starts as a trickle can become a landslide and, in fact several large firms have gone bankrupt recently.   "Watch out for firms who lose a major rainmaker.   That can be the beginning of the end," Peterson warns appraisers.   "And, be careful if you see particularly strong practice areas where the parts of the firm may be worth more than the whole."   Both are signs of imminent partner and associate defection.

"You get a couple of empty offices in a big expensive law firm space and the remaining partners start to panic," Seigneur agreed.