Critical Questions for Future Partners

Maybe You Should Pass Up That Partnership Offer (Really)

By | Aug.09.17 | Associates, Daily Dispatch, Law Firm Management, Legal Careers

You’re in a small firm with one or more baby boomer senior partners, and they’ve just made you an offer of partnership. Congratulations. Maybe.

Before you accept, there are lots of questions you should ask. Here are just a few:

  • Is there a written partnership agreement? May I see a copy?
  • Is there a buy-in? If so, what’s the price, and what share of the firm do I get?
  • How is compensation decided? Is there a written compensation structure, or is it more like “The Three Musketeers” — all for one, one for all? If so, what can I expect for compensation?
  • What if one partner’s revenues drop? How does compensation work in that case?
  • What are partner plans for retirement or transition? Am I part of those plans?
  • What are partner expectations for buyout of their shares?
  • Is there a written provision regarding partners who become disabled or die?
  • Is there an expectation of compensation to retired partners for existing clients?
  • What is the plan for retiring partners to transition their client and referral relationships?

Don’t Go Into a Partnership Without a Road Map

They want to make you a partner, but those in control usually want to stay fully in control until the day they leave. This means you may have no control over the direction of the firm or your practice until the controlling partner walks out. Without a carefully devised plan that transitions management and ownership, you could be owning a piece of a “that’s the way we’ve always done it” firm. Saying yes could mean you still have no more control over your future than when you were an associate. Except that you’re financially on the hook in any crisis.

Most traditional small firm partnerships are like the proverbial shoemaker’s children. While they may do contracts and agreements for everyone else, they have none of their own. They’re traditionally handshake-based. When there is an agreement, it is often vague to the point of useless. In fact, many small firm partnerships aren’t really partnerships. They’re more like collaborations — or cost-sharing relationships — than true, businesslike, partnership structures. I’ve seen many “firms” where each partner does their own billings and collections and keeps their own set of books.

If this is your situation, be careful. If you want to accept, your job is to codify and clarify the relationship and your future. That can be difficult. Your incipient boomer partners likely will argue against it, and may even be offended by your suggestion. (“Why do we need a written partnership agreement? We’ve worked together for 30 years without one.”)

So, your challenge is not simply to codify an agreement but to codify an agreement that makes your boomer partners happy.

Critical Questions to Ask Your Future Partners

First, if there is anything in writing about the partnership, find it. And unless the partners state unequivocally that there is no agreement, keep looking. A document discovered at a later point could cause problems. You want to find that document and reference it specifically as superseded in the new document you’re drawing up.

Next, call the partners together and get answers to these straightforward questions.

Ask: “Do you plan to retire?” Most attorneys don’t want to retire, they just want to “slow down.” Even those who profess the desire to retire seldom do, for two major reasons. First, they don’t have enough money set aside and need continued income. Second, most attorneys so genuinely become “attorney” that when they stop, they literally don’t know who they are and often lose their compass. Most would like to die at their desks.

If they plan to retire, ask: “What are your expectations of your partner relationship as you retire?” The answer you’re hoping for is, “I’ll just step back, slow down and finally step away,” because that’s the traditional approach. “We got together for mutual support, and when we leave, we leave.” That’s one of the few advantages of an unwritten partner agreement. Partners can separate with no obligation beyond cleaning up shared operating costs. So, if that’s the expectation, put that into your agreement.

However, you might be surprised that the retiring partners expect some payout for the value of their shares. If so, find out what they expect. Here’s where the partnership offer could get dicey, if the partners expect you to buy them out as they retire. The game may not be worth the price of admission, so you need to know exactly what they want. If there is — or is not — a buyout expectation, put it in your agreement.

Follow-up questions to the “walk away” answer. You need to know if the partners expect compensation if you do work for former clients they originated. Again, you hope the answer will be no. But they may expect a piece of the action. In fact, even if they don’t expect it, that’s exactly what you’ll want to set up in the agreement you are drafting, as a carrot to signing. If there is an expectation for revenue-sharing on past clients — or new clients they refer in — codify it, and put it into your agreement.

Plan for Their Transition Out

No matter what your future partners say, don’t count on their full retirement. Your new partnership agreement must lay out the parameters of transitional stages from active to semi-retired to of counsel to completely out of the firm. This is of two parts:

  • First, compensation based on production plus a share of profits based on ownership shares
  • Second, with a minimum revenue level to maintain that nice office

Put it in your new agreement.

Disposition in Case of Death or Disability

One of the most important questions you can ask is whether there are written provisions for a partner who dies, becomes disabled or whose revenue contribution diminishes. Often, the disabled lawyer expects to continue to get their share of revenues, or at least some share, even when they’re not producing. This is a dangerous expectation — one that can cause longtime partners to abandon the practice. Again, codify this, and put it in the agreement.

Here is an urgent corollary: Regardless of any written partnership agreement, the firm must have — right now — a written agreement signed by all partners regarding the disposition of their partner shares in case of death or disability.

Why? Because not every attorney has an effective estate plan (sometimes not even the estate planning attorneys). Partners of an attorney who dies may discover that their dead colleague’s spouse or another relative now “owns” part of their firm. Not ethically possible, but it happens far too often. In fact, I just completed work with one such firm where the non-attorney son inherited his attorney father’s firm.

The Importance of a Partnership Agreement That Works Now — and Later

Yes, it’s usually better to hook up with an established attorney or firm, but don’t be too eager. It is critical that you fully understand the landscape of what you’re walking into and endeavor to codify it all in a partnership agreement that works for you and them.

Plus, there is another and future reason for you to build a comprehensive partnership agreement. If all goes well, one day soon you’ll be the partner offering partnership to others as your firm grows. And you’ll already have a sane and sensible agreement to work with.

Dustin Cole is a business and marketing advisor for law firms with nearly 25 years of practical experience helping lawyers build better, more profitable and more satisfying businesses. He has presented practice management, marketing and risk management CLE programs for more than 70 bar associations, as well as hundreds of firms. He especially enjoys working with small firms. Learn more about Dustin at awww.attorneysmasterclass.com.

Illustration ©iStockPhoto.com

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