Starting a law firm is a business fraught with risk and frequently blessed with reward too. But there are traps and the path towards success can be pockmarked by financial, regulatory and lifestyle issues that can imperil the lawyer entrepreneur.
Recruiter Harrison Barnes has written of the top 10 reasons why you should NOT start your own firm in a vein that attempts to avoid being overly pessimistic. One reality strikes home with these initiatives: like most businesses, most ‘new’ law firms fail. But failure can also be a slow-burn affair that doesn’t hit home until something happens that persuades the principal or principals that ‘enough is enough’.
So Mr Barnes has kindly assembled his 10 reasons why you should not begin on the road to law firm self employment.
His 10 reasons why most law firms fail begins with the obvious one that practising law and operating a business are two, quite separate things, which require different skill levels.
When attorneys speak with me about starting their own law firms, one of the first things I ask is how much money they are currently making. If an attorney is making $200,000 a year, this is a good income. The attorney often figures: “My billing rate is $400 an hour. If I just bill 500 hours on my own I will make as much money. Even if the attorney could bill the same amount of money to clients working on his or her own as he or she was billing while working inside of a law firm (the attorney actually would not be able to do this), this flawed business logic misses the following.
In addition to this $200,000 a year, the attorney is generally getting:
- An expensive, nicely built office to go to each day.
- A group of other attorneys to bounce ideas off of each day.
- A phone system, Internet, computer and other “electronic support.”
- Secretarial, paralegal and word processing support.
- A group of other attorneys who go out and gather work for the firm and bring work in each day.
- Reviews to keep the quality of the attorney’s work product up.
- A “big name” that allows the attorney to have credibility in the marketplace.
- Paid vacation, paid sick time and other benefits.
- Bonuses paid for productivity.
- Health insurance.
- Management to make decisions about things like whom to hire, whom to fire, where to get office space, what phone system to use, how to review people, how many people to hire, where to open and close offices, how to pay people, when to slow the law firm down and when to grow it, whom to hire to get clients and more.
- A copy room, copiers, paper, toner, fax machines and so forth.
- Westlaw, Lexis, a law library and other research support (maybe even a librarian).
- IT staff to run servers, keep the computers running and monitor the attorney’s emails.
- Payment of the attorney’s payroll taxes, workers compensation insurance, 401K plan and other benefits that can add up to 15% or more of the attorney’s salary.
Even big name operations like Brobeck; Finley Kumble; Mudge Rose; Howrey & Simon; Dewey LeBoeuf found themselves in a position where expenses outstripped revenues – a key lesson for any law firm.
Take something as simple as getting clients to pay their bills. Most solo practitioners and attorneys with small law firms will tell you that they rarely collect 80% of what they bill. Clients are “fickle” and when you do not have a large name behind you it is often difficult to get them to pay their bills. Attorneys run the risk of not getting paid all the time and it is even more difficult when you have your own law firm.
“I’ll require everyone to have a replenished retainer at all times!” you might say. Good luck with that. This might work to some extent depending on your practice area; however, this generally will also reduce the number of clients who are interested in hiring you.
So what are the other nine reasons? They run from the reasons for starting a firm (no other option is open) to the need to handle contingency work to a lack of respect for the solo practitioner by judges and others.
But there are more that are worthy of consideration. You can see the full list at BCG