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    Wisconsin Lawyer
    November 01, 2017

    Pass On a Partnership Offer? Maybe

    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. Or maybe not.

    Dustin A. Cole

    work team looks at drawing board

    Maybe you should pass up that partnership offer – really.

    In my work with small firms, I see many reflections of bygone eras that can cause you lots of sleepless nights, unless you do your own due diligence.

    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 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 then?

    • 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 any written provision to deal with a partner who becomes disabled or dies?

    • Is there an expectation of compensation to retired partners for existing clients?

    • What is the plan for a retiring partner to transition his or her client relationships and referral relationships?

    The Bottom Line: Don’t Go Into a Partnership Without a Roadmap

    And here is one huge caution. Even though they want to make you a partner, those in control usually want to stay fully in control until the day they leave, meaning that you may have no control over the direction of the firm or your practice until the day the controlling attorney 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, with no control over your future and in substantively no different position than when you were an associate. Except that you’re financially on the hook in any crisis.

    Dustin ColeDustin Cole, Master Practice Advisor, Attorneys Master Class, 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.

    The reality is that 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. And when there is an agreement, it is often vague to the point of useless. In fact, most small-firm partnerships aren’t really partnerships, they’re more like collaborations – in other words, cost-sharing relationships – rather than a true, businesslike, partnership structure. I’ve seen many “firms” where each partner does his or her own billings and collections and keeps his or her 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. And that can be difficult when your incipient boomer partners will argue against it, and perhaps even be offended by your suggestion. “Why in the world do we need a written partnership agreement? We’ve worked together for 30 years without one.”

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

    So where to start? As the song says, “Let’s start at the beginning.” If there is indeed anything in writing about the partnership, find it. And unless they state unequivocally that there is not an agreement, keep looking. The document discovered at a later point could cause problems. So if there is a document – any document – find it, and reference it specifically as superseded in the document you’re going to draw up.

    Critical Questions to Ask Your Future Partners

    Next, get the partners together and ask them some straightforward questions, such as:

    “Do you plan to retire?” In my experience, most attorneys actually don’t want to retire. They just want to “slow down” and work at a slower pace. And even those who profess they want to retire seldom do, for two major reasons. First, often they don’t have enough money put aside to retire, and need continued income. Second, if they did retire, who would they be? The sad fact is that most attorneys so genuinely become “attorney” that when they stop, they literally don’t know who they are. Most attorneys would like to die at their desks.

    A grim ABA statistic from some years ago says that the average longevity of a retired lawyer is 3.5 years. Of course, that’s partially because some lawyers don’t retire until they are 82. But a sadder fact is that a lawyer who does decide to retire fully often literally loses his or her compass and goes quickly into an age decline.

    It’s critical that you fully understand the landscape of what you’re walking into – and that you endeavor to codify it all in a partner agreement that works for you, them – and the future.

    “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 other obligation than cleaning up the shared operating costs. And if that’s the expectation, put that into your agreement.

    However, again you might be surprised that they 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 their expectations are. So if there is – or isn’t – a buyout expectation, put it in your agreement.

    If you do get the “walk away” answer, ask a couple of follow-up questions, such as:

    “After you retire, do you expect any compensation for old clients you originated who come back?” Again, hopefully the answer will be “no.” But you may be surprised. They may expect a piece of the action. And 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.

    So, no matter what your 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 out of the firm for partners. 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 into your new agreement.

    One of the most important questions you can ask is the following:

    “Is there any written provision for a partner who dies, becomes disabled, or whose revenue contribution diminishes?” Too often, the disabled attorney expects to continue to get his or her share, or at least some share, of the revenues even when not producing any. This is a dangerous expectation – one that can cause longtime partners to abandon the practice. Again, codify this, and put it into the agreement.

    And here is an urgent corollary to this. Regardless of any written partnership agreements, the firm needs to 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 estate planning attorneys. Partners of an attorney who drops dead may discover that their dead colleague’s spouse or other relative now owns a 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

    And there is a final and future reason for you to build a comprehensive partner 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 partner agreement to work with.

    Yes, it’s usually better to hook up with an established attorney or firm. But it’s also critical that you fully understand the landscape of what you’re walking into – and that you endeavor to codify it all in a partner agreement that works for you, them – and the future.

    There is more – lots more. It’s a bit of a minefield, and as they say, the devil is in the details. Much of the devil will be in maintaining the cooperation of the senior partners throughout the process. For small firms creating succession and transition plans, an outside professional can be a positive resource in developing the agreement and maintaining good relationships.

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