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OWNER'S MANUAL

How to Evaluate Law Firm Financials

Revenues and expenses and benchmarks, oh my!
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Dear Jeff,

Law schools teach the law but they don't teach business. I recently started my own estate planning firm and am struggling to make what I think I should. Are there benchmarks for earnings and expenses I can use?

-- Name withheld by request

I know a bunch of lawyer jokes but not much about the business of law, so I asked the American Academy of Estate Planning Attorneys (AAEPA), an organization that provides its members with educational materials, research, and practice management techniques for insight.

The following are benchmarks the AAEPA uses to analyze a new member firm's financials. (Keep in mind the figures were developed from analyzing 17 year's worth of results for rural and urban estate planning firms across the U.S. so they may not apply to personal injury, criminal defense, or other areas of practice.)

While specifics vary from firm to firm, the following tends to be fairly consistent:

Revenue per employee on payroll: $150,000

Easy to calculate: Gross revenue divided by total employees. A half-time employee counts as a .5, an employee who works four days a week counts as a .8, etc.

If your firm falls below $130,000 per person that's a huge warning sign. (Of course, since your practice is new it could take time to get there.) Otherwise your firm is likely to be over-staffed and/or inefficient.

Revenue between $150,000 and $175,000 per employee is great. To get there you'll need to charge consistent fees, not under-sell your value, put solid systems in place, and maintain an extremely low employee turnover rate. 

I know what you're thinking: "How can my paralegal generate $150,000 a year?" Obviously he won't, but your setup should ensure that you are freed up to as much high-revenue work as possible--which then raises your per-employee average.

Revenue per attorney: $500,000

Gross revenue divided by attorneys on staff.

Well-run firms tend to have per-attorney revenue of at least $500,000, but many of the AAEPA's member firms are closer to $1 million per attorney. Of course those firms have worked long and hard to reach that level and their structure supports it; a two-attorney firm might have one "back-office" lawyer fulfilling the majority of the other lawyer's $1 million rainmaking, client-landing efforts.

Since you're new a lack of clients may be your biggest revenue issue. Past that, firms that tend to fall below this benchmark tend to do so because their attorneys are doing non-attorney work like drafting correspondence, drafting and editing documents, attending final signing meetings, checking the mail--all the stuff that should be delegated.

Salaries: 65 percent of gross revenue

Of that amount, a firm's owner should be paying themselves 40 percent of gross revenue. In your case that might be high since you've likely made significant early investments in furnishings, equipment, etc.

Then 25-30 percent of gross revenue should go to staff and non-equity attorneys. You might fall on the low range because your employees are relatively new and possibly inexperienced. Firms with long-term skilled employees may decide to pay a little more, both to reward service and to keep turnover low.

Marketing: 8-10 percent of gross revenue

Generally speaking, spend less than 8% of gross revenue on landing new clients and you'll probably struggle to meet revenue goals. Spend more and you're probably not marketing wisely.

Another way to look at marketing results is on a per-case rather than per-client basis. If you land me as a client, that's one client. If you do an irrevocable trust, a family limited partnership, and a durable power of attorney for me, those count as three cases. Divide your marketing expense by the number of cases you handle. If you're spending more than $250 per case your marketing is relatively inefficient.

Rent: 6-7 percent of gross revenue

You might spend more for prestige address, and only you can decide if that expense is worth it.

Otherwise, spending more probably means your space is too large. Total office space, counting offices, lobby, conference rooms, and other common areas, should range between 250 and 350 square feet per employee.

If your number is higher you could consider moving, but you could also consider subletting space to a complementary firm like a CPA or financial planner. Not only will you reduce expenses, you might create a nice cooperative setup that benefits both firms.

Common Warning Signs

According to the AAEPA, here are some common business issues struggling law firms tend to share:

  1. Unhealthy fees. Too low or too high.
  2. Fudged fees. Different fees for different clients, different fees from one attorney to another in the same firm, tossing in additional services at no extra charge for some clients and not for others... in short, sloppy fee structures.
  3. High employee turnover. Constantly training and ramping up new employees.
  4. Poor marketing plans. To paraphrase Field of Dreams, "Spend it... but they won't necessarily come."
  5. Attorneys performing non-attorney tasks. Leave non-attorney work to non-attorneys; attorneys should generate revenue.
  6. Ignoring additional work. The client who comes to you for a Will may also needs a Trust, a Durable Power of Attorney, maybe a Pourover Will--basic needs meetings can often uncover additional client needs--if you're paying attention.

Your results may eventually vary (hopefully in a good way), but for now, use these benchmarks as targets to shoot for as you build your practice.

And then call your law school and ask, "Granted I took business law, but why didn't you teach me anything about the actual business of law?"

Last updated: Jan 22, 2014

JEFF HADEN | Columnist

Jeff Haden learned much of what he knows about business and technology as he worked his way up in the manufacturing industry. Everything else he picks up from ghostwriting books for some of the smartest leaders he knows in business.

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.



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