The Fork in the Road – Two Paths for Small Law Firms to Grow

by Jennifer Gillman | Gillman Strategic Group

Small law firm owners and solo practitioners are certainly aware of the phrase, chief cook and bottle washer. Not only are they aware of it, but they also live it every day. As a business owner and practicing lawyer, she must handle everything from the most important tasks to the smallest, most menial tasks. One minute, the lawyer is closing an important deal or arguing a case; the next moment she is ordering office supplies and paying the phone bill. With all these responsibilities, how can she also financially grow her firm? As a legal recruiter, I have seen two paths: merge or hire.

The first path is merging the practice into a larger firm. Obviously, the perceived downside is that the lawyer will no longer be her own boss. This is only partly true. The lawyer will have to adapt to the new firm by learning its culture, policies, and methods. However, the acquiring, larger firm is often flexible and accommodating - meaning that its management appreciates and understands that the small firm owner did quite a bit right to achieve her level of success. Therefore, they will allow her to practice the way she always has.

Another perceived downside is that the law firm owner will make less money by moving her practice to a larger platform. In my experience, solo attorneys and small law firm owners retain up to 70% of their revenue, while partners at larger law firms are compensated between 30 – 50% of their book of business. On the surface, it appears that merging will take money out of the lawyer’s pocket. This does not have to be the case.

For example, there is often a revenue ceiling of $1 million per year at a small firm. The firm cannot grow because the lawyer simply doesn’t have the bandwidth - too much bottle washing. With more time dedicated to business development and a deeper bench to handle legal work, she can focus on growing her own practice. Additionally, the lawyer can cross-market the acquiring firm’s other services. At most larger law firms, originations are compensated at a significant percentage. When her practice was limited to one or two areas, she had to refer business out to other attorneys. In a larger firm, that work could be kept in-house, and the lawyer gets credit for it, whether she works the files or not.

Consequently, her client revenue should be able to double when merging the practice into a larger firm. The $1 million is now $2 million. Using the percentages mentioned above, theoretically, the lawyer’s compensation can grow from $700,00 per year to $800,000. Plus, most likely, the lawyer will not have to pay for other benefits such as healthcare, insurance, and retirement plans or marketing, memberships, and professional development expenses out of her own pocket. These significant expenses can be, and should be, viewed as additional compensation.

As a former practicing lawyer, I must add a disclaimer. I find the above comments to be true only when the attorney merges her firm into the right law firm. Therefore, complete the proper due diligence before taking the merger path.

The other path to growing the law firm is hiring more lawyers. After all, there are only so many hours in a day to bill clients and run the business. While it can take some time to find the right people to help grow the firm, it could be a worthwhile endeavour. For example, I know a partner who left big law to start a firm. Through an aggressive recruiting strategy, the firm has grown to two dozen legal professionals.

Admittedly, this kind of aggressive approach may not be for everyone. That said, when revenue is stagnant, a less aggressive approach can still be effective.

When adding more lawyers is a consideration, it is important to be strategic. Is an attorney needed to service existing clients in the law firm's core practice areas? Or does the firm want to grow by offering additional services? If so, the law firm owner may want to look for people with a complementary area of expertise. For example, the firm currently only handles trusts and estates. It is leaving money on the table by referring out eldercare clients to another firm.

A bonus to hiring the right people is succession planning. If something were to happen to the law firm owner, or she wants to retire, the clients will remain in good hands. Consider these issues before following the hiring path.

You probably have attorney colleagues who have grown their practices through merger or hiring, and perhaps even a combination of both. As you look ahead to 2022, review whether either of these paths makes sense for the future growth of your solo practice or small law firm.

Jennifer Gillman, President of Gillman Strategic Group believes that successful lawyers should be happy too. As a Law Firm Matchmaker, she helps law firm rainmakers who are feeling frustrated and unappreciated to find their exact right, perfect fit at a new firm where they can feel valued and supported.

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