Practice Management

Year End Distributions to Law Firm Partners

By Tom Collins

It is probably too late for most law firms, but if you haven?t written those yearend distribution checks yet you might want to read two of Jim Cotterman?s recent blog posts.  See his post Balance Sheet Metrics and his post Partners Contribute Hidden Capital. Cotterman is big on new partner buy- ins and instructs law firms to reinvest a portion of profits back into the business.

Cotterman puts it this way:

 ?Partners should receive a fair exchange for their own labor plus a share of the profit from the labor of others less the following:

LESS investment for growth?new people, offices, practices and markets are often funded out of current cash flow.  Since firms deduct these expenses currently they are the hidden capital invested by owners to grow the business.

LESS investment for capitalized assets?items shown on the asset side of the balance sheet when there is no corresponding third party obligation for funding those assets (debt or capitalized lease obligations).

LESS investment in working capital?higher salaries for associates being a prime example of a limited duration cash gap often funded by initially lower equity partner compensation.?

Cotterman is right. The future success of the law firm depends on what you do not distribute. Getting partners to accept leaving something on the table isn?t easy, however. It is made harder by practices that fail to pay departing or retiring partners for their share of the ?value? of the law firm.

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Full post as published by More Partner Income on December 20, 2007 (boomark / email).