Attach a Capital Call to a Firm Decision to Determine Level of Commitment

August 18

It is not uncommon for law firm members or managers to have big, “can’t miss” ideas. How many times have you heard someone say, “it’s a no-brainer”?

 

Let’s assume one of your partners makes one of the following statements:

  • "We need an office in big city X, or we risk losing clients."
  • "We have a chance to bring in a lateral group, but we have to move now."
  • "We should merge with firm Y before someone else scoops them up."
  • "We need to take that empty floor before the building leases it." 

How does your firm make decisions that involve significant risk?

 

In our experience, the typical firm is made up of three basic decision types:

  1. “Let’s do it, and we’ll figure out the details later”;
  2. “We need an evaluation process and a complete understanding of the risks involved”;
  3. Those who are generally against everything

 

It seems fitting that there is always a reasonable middle, If there isn’t enough might in this group, decision-making can get dicey. Either the firm acts too quickly, or it does nothing.

 

Some equity owners see the firm as an entity separate from themselves. The firm’s group of shareholders finance the risks the firm takes.  For them, the risk is not real. 

 

Too few equity owners actually equate the signature they put on a firm credit line or office lease as a personal obligation. Many think the firm’s assets, which consist primarily of Accounts able and Work in Process, can cover any indebtedness before getting to them personally. These same people might look upon decisions differently if firm management were to tell them any losses sustained will reduce future draw payments.

 

So what can a firm do to enlist the proper level of engagement when making risky decisions? We suggest attaching a capital call to the decision, which will cause everyone to sit up, put their smartphones down, and start asking questions.

 

Many law firms use too much debt, and they put too much pressure on cash flow. Rarely do they have a contingent fund, and most are undercapitalized. In our experience, undercapitalized firms tend to take more uneducated risks and lack accountability for delivering promised results. These firms tend to also shut their financial people out of the decision-making process because of the scrutiny they bring.

 

Adequately capitalized firms have an immediate incentive to make good decisions because they do not want to deplete their capital (their money). When stakeholders spend money that they feel is their own, they will demand at least an analysis of ROI (return on investment), a scenario plan (what-if analysis), and an exit strategy.

We have worked with several lawyers who wished they would have paid more attention to the risks their firms were taking and asked more questions. Attaching capital calls to riskier decisions is a great way to ensure everyone pays attention and understands the risk.

 

 

PerformLaw works with law firm clients who value strong financial and strategic advice. For nearly two decades, we have provided significant decision support to our client firms. If your firm can benefit from objective and knowledgeable resources when making important decisions, contact us.

 

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