There is perhaps no profession where entitlement is less justified than in the law. Practice needs should always be fulfilled first, and personal needs should be met with the minimum expense necessary to maintain a standard of living.
If you are a partner in an existing firm, you are personally responsible for the debts and liabilities, in addition to having put in your own capital. Spending sleepless nights wondering how to improve the efficiency and growth and profitability of the law firm is a given.
We’re talking about the essential concept of ownership, which is the opposite of entitlement. An ownership mentality supports an emotional commitment to the success of the firm in which the lawyer as owner is the last person to receive financial benefit from the firm — after staff, associates, vendors and suppliers.
The recent financial crises seem to have challenged this commitment, at least for older lawyers. They have seen the value of their homes go down 20 percent or more and the value of their stock portfolios drop dramatically.
They are confronted with questions they hadn’t considered since their earliest days in practice: “How much of what I earn today do I spend on gratification for today?” “How much do I put aside for safety and how much do I put aside for inheritance by my heirs?”
Delays in retirement are now common, with 38 percent of lawyers in one recent survey saying their retirement will be at least five years later than expected. The income stream for many lawyers comes from their law practice. Options to retire on that income stream include selling, closing or merging the practice, but none of these is likely to provide the same income the lawyer is accustomed to receiving. Lawyers unwilling to adjust their lifestyles likely must remain in their practice, working to build it up further in order to reap the rewards needed to fund retirement.
Every lawyer will have different income needs in retirement, and valuation of a practice to support retirement can vary widely based on what the income stream is worth to a prospective buyer. A typical value can be anywhere from 50 to 300 percent of annual gross receipts, depending on the nature of the practice, the transferability of the clients and how much repeat business is expected. Whatever the annual revenue is, a multiplier provides a rough idea of how much, or how little, a practice will be worth as a “lump sum” to support retirement.
In too many cases, lawyers have not adequately considered this calculation. Their first thought often is to sell their practices, but with unrealistic expectations: “I’m earning a million dollars a year and I don’t want to sell for less than that.”
A practice is worth what a buyer will pay, not what a lawyer wants to receive. Consider setting aside a specific sum each week for living expenses and future retirement, then putting the rest into maintaining the value of the practice. That requires tough discipline, but the alternatives for failing to accept the discipline of ownership are far tougher.