Build or Buy? Starting Your Own Law Practice

  • April 23, 2017
  • Aaron Grinhaus

You are about to go on an adventure, one over which you have control of the outcome.

Joe is a lawyer who works at a mid-sized firm downtown. He works about 50 hours a week in an area of law he likes, with people he likes, and has only a 20-25 minute commute from work. His take home pay is a fraction of what he bills though, and his schedule is not very flexible. However the clients love him, and he enjoys building relationships. 

One other thing: it has come to the point that Joe dreads going to work every day. It’s the same thing day-in and day-out, with nothing there to motivate him except a bonus that rarely adequately reflects the amount of money he brings to the firm. He knows it’s time for a change, but the thought of moving to another firm is not appealing, and with a young family he’s not sure he can take the risk of starting his own firm. The proverbial (and fictitious) “Golden Handcuffs” have rendered Joe immobile. 

If you change some of the facts around, does this sound like you? If so, you are not alone, and not without options! Taking the leap from employee to entrepreneur by either buying or building your own firm is within the realm of possibility, despite those perceived barriers that block your way to the “promised land” of law firm independence. 

Dearth of Knowledge 

In law school we learn how to research and read the law, but in terms of facing the world, there is a dearth of knowledge. Articling is the theoretical gap-filler in that regard, but other than the voluminous regulatory guides provided by the Law Society of Upper Canada (LSUC), there are no formal methods by which the practical business operations of running a law firm are imparted to aspiring, junior or even senior lawyers at firms. In fact, it is specifically in the interests of a firm to ensure that its employee lawyers are dependent on their systems and processes so that the profitable symbiotic relationship is maintained. 

When considering whether to venture out on your own there are two general options: start something new or buy something for sale. Both options bear numerous considerations and onerous obligations: the LSUC book keeping rules, managing your trust account, hiring employees, choosing the right professionals to help manage your banking, book keeping, and more, finding the right resources for document storage, IT and systems for client information management, marketing, and more. All this even before you begin to practice law.  

Part of starting your own firm is an art as opposed to a science, but the following pointers will help guide you on the path of law firm independence. 

Find a mentor! 

Whether you are a recent call starting from scratch or leaving firm practice to hang up your shingle, it is crucial that you have someone you can turn to for advice and wisdom. Even in “The Godfather”, Don Corleone, the archetypical leader and businessman (albeit on the other side of the law from us) had his “Consigliere” lawyer to whom he would turn for a fresh perspective and guidance; however, even Don Corleone had far fewer rules to follow than lawyers do!  

I was going to use the analogy that starting your own practice without a mentor is like trying to learn how to ride a bicycle without training wheels, but it's more like trying to learn how to ride a bicycle without any wheels at all. The biggest challenge tends to be not knowing what you don’t know, and having a mentor can help you avoid the vast majority of pits and traps associated with trying to start a law practice. Having access to someone with experience who you trust will open your eyes to a whole world that you would never have seen working in a firm or in-house. 

Assemble the right team 

It doesn't matter if you are venturing out in partnership with someone or going out on your own, you are never a “Sole” practitioner. In addition to your mentor, who will always be there behind the curtain, you will have a team of people helping you manage your day-to-day operations, even if at the beginning that team may be very small (ie an accountant, financial advisor and/or barebones clerk staff). That team will grow over time to include Legal Assistants, Clerks, bookkeepers, other full- or part-time staff, etc., and the key is to scale out as your needs arise.  

The other key is to recognize, as many lawyers fail to do, that you are human, that you have to spend some money to make money, and that you cannot and should not try to do everything yourself. Delegating and investing are two key strategies for the successful growth of your business. While at the very beginning it may be unfathomable that you will need assistance in completing files, believe me when I tell you that the 3-6 months it takes to ramp up to your first live files will come quickly and you don’t want to be scrambling to find the right people to take some of the administrative burden off your plate. As your practice grows you will see that administration, as opposed to the actual practice, will consume a much larger proportion of your time than you ever expected.  

Plan, plan, plan 

Running a business takes time. Lots and lots and lots of time. Family time. Recreational time. Frankly speaking, time you could be eating or going to the washroom. If you are coming from a firm or from in-house, you run the risk of being blind-sided by the myriad administrative and compliance matters that threaten to consume all your time. Often this is because as an employee you would never have had to deal with things like bank runs, LSUC spot audits, internet outages or even answering your phone after hours. When you realize that a missed call could result in a missed retainer, you will find yourself answering unknown phone numbers at eight o’clock at night (at least at the beginning), since every lead has the potential of justifying the investment you made in your business. That is exactly what all that time is: it is not a sacrifice, it is an investment.  

The best way to mitigate this risk is by planning and budgeting in advance. For example, we know that in our first year of practice you will most likely be audited by the LSUC. Therefore we are able to plan for it to make sure you have the proper systems in place to adequately track your book keeping and office management practices. This way you are not wasting time and money scrambling when the audit comes.  

Planning will also help you find the time to do the things that are important to you. Mental and physical wellness are extremely important, and the way to accomplish it is by taking time for the things that you find important, such as spending time with friends and family, vegging, binge watching shows, hiking, or even for those very strange people, going to the gym. 
 

Buy a Practice or Start a Practice? 

If you’ve ever wondered “why reinvent the wheel”, the answer is because sometimes it is cheaper to use materials you have to make your own rather than buy one that has been marked up for profit. Also, some wheels are better than others. Same goes for law firms.  

If you are buying one, it has a price, and what you are paying for is the “goodwill”. Goodwill in this context is essentially the existing client list, the phone number and the website, which all have value.  

Nadim Kurji, who purchased a practice in Cobourg, Ontario about a year ago (Hustler Kay Kurji & McCourt), has a few warnings for lawyers who are looking to buy a practice of their own. His experience has been rewarding but there are several challenges that must be faced, such as reconciling modern methods of running a practice with existing systems in an older, in his case a 43 year old, practice. “I'm currently in the midst of trying to modernize a practice that has been around for 43 years...it's no easy feat, but I intend to use technology to its fullest” says Nadim. He also appreciates the value of support staff in familiarizing yourself with a new firm and its files: “I can state unequivocally from experience that there is no replacement for experienced and knowledgeable legal staff.” 

"Explore opportunities outside of major centres since not only are communities often in great need of legal services, but they offer a young lawyer great potential to make a meaningful impact and good living.” 

Nadim warns that it is important to do your research on the firm, its clients, and the community before buying: “if a practice is built around two or three key clients who keep the lights on, there is no guarantee that they will stay with ‘the new guy’ … [a]sk about key clients and what your predecessor is willing to do to help you retain them”. He also suggests that “anyone buying a practice do [his or her] research about the firm, its reputation, as well as the community in which the practice is located” to ensure that the community is one in which you will feel comfortable.  

Despite the challenges though, he says that “taking the plunge…was the best move I've ever made… I am truly passionate about encouraging young lawyers to explore opportunities outside of major centres since not only are communities often in great need of legal services, but they offer a young lawyer great potential to make a meaningful impact and good living.” 

Doing personal due diligence on your comfort level with the work, the staff and the community is important, but there is another level of due diligence that will be required. You may for the first time have to hire a lawyer of your own (gasp) and accountants to conduct due diligence to ensure you are getting what you think you are getting. You will likely also assume a lease, take over employees and adopt a number of systems and obligations that you will need to operate the business. The upside is that it saves you doing all that on your own, though the purchase price may be something that will hang over you as a liability for some time. You also may be inheriting other liabilities. 

In the alternative, if you have a referral or potential client base, the ability to survive at least a few months on no income, and a vision, you may be better off starting your own firm. Marketing, sales and administration will be a much larger part of your practice if you open your own firm and it will take time to ramp-up. Your initial start-up costs will be substantially lower; however, you will have to find mentors, staff and scale out at a pace that is in step with your growth.  

It is a good idea to explore both options before opening up. For some the purchase price of an existing firm is the prohibitive exclusionary factor that makes the decision for you. 

Cash Flow 

Starting a law firm will cost you some money. If you are coming from another position you likely have some money socked away for this purpose. If not you may have to borrow. In any case, make sure you have adequate liquid capital to cover your expenses. You do not want to miss an opportunity, or find you are short on resources, just when you are starting to convert your leads into retainers. Cash flow is the life-blood of any business. 

Structure 

Structuring your practice forms the foundation for your business. As any architect, builder or kindergarten student familiar with Lego can tell you: having a firm foundation will allow you to grow as high as you want without falling over. The question then becomes which of the following is the best fit for you: Sole Proprietor, Partnership, Practicing in Association, Professional Incorporation? It is important to speak to someone familiar with the options to explain what the best option is for you. Each structure has different uses, advantages, costs and of course consequences. Some of them can even be used in conjunction with the others (such as a partnership between professional corporations). This is where your team of advisors will step in to help you get set up properly. The good news is that once you are set up you rarely have to think about these things again. 
 

Taking Flight 

Some people have compared starting a law firm after having been an employee or having just finished articling as jumping out of an airplane. I like to think of it as having jumped onto an airplane: you are about to go an adventure, one over which you have control of the outcome. Though the risk may seem ominous, and the process overwhelming, remember that you are not the first one to take this trip. The tips and strategies above are a good way to start your trip off right so that you end up at the destination of your choosing, and not at the baggage claim looking for lost luggage. 
 

About the author

Aaron Grinhaus (grinhauslaw.ca) is a business, tax and estates lawyer who regularly advises lawyers and other professionals who are venturing into private practice. Please visit GrinhausLaw.ca/Freedom to learn more about the firm and its professional advisory services. 

 

 

Learn more about buying a law practice and get practical advice from lawyers who have first-hand experience at the April 27th CPD program, Buying and Selling a Law Practice, the latest from the OBA’s Enterprising Lawyer series. 

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