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Episode 05 Buy Episode

Successful Law Firm Succession

Law as stated: 4 June 2020 What is this? This episode was published and is accurate as at this date.
In this episode we discuss succession planning for law firm owners, in particular smaller firms and sole practitioners, with some practical tips from an acquirer of law firms on how to maximise the value of your practice.
Practice Management and Business Skills Practice Management and Business Skills
4 June 2020
Craig Osborne
RMB Lawyers
1 hour = 1 CPD point
How does it work?
What topic does this episode consider?Succession planning for lawyers. This episode looks at how law firms are valued, providing practical tips for law firm owners to maximise value in their firm.
Why is this topic relevant?4,000 lawyers in New South Wales are expected to retire in the next 10 years, meaning that there is a large number of lawyers who will soon have to consider their succession plan and how they will maximise value in their practise as well as their transition to retirement.
What are the stats?The Law Society of New South Wales issues information on the make-up of solicitors holding practising certificates. Of the 36,046 lawyers in NSW, around 29% are aged above 50 years old, and around half of this amount are older than 60.

In 2018 The Law Society of New South Wales commissioned a report from Urbis on the National Profile of Solicitors. That profile presents a demographic picture of the legal profession, as well as changes observed over time. That report found that 79% of private law firms are sole practitioners. With such a high percentage of smaller practices, succession is a key consideration for all lawyers, particularly those wanting to transition to retirement within the next decade. You can find a link to this report at the end of this summary.

What are the main points?
  • Law firms are valued on a multiple. A multiple approach involves taking a measurement, in this case revenue or EBITDA, and applying a multiple. For law firms the multiple can vary but Craig suggests 1 times multiple. This means that a law firm with annual revenue of $5 million, would be valued at 1 times that amount, i.e. $5 million. Multiples vary by industry and are subject to many different factors. By way of comparison, the financial sector tends to trade at high multiples anywhere from 3 to 12 times, whereas tech companies can have multiples exceeding 16.
  • Succession for law firm owners ordinarily involves:
    • selling internally;
    • selling externally;
    • shutting down the business.
  • Selling internally may not guarantee the highest sale price, but is likely to be favourable to clients as there is continuity and established trust and confidence. Selling internally can often be a challenge for sole practitioners and small law firm owners because of turnover and feeling unable to transition the practice to the right person.
  • Selling externally requires the business owner to have had a strong reputation, particularly for small firms or sole practitioners.
  • An acquirer will assess a target firm based on a balanced scorecard: financials, people, customers and processes.
  • Law firm owners planning to retire should focus on developing the following areas in order to maximise and become a viable acquisition target:
    1. maximise sales;
    2. implement efficient practices;
    3. monitor accounts receivable;
    4. ability to scale;
    5. effective human resources; and
    6. taking advantage of technological innovations.
  • By establishing a mutually beneficial succession plan well in advance, law firm owners can become comfortable over time with the idea of one day stepping down and having someone else run the business. This can help mitigate common feelings of uncertainty, unease and anxiousness when retiring.
What are the practical takeaways?
  • Planning for succession is the best way to prepare and maximise value on sale.
  • It can be very difficult for people to let go and step away from being a business owner.  For many people, being a business owner is strongly linked to their identity so it can be emotionally difficult to let go and hand the reins over to others, especially if still working within the business.
  • Acquiring firms consider the mindset of the selling business owner and the steps that have taken to date to succession plan; it’s a red flag when an owner wants a quick payout but does not want to invest time and effort in transitioning the practice to new owners.
  • If you are planning to sell your business/retire within the next few years, you should create a plan now. A growth mindset will help business owners maximise value in their business, including being open to change, in particular organisational and technological changes to improve efficiencies.
  • A business with longevity is marked by its system of open communication and the sharing of clients, information and skills between its lawyers.  It’s integral that business owners and senior lawyers allow more junior lawyers to build their practice and flourish; more junior lawyers need scope and support to build relationships with clients.
  • Culture is key. Cultural artefacts can be visible at first glance, from the attitudes of employees, to plans for career progression for employees, to the vibe and feel of the office. You can tell a lot about a law firm from its culture.
  • Beware of fee earner concentration, where one person generates the bulk of the revenue.
Show notesPractising Solicitor Statistics as at 30 June 2020 

2020 National Profile of Solicitors, Urbis

David Turner:

 

 

 

 

1:00

Hello and welcome to Hearsay, a podcast about Australian laws and lawyers for the Australian legal profession, my name is David Turner. As always, this podcast is proudly supported by Assured Legal Solutions, a boutique commercial law firm making complex simple.

Today on Hearsay we’re talking about succession planning. Around 4,000 lawyers in New South Wales are expected to retire over the next 10 years and the path to retirement varies depending on the lawyer’s role and their specialisation. A partner retiring from a big law firm faces very different challenges to a partner or a sole practitioner retiring from suburban or regional practise. From transitioning clients to managing employees to selling or winding down a practice, there are many challenges on the path to retirement. Like so many of life’s challenges there are also opportunities for lawyers to approach retirement in a way that ensures the effective transition of their practice as well as maximising value to increase that lawyer’s overall return on sale. Joining me to talk about succession planning for lawyers is Craig Osborne, managing partner of RMB lawyers. Craig thanks so much for joining us on Hearsay.

Craig Osborne:Thanks for having me, I’m excited to be here.
DT:Now tell me a bit about RMB.
CO:

 

2:00

Look it’s a nice little story, the firm kicked off in 1885, gentleman by the name of Charles Coffee-Russell came from Belfast on a boat and set out his shingle in Crown Street Wollongong. The firm bumbled along for about 115 years, not doing much, but it survived two world wars, the Great Depression, cataclysmic other events in the world and saw Wollongong go from I guess what was a, timber getting town to then sheep believe it or not, and then dairy farming, coal, steel, education and then to what it is today.
DT:Doesn’t sound like bumbling along to go through so much industrial change in one location, so many world events!
CO:

 

It’s funny, it was a very traditional law firm and we’re very proud of the history, but we decided to take a different tack in about 2000 because we saw commoditization occurring. We saw a lot more competition, we saw clever business people coming to law and eating at our pie and our firm was going backwards. After about 115 years of practice we decided to do something about it and we’re still at it and enjoying it.
DT:And that something different has resulted in RMB being one of the largest firms in regional New South Wales, how many locations do you have now?
CO:

 

3:00

 

So, 11.

TIP: Those 11 locations are Bowral, Braidwood, Camden, Dapto, Goulburn, Kiama, Nowra, Queanbeyan, Shellharbour, Warilla, and Wollongong.

We’ve stayed stationary for a little while and we’re hoping to open some other locations in the next few years.

DT:What’s that newest 11?
CO:Well it’s funny we have this discussion all the time it’s quite fun, where to go to next. I don’t know where it will be, but we’ve got some targets we’d like. We haven’t got anything out in, right out West out of the great divide. Goulburn’s as far as we go west and Bowral so we’re looking over there, and we know a lot of people out there and a lot of us have backgrounds over there so that should be fun. Down the coast is obvious for us and we just sort of started the last few years a little bit of a full raid to southern Sydney.
DT:And when did that quite aggressive expansion start?
CO:We had an accidental merger in about 2005.
DT:An accidental merger?
CO:

4:00

 

 

Yeah was great fun, I was appearing in court against a fabulous friend and lawyer and we had a bit of fun with that and at the end of it we had a cup of tea, I said to him what are you going to do about your business? There were two partners in a small business, and they were coming to the age, and he said well I was going to ask you about that and away we went. 2005 we undertook our first merger and, a little bit by accident, we weren’t very good at it, but it was probably one of the best.
DT:That’s a great story and by the way, as a litigator, a great story about courteous litigation.
CO:Yeah that’s definitely, absolutely, it was like the cartoon with the big sheepdog and the wolf checking, bounding off after the battle and anyway that was 2005 and it was a very successful merger.
DT:So, 10 or 11 locations in 15 years, how do you keep that pace of growth?
CO:

5:00

 

 

 

 

 

6:00

 

 

 

 

 

 

 

7:00

It’s tricky, we’ve had to reinvent the way we look at business. I think the two pillars of our reinvention, one we’re on a best practice system so we’re constantly challenging ourselves to improve every aspect of what we do, as customers start to demand more and more.

TIP: We’ve talked about continuous improvement in other episodes of Hearsay – if you’d like to learn more, listen to my interview with Dr George Beaton, where we discuss the Toyota Motor Corporation’s “Kaizen” philosophy of continuous improvement in manufacturing.

The second part, a fairly simple strategy, is to improve on six items every day, one sales, getting more clients, recognising that the law firm that makes the most sales, has the most clients is likely to win, or partially win. Next is the pipeline, the way you produce your work because customers want it now, they want it faster and cheaper. Third part is billing collections, and in the old days you just sent a bill and you hoped it turned up. Billing collections is a different conversation now, how you price.

TIP: Hourly rates aren’t the only way to charge anymore – increasingly, law firms need to offer fixed fees to meet their client’s expectations around pricing. Often, those fixed fees are just based on an estimate of what the job would cost at hourly rates, but increasingly, innovative firms are setting their fixed fees based on value, not cost – which depending on the value of the transaction or work product to the client, might be less, or might actually be more, than what would be charged at hourly rates.

A 2009 survey by the National Australia Bank found that SME clients preferred fixed fees over any other method of charging, seeing them as better value for money than hourly rates, and making those clients more satisfied and more likely to recommend their lawyers to others. However, the same survey found that most lawyers don’t understand their client’s priorities around fees very well – NAB found that lawyers thought their clients preferred hourly rates over fixed fees, when actually it was the other way around. It doesn’t sound like RMB is making that mistake.

The next one down is scale, scale at which you operate at, your people which is the biggest aspect I suppose, and finally technology. If we can improve those six items every day, we’re going to develop organically, little by little, acquisition.

DT:That’s a great structure for improving the business of law. I think so many lawyers really focus on improving their practice, but few take such a considered approach to improving their business in the same way.
CO:

8:00

 

 

 

So glad you said that, because as a young lawyer I met some really great lawyers in Wollongong. I looked up to them very much and they were better lawyers then I thought I could ever achieve, and as it happens, they probably still are even though most of them retired, but I noticed that they weren’t very simply successful financially. I saw lawyers who were fabulous lawyers technically who weren’t financially successful, and I saw some lawyers who weren’t fabulous lawyers technically but were very financially successful, so I want to try and get both.
DT:That’s the dream. Now we’re talking today about succession planning and I think the reason that fades into RMB’s rapid growth of the past 15 years is because many of those acquisitions have been as part of a succession planning process, haven’t they?
CO:

9:00

 

That’s right, so succession for me for example, I’m 56, it’s going to be easy in this business. There are people rising and rising and rising in this organisation and I’ll get a tap on the shoulder at some stage and I won’t be bitter about it. I’ve told my partners you come and tap me on the shoulder when it’s time and you say we’re going to Machiavelli’s in Sydney for a bowl of pasta, and I’ll know that it’s over. Succession to me is a dream. We have a formula and when they tap on the shoulder, they pay me a cheque and I go home. They may invite me to consult and get me to work if I want to, and so I’ve got myself in a beautiful position personally. Unfortunately, not everyone has that good fortune and there’s three ways to end this. Lawyers, in I’m mostly talking about in suburban practises and regional practises, you can either sell internally to someone that you’ve mentored and put through, or more than one person, you can sell externally and that can be a merger or a sale depending where you are in your career, or you can close the doors.
DT:

10:00

That last option is just such a waste of value particularly if you’ve had longstanding trusted relationships with clients for all that time.
CO:

 

 

What a waste, and most of the lawyers that I’ve come across in my lifetime are what I call heroic workers and it’s not just a job but it’s, I don’t want to go too far with it, but it is a bit of a calling and people go out of their way and part of their identity is being the lawyer, the person that helps people. What a shame to let that fritter away and not keep the value and make some value for yourself towards the end of your time.
DT:Obviously, those first two options are the ones that we would hope most lawyers contemplating retirement are targeting.
CO:Yes.
DT:

 

11:00

Now that first option selling to someone that you’ve mentored, someone internally, may not be the highest price from a sale if it’s not a competitive process, but a perfectly respectable result that I’m sure most clients would be happy with if they had a relationship with that person. Tell me a little bit about how you’ve seen that work in your career?
CO:

 

 

 

 

 

 

12:00

 

 

 

 

 

 

13:00

It works wonderfully and you’re right, you often don’t get the maximum price. I mean it’s funny how we value law firms, we tend to be a one times multiple.

TIP: Now, private M&A lawyers listening to this episode will know that a multiple of earnings before interest and tax, or EBIT, is a common way of valuing small businesses.  However, a 1 x multiple is quite a low multiple – it’s not uncommon for established small businesses to sell for anywhere from 3 to 5 times EBIT.

Why is RMB’s multiple for buying law practices lower than that?  It’s probably got a bit to do with the certainty of recurring revenue in law practices. Many clients might only engage a lawyer a handful of times in their lifetime, so there’s no certainty that those clients will produce income for the business every year – and retaining those few clients with regularly recurring legal needs often depends on an existing relationship between the client and the lawyer – which might not be continuing after the purchase of the practice. Later in this episode, Craig explains how to maximise the value of your practice before a sale.

If you sell on the open market you can do a little bit better than that if someone’s got a particular growth strategy at play, but generally it’s only one times. If you’re selling to someone you know who you’ve taught, who you like, who you want to be successful, they know how you expect your customers, your business customers, to be treated. They know how you expect the team members to be treated and to some extent you keep quite a deal of control because your DNA really heavily remains in the business. What’s tricky about that is a lot of practitioners in suburban and regional places have real difficulty with mentoring and keeping leverage. They get despondent, they train three lawyers and put in a lot of time and they leave and they’re like right I’m giving up, I’m going to just go it alone and that’s where the difficulty begins because you can’t sell internally.

DT:Let’s talk about then that second option of selling to an external party perhaps through a competitive process. You’d be very well schooled in this area having led RMB’s growth through acquisition. You mentioned earlier the way RMB values a potential target usually as a multiple EBIT, what do you look for before you start valuing the firm in terms of a viable or a desirable target?
CO:

14:00

 

We look for businesses who have owners that we admire, and there are two types, we look for very small businesses with one owner who is 65 to 70 and wants to go and usually those owners are in our geography already so we know them and we’re attracted to them because of the person. You tell a lot from a person; you know the Berkshire Hathaway large conglomerate still says in their purchasing businesses that they’ve never done a good deal with a bad person.

TIP: Berkshire Hathaway is the multinational conglomerate still substantially owned by famous American investor Warren Buffett, so Craig has good reason to follow their playbook.

So, let’s start with a good person. A good person has acted with integrity and ethics all the way through their career. That’s a great start.

DT:

 

You know I think many of our listeners will have heard this old adage that law is a career in applied ethics, it’s a good place to start with an ethical practitioner. What do you see is a red flag?
CO:

15:00

 

 

 

 

 

So, I’ll go to people first if I can, if it’s a merger where you’re taking over any, I guess partial control of a larger organisation, we start with a couple of clear ideas. One is that the business has come to us and wants to talk to us because they’d had difficulty managing one aspect of the business and choose this succession. It’s usually not having employees coming through with leverage and they come to you with a problem, and we think we know how to solve that problem because we’ve learnt overtime. The red flag for me is to an owner who says “I want you to solve my problem and I want you to give me some money but I’m not going to cooperate” that’s a big red flag. I’m not going to change anything I do, and that sort of person doesn’t understand that they actually caused the problem or were part of causing the problem. They want you to solve the problem, but they don’t want to help, and I’ve come across that a mere handful of times, but it caused a lot of damage.
DT:

16:00

This is something we were actually talking about before the episode started weren’t, we, about how difficult it is in law for some people to accept that it’s time to step away from that leadership role.
CO:

 

 

 

 

 

17:00

You’re right, it’s very difficult because it’s a career. I guess one of the great things about law is that you can bat on for a long time. We’ve got lawyers in our business in their 70s, I think the oldest one is 78, and I will be respectful of that. But I think a lot of us, and I include myself in this, a lot of who you are is what you’ve done in your business and it’s very hard to hand over. Well for one, to accept that you should change and the business that is buying you or acquiring you or merging with you, wants you to change with it to make it viable, to change a non-sustainable business because they’re not if there’s no succession, to change it to a sustainable business takes change and effort. You do get a fair bit of push-back sometimes from people who say hang on I’m an artist I’m Vincent van Gogh you can’t possibly change my processes, I’ve been doing this since 1960.
DT:Which is the hallmark in the succession process.
CO:

 

 

 

 

 

 

18:00

That’s right, and the same way.

TIP: What Craig is going to describe here is a ‘fixed mindset’ – the term used in organisational psychology for the belief that strengths and weaknesses are immutable attributes. For those with fixed mindsets “but it’s always been done this way” is a perfectly valid reason to resist making sensible changes, even when you’re approached by someone acquiring your firm.

Those nice characters, who’re good lawyers, don’t want to change the way that the business makes sales. They don’t want to change the way you process work. Typically, if they’ve got more secretaries than they need and no technology. They don’t want to change the technology. They don’t want to be involved in best practice systems, and partly because it’s just scary, and partly because it’s “I’m the artist you can’t change me I’m already Vincent van Gogh.”

DT:

 

 

Let’s talk about some of those processes and I suppose some of those changes that people might be resistant to, because as we were saying that analysis might start with people, but it doesn’t end there, and particularly as an acquirer that has several different locations it’s obviously important for you to have good processes throughout your business and developing processes that make that integration easier is probably a big part of a target firm putting themselves in a position to command a higher price at acquisition isn’t it?
CO:

19:00

That’s right. So if you’re looking at what a business can do to be more attractive to a business like mine one, one is to don’t let your business decline too much before you start to talk with whoever it is you would like to consider as suited to buy your business.
DT:In terms of that decline how do you look at the strength of the business? Do you analyse that on client list or cite the number of matters needed? What do you use?
CO:

 

 

 

 

 

20:00

 

 

We divide it, I guess we use a balance scorecard system that a lot of businesses use from Harvard.

TIP: We’ve spoken about the balanced scorecard system on Hearsay before – a balanced scorecard can take many forms but essentially, it’s an assessment that tracks performance on a number of different metrics, all of which ultimately tie back to the organisation’s overall strategy.  You can hear more about the balanced scorecard in my interview with Dr George Beaton.

And we look at 4 aspects of the business. We look at the financials for at least three years and you can see the pressure points defending overhead as opposed to growing your top line is a sign. In terms of people, we ask to talk to people inside the business and hear what they’ve got to say, and you can feel the attitude, optimism versus not, with the people. With respect to customers, you look at the split of customers. Where they’re from, how many repeat, others declining in numbers, so a simple method is how many new customers you take a month and what’s the approximate value of the work, the estimate of fees. Most businesses can’t tell you that, but it would be a very good start if you could, and then we look at process improvement. What did they do to improve the processes? If anything. Some is technology-based others are not, but there are lots of things that a good business could do to get themselves ready to make themselves attractive for an acquisition.

DT:It sounds like three of those in particular there are financial reporting, clarity in terms of financial reporting, good processes perhaps just organisational ones, not necessarily driven by technology, but also an appetite for technological change.
CO:

21:00

Absolutely, and also looking at what systems there are for employees. A lot of the businesses we look at have not got a performance review structure for their employees. There’s no way that those employees can get ahead, so it’s very difficult to change those employees. They decide on a life of staying still so we’d like to see an employment system where there is career progression, a documented career progression, because those people are going to become very important when the top lawyer leaves.
DT:Yes, even for continuity with the clients.
CO:

 

 

 

22:00

 

Absolutely. Any time you’ve got that dominant lawyer in a practise, and you often do, who hasn’t shared clients or skills with other people and you got a series of two or three younger lawyers who are having difficulty attracting clients, having difficulty billing a budget, that’s a red flag.

TIP: This is one of the common criticisms of the billable hour as a method of measuring performance and allocating bonuses; individual billable hours targets can incentivise the best economic outcome for the individual – which is hoarding work to increase one’s own KPI performance and therefore, one’s own individual bonus – at the expense of the overall efficiency and performance of the firm.  In the study of microeconomics this is called the ‘principal and agent’ problem; the incongruity of the incentives of the business owner and the employees or agents that conduct the business on the owner’s behalf. One way to solve the principal and agent problem is to tie the agent’s individual economic success to the success of the firm overall, but a balance needs to be struck between incentivising cooperative behaviour and driving individual performance.

Sharing is so important in law firms and it’s the least well-exercised skill that I see. Lawyers don’t like to share.

DT:

23:00

And that raises the topic that I think is a hot button topic at the moment in every field of legal business, but it must be especially important in succession, which is culture. What are the hallmarks of a positive culture that you look for and what are some of the ones that you try to avoid? We’ve mentioned hoarding work as one.
CO:

 

 

Yes, hoarding work’s a shocker, and look lawyers have been doing this since lawyers invented ‘he or she who dies with the most clients wins.’ As opposed to let’s share it amongst us and go and find some more. Things we look for that are really good signs are optimism in team members, some career progression in them, we look at things like premises. Has there been any injection in money to make the premises look better? Because those things aren’t crucial you can fix those, but it shows the mentality inside the organisation.
DT:

 

That’s an interesting one, it’s a really interesting one that there’s a concrete (pun intended maybe) cultural artefact I suppose.
CO:

24:00

 

 

 

 

 

 

 

25:00

 

There is, and you feel it, it’s an EQ item. I can walk into the business for the first time and I can tell if it’s in decline by my first look, by my first discussion with maybe the receptionist or the young lawyer, by the way the office is presented. It’s just: is it in decline or is it OK at the moment?

TIP: When we talk about organisational culture, culture is sometimes described in three layers:

  • At the top layer, there’s cultural artefacts –how people dress in the office, the language used in the office, the organisational structure, even things like the way the premises are laid out and decorated;
  • Next, there’s cultural values – the things the organisation expresses are important, maybe through a set of published values or a mission statement; and
  • Finally, there’s cultural assumptions – the unspoken beliefs that underpin the rest of the organisation’s culture. There might be an unspoken belief that billable hours are the most important thing, for example.

The point is, the cultural artefacts at the top are a bit like the tip of the iceberg – they’re not everything, not by a long shot, but they tell you a lot about what’s underneath. That’s why Craig is looking at cultural artefacts to tell him something about a law firm he’s acquiring.

When you merge or particularly if someone just wants you to buy their business it’s very difficult to keep value in. It’s not like a normal business. Very different. You’re not selling shoes. We need to keep the value in the business, so he wants top dollar, what is the thing that I have to do with that person to keep the value in my business? And it’s tricky without cooperation, and it’s tricky with a business in decline.

DT:

26:00

I suppose that brings us back around to the valuation that you mentioned earlier that a x1 EBIT is your usual valuation methodology?
CO:

 

With a bit of money for what I call the capital account for money to be injected in the business over time. I mean I’m dealing with businesses all the time they’ve got 2.5 -3x but many law firms don’t really have recurring revenue.
DT:I was going to ask you about that because I deal with a lot of business sales myself, and you do see that for established SMEs three or even five times even, for longstanding businesses is not uncommon, but as you say it’s a different revenue model in law.
CO:

 

 

27:00

It is, and particularly when you haven’t got any sale strategies in place. When you’re relying on people to walk in your door, relying on word of mouth (only word of mouth) is fabulous because you can stimulate word of mouth and other things. So, what is the value of business? You can look at it two ways, I like to look at it as what is revenue per annum on average over the last three years. What can I afford to pay for this business for its capital account? Extra overs? What’s in the wills cabinet?
DT:Yeah right, interesting. Lead generator I suppose.
CO:

 

 

 

 

It is, I mean if you look at the wills cabinet, I call it the wills cabinet, generic name for it, but the data recorded very well. You don’t really know who’s gone and done another will somewhere else, so I use a formula that allows for attrition and then I can bang out a number within about 10 minutes. If I know how many wills are in there. A wills cabinet is more valuable if you’ve got the names and addresses on the wills. A lot of wills don’t have names and addresses, because it’s a form of data we have to manually put into our database, but it’s better than ‘hi I’m Sally and John and you don’t know where I live and you never will.’ So, look lawyers don’t get a great bang for buck compared to other businesses. We just don’t have repeat revenue.
DT:

28:00

I suppose a take away for listeners might be, particularly ones who might be contemplating a sale in the future, is that if you can find a way to build that recurring revenue either through a sale strategy or through the clients that you target, that can make a big difference.
CO:

 

 

 

 

29:00

Absolutely it can, and the mistakes people make towards the end of their career is one, you get a little bit tired and you’ve been relatively successful so you’re probably not as hungry as you used to be, and you just stop investing. I’ve mentioned that you stop investing in sales or some people don’t even invest in sales at all, it’s often investing in technology, but you often stop investing in your customers. You stop talking to them unless they come in for a job. In mergers and acquisitions in the small space which we’re in, we have to be careful not to, if you are rescuing your business it’s really in decline, you’ve got to be careful not to drown with it. Because you know I can give an example of a bad merger it’s a business it was turning over $2 million and it was in serious decline and had a major breadwinner, one person was billing half the fees and 5 others were billing the rest. That was the person that was exiting, that’s a really dangerous merger, very dangerous and year 2 of the merger billed $1.4 million so there’s a loss of $600,000 in revenue. That’s probably the worst drop I’ve seen. I saw another one in about 2010 where the business openly said we’re losing our best clients. It was a commercial client who brought a certain amount of revenue and I think the turnover was $1.2 million, and in the first year of the merger was down to $800 000 so there’s a third. You can get it back, but it takes a lot of energy and you have just got to be careful you don’t pay over for a business like that.
DT:

30:00

Both of those examples just there highlight the problem of concentration and in a lot of industries when we talk about concentration we’re talking about customer concentration, like that latter example of relying too much on the one golden goose which if it goes away you’re in big strife particularly if you can’t scale that as fixed costs quickly. But your first example raises an equally difficult point for law firms and other professional services businesses I suppose which is fee-earner concentration, having that one star like Michael Jordan on the Chicago Bulls.
CO:It’s such a good expression you’ve used.
DT:Tell me a bit about how you ameliorate that challenge or maybe how are some of this intending to sell can ameliorate that?
CO:

31:00

Of course, thank you, well firstly the best position to be in is not to have the one star unless you’re a sole practitioner that’s okay to have one star, and to not have one star you have to share; we have to teach others. How do you ameliorate this if you do buy a business who’s got a star and that particular star doesn’t want to cooperate after he or she’s got the money? And I’ve seen one of those. First of all, we like to keep the retiring lawyer. We don’t like to exit people we like to keep them and pay them well to stay on and help us transition, to help us transition clients to help us train people, to help lead by saying ‘yes RMB are going to change the way we do some processes and I’m on board with it,’ because that is the most trusted person in the business and they’ll follow the leader. Unfortunately, it doesn’t work if you keep the person on and they lead the people the wrong way and they won’t share, and they won’t teach and I’ve had one of those instances and there’s really no way you can ameliorate it up into excellence.
DT:

32:00

Have you had an experience where that star fee-earner might not be an owner of the business but he’s actually an employed lawyer, does that raise different dynamics?
CO:

 

 

 

I’d like that to happen, but I haven’t, and I’m so glad you raised it because that would be fantastic. Look more often than not I see businesses where the concentration of fees are with the owners and the younger lawyers get to do the scraps that fall off the table. Which is part of the reason they don’t stay because they’re set a budget which they can’t possibly get and they see at the end of the year the owner says ‘look what I billed’ and a little bit of chest beating you mustn’t be as good as me. Now I know people aren’t as stark as that but that’s how they feel. In order to have the star lawyers not an owner, you’ve really got to put time into them, and you’ve got to be generous with the work they get. We do some of the work they get and let them be stars and that’s where in a sort of bigger regional firm like ours now, the stars are not the owners anymore.
DT:

33:00

That dynamic that kind of toxic dynamic of comparing as an owner of the firm your work with your employed lawyer raises a different point, and it’s one we were talking about before which is that as an owner of a business you really need to be focusing on things other than fee-earning work as well. You shouldn’t be doing so much billing work to the exclusion of working on your processes, to the exclusion of continuous improvement in those six areas you were describing earlier.
CO:

 

 

34:00

Spot on, I mean this business is still a small medium enterprise, it’s got 100 people in it, it’s got 6 cost-centre leaders and they’re the most senior, well sorry, they’re the owners of the business at the moment, the only one cost-leader earner who’s not a leader and that’s been a great experiment but they are not the highest billers in the firm, we’ve flipped who bills what as an example this firm this financial year of its billings the owners will bill 18-20%. The non-owners will bill 80-82% and that’s been deliberate. Because of all the things you’re saying and so the owners of the business concentrate on sales, improving the pipeline, the billing and collections, increasing scale, dealing with the people making their careers, making people better than us which is pretty easy if you want to do it because we’re not that great, and then learning how to use technology is so much fun. I’m 56, we’re increasing our technology use at a great rate at the moment and it takes time to learn it, takes time to get skilful enough to pick the right stuff, but that’s what our business owners are doing at the moment and as a side, all six business owners now could walk out the door tomorrow and this business would absolutely survive.
DT:That’s the hallmark of a business with longevity.
CO:Yes.
DT:

35:00

You see sometimes acquirers valuing businesses and often that key person risk is such a big part of that valuation because the business might be relying on an individual personality whether the model is there, and the structure is there.
CO:

 

 

 

 

 

36:00

If I look at our business, it would be a great business to buy. I’d like to buy our business because you could just buy it and grow the younger people that are coming through quite easily and you could say goodbye to the partners, if you want. I mean we don’t ever do that we see great value in keeping the owners, who are often the founders. The fact is most law firms don’t last more than one generation, they just don’t. And it’s because of lack of sharing and lack of generosity, it’s not just money, it’s general sharing of clients, generosity with your time and mentoring, generosity in allowing someone to come into your business at a price that’s not the top of the world. That sort of generosity is not that easy to find because it’s a cost benefit analysis. You’re losing time, and money, to put into someone else who may one day buy your business.
DT:I think that’s something that a lot of people must struggle with particularly when we’re talking about process and technology because if you haven’t changed what you’ve done for decades, it might be really difficult to incur that kind of capital expense for what you see is the benefit of someone else.
CO:

 

 

 

37:00

Well said. I mean look at all sole practitioners and small firms, it’s very difficult fundamentally to take some of the money that is coming from your hard work and spend it on marketing. It’s awfully difficult philosophically and physically to take money out of your bank account and buy technology that you don’t like anyway, but the end result is if you don’t, your business will decline. It’s just where we are at the moment and there’s so much competition in law now. Thousands and thousands of lawyers trying to eat away at a pie that’s about the same as it was 20 years ago.
DT:

 

 

 

 

 

 

38:00

This is a topic that’s come up a few times in our episodes the more for less challenge that we are really being challenged to deliver more value for clients but with ever decreasing resources and profit margin.

TIP: The ‘more for less’ challenge was first described by Richard Susskind in his 2013 book, Tomorrow’s Lawyers. He refers to the fact that clients expect more from their lawyer, in terms of the breadth and depth of their expertise and the services they offer, but disruption in the industry continues to drive prices lower and lower. Here’s something to consider though – while we think of the legal services market as a very mature market without a lot of growth prospects, some studies suggest that only half of all people with legal problems consult a lawyer about them – so if you can find a way to deliver your services more affordably and accessibly, there’s potentially a huge untapped need out there.

CO:

 

You’re right and look at one of the KPIs we’re about to, at the end of this financial year, measure our performance against the KPIs firmwide that we set at the beginning of the year and we’re going to fail some. But we’re going to succeed in a lot. One of the ones we will succeed in is reducing the cost of production by X percent. And the next one straight underneath is spend at least half of that in the new financial year and increasing your marketing spend. So, there is an absolutely deliberate strategy not to reduce costs of reduction and put more money in your pocket, use cost of reduction to put a little bit more money in your pocket and also spend more on marking to make it more sustainable in the future. That sort of thing is very difficult for a sole practitioner, because they just don’t have the benefits of scale.
DT:

39:00

I’m glad you shared that KPI with this actually because it’s rare to see this kind of continuous improvement philosophy in a law firm. In fact, it’s rare to see it outside of manufacturing really where you have that, I think it’s called Kaizen, that continuous improvement always doing better than the day before.
CO:

 

 

 

40:00

The way we’ve been doing via “necessity, is the mother of invention.” In 1998 this lovely proud business called Russell McLelland Brown then were struggling and we had a fantastic law firm consultant come down here, and I’ll let you know she’s still consulting with us, and we were in a near-death experience. I was the youngest partner by 10 years and at the end of the week of consulting I was the managing partner in what I would describe as a real poisoned chalice. I said the consultant as I walked out to the car park ‘what have you done?’ and secondly ‘I can’t get these people to listen to me.’ She said the way you’re going to do it Craig is you are going to enrol yourself in a best practise system and every time we get push-back say it’s not me asking you to do it, the system requires that or we won’t pass the exam. Which is what I did. And so, because it worked, we’ve kept up with it somewhere around ISO standard organisation 9001 because we’re externally audited every six months and we’re internally audited constantly. Internally audited sounds awful, sounds like someone’s doing something nasty to you, but it’s just checking that you’ve written what’s the best way we can do something, make sure the whole firm does it, à la McDonald’s, there I said it I’ll probably get criticised for that, and then only then can you improve the way you make your chips.
DT:You could grow RMB into 34,000 locations.
CO:Not in my lifetime. Law firm growth is a pretty slow burn.
DT:

41:00

We’ve talked about some examples of acquisitions that maybe weren’t so successful or businesses that weren’t so successful before they were acquired, tell me a story about one that was a real delight that really succeeded.
CO:

 

 

 

 

42:00

There was a lovely one and it was lovely because we actually had opposite skill sets. The firm we were talking to had a skill set we aspired to. I knew we needed their skill set because I was the lawyer who was doing it in our firm and I wasn’t very good at it and they were and I competed against them regularly in cases, and we had absolute trust and honesty with each other. The two lawyers involved knew that they didn’t like running a law firm. They knew that they weren’t very good at it. My firm knew that they were very good practitioners and would be an excellent to add to our revenue and expand our client base. When we did the deal, which is a handshake at the time before putting a few dot points down, we’re a bit more serious about it now, they said we’re going to cooperate with you, thanks for giving us some money we appreciate it, we’ll put that in our superannuation now and by time we actually retire that’ll be worth something thank you, and we’re going to cooperate because we know that we’re not good at what you’re good at.
DT:That’s a surprising story. I was expecting you to tell me we found this business and it had really systematised processes and it ran like a well-oiled machine, very clever business person operating it and they were able to command a high price, but what you’ve actually told me is that that really successful acquisition came from an awareness of one’s strengths and weaknesses.
CO:

 

43:00

Thank you and look it’s funny now but that firm we acquired, it was a merger, a dead set merger, he took on two new partners but with a structured plan things retire a certain time. They didn’t have computer calendars; they were using manual calendars. They had very little technology at all, no sales or marketing systems, couldn’t retain lawyers, all those things. But they were really good lawyers and they knew that, and they were very confident about that, so no, it wasn’t any of those things that attracted me to them and them to us. In the first year of the merger, if you added the revenue each had made alone and then the next year you put it together, we went up by 30%.
DT:Wow!
CO:So that was a really good one. And when you get a great start like that and you get momentum, people were sort of wanting to believe. When it goes the other way, the vendor goes well really, I really believed in what you promised, and the buyer goes well we’re not coming out of our skin either. But they all come good.
DT:

44:00

What you’ve described there is actually quite a hopeful note I suppose for those who are looking to transition to retirement through an acquisition can be comforted by the fact that look if you don’t have those processes in place, and ideally you do, but even if you don’t, an open mind set about inviting change and inviting an acquirer to make changes to your business makes a huge difference.
CO:

 

 

 

45:00

It does indeed, it’s all about ‘okay we’re together now what can we do to help let’s go let’s do this together.’ As an acquirer we don’t have a really aggressive management style, it’s a fairly egalitarian management style and we like people to come along for the for the good ride and put the effort in together roll up the sleeves, we’re certainly not Master and Commander and sometimes maybe we’d be better off if we were, so that means sometimes it takes longer to get it right. The longest I’ve seen take to get a merger right for us is 4 years. That is a lot of pain for 4 years. But some of them that just go whacking within three months, it’s beautiful, but it’s all up, it’s in the philosophy and in the mentality and the agreement, not a submission just an agreement of what the two parties are good at. One and one made three in that instance and it was a delight and still delight and the business is firing now.
DT:

 

This is the challenge with mergers in every industry not just in law, that the value that you might be hoping to gain from synergy tends to be lost in that first initial period in integration. I’m guessing that those mergers where you were able to integrate quite successfully early on, were the mergers where even if those systems weren’t in place there was an open mind set on the part of the acquired firm.
CO:

46:00

Exactly, you could put the systems in place. I mean whatever the faults are of this particular business we could have really good systems then if we could drop them instantly in the other businesses they would flourish. It’s only the people that can stop you really. The people is a major aspect that is difficult particularly if you have an egalitarian management style. And if people are allowed to misbehave and then some people do. Some people feel very threatened by it. You can imagine if my organisation merges tomorrow with an organisation with three lawyers and seven support staff, if the lawyer that seems the most dominant one tells the staff look ‘don’t listen to anything they say’ we can have a difficult time. That can sometimes happen, not very often, but sometimes.
DT:

 

47:00

Let’s talk a bit more about that post sale period. We’ve talked a bit about identifying a good acquisition target and the things that a target hoping to be acquired can do to improve enterprise value, post-sale you do often keep on partners either in a partnership ownership role or otherwise as a consultant, what are some of the pitfalls that those people might experience in that post-sale period?
CO:

 

 

 

 

48:00

 

 

 

 

 

49:00

For sure, well look using examples of the latest merger we did, they were three equity partners in a traditional partnership model. One exited immediately from ownership and was paid a nice cheque and stayed on working for three years, full time initially, then four days a week. The next equity partner stayed on for three years and his share was bought out, so that was his succession problem solved, he stayed for another year, said ‘I only want a year,’ and then there is only one equity partner left and he’s only 35 so he’s going to be around for a while. The problems you face from there looking at the other side we try to be very acutely aware of these things is that what was your firm alone is not your firm alone anymore. It is territorial and there can be resentment derived by the fact that my staff, the team members who I work with for long time in regional areas staff stays in firms for a long time, they could feel they’re not as important as firm team members who looked up to them, they can feel as if ‘okay I wish I stayed a bit longer,’ ‘I’m feeling fresh’, ‘I sold too early,’ ‘I don’t have any interests what am I going to do,’ ‘this is coming to an end one day,’ even though the firm that merged with us is saying work as long as you like. They want me to comply with things that I don’t like doing, like I don’t like sending emails, I find that offensive. I don’t like returning calls to the business owners, I like just doing what I’ve always done. So there’s a bit of hurt and aggravation and upset and I think most of us get to that when we get to retirement wondering ‘what am I going to do’, I think when you have a merger partner come in, you can possibly blame those people sometimes for what you’re feeling. You’re going to feel that anyway, as you retire, some people feel elated ‘I can’t wait to be retired’ but many lawyers feel that grief and loss. It’s what I’ve done, I’ve been good at it, I don’t feel important anymore, what am I going to turn to.
DT:Not just a job or a career, but a profession is such an identity.
CO:In the town if you’ve run the triathlon club, you run the bridge club, you’re on the board to sporting clubs, you help out in the local school, those sorts of things you’ve enjoyed and you keep doing those but I think people feel that they’ve lost status when their businesses merges with another. The name changes, I mean I’m changing my mind on this now, I think the next few mergers we do, won’t change the name.
DT:Yeah right.
CO:

50:00

There’s really no purpose to it, the money goes in the same place, you still use the money to market and buy technologies. I see that people get very upset by it, we’ve traditionally called things RMB, that’s why we shortened it to RMB, being whatever the name used to be until all the partners are gone, but maybe I’ll just leave it as it is and not have RMB anywhere, I don’t mind, I don’t know, I don’t think there’s much in the name really.
DT:There’s obviously an appetite for that sort of approach people do feel a sentimental connection to the first name.
CO:They do, and you can lose some of that when merging, so if you’re merging with a firm in Cowra that’s been there for three generations, you go and change the name, that hurts people.
DT:Absolutely, and it has a tangible effect on your sale, does it?
CO:

51:00

It does, and it’s an interesting split: what do you do, do you double barrel it? RMB-Cowra law firm, or do you just leave it at Cowra law firm? I mean I think we’re at the stage in our business life at RMB that we’re probably retaining the old name as long as not ridiculously long.
DT:

 

 

 

 

52:00

You could end up with the US style with 7 or 8 named partners. One of the challenges we spoke about earlier, and we keep coming back to this because it’s such a part of the law firm culture and dynamic, even though it ought not to be, is sharing and hoarding. In that post-sale period where you might have an enclave almost of stuff from an acquired firm, I imagine one challenge is that there might be a particular skill set or kind of work that the acquired firm traditionally did because they were generalists and they did a little bit of everything, and as part of a larger organisation, that now goes to a specialist who does that work exclusively. How do you, as an acquirer, manage that cultural change going from being a high street generalist to focusing on a particular area and having to share that work?
CO:

 

 

 

 

 

53:00

 

 

 

 

 

 

54:00

RMB runs in six specialist cost centres or divisions and most senior lawyers are in one or two, some of the junior lawyers can be in three or four, to decide what they’re good at or what they like, but it can be very difficult. In the latest merger we were involved with, we had 5 attempts at developing workflow for when you came in the door, who would get the work and then who would supervise it, and they all failed. You require the corporation but the people on the ground in the office including the receptionist take the calls who was often the best friend of the senior partner. It doesn’t work to say let the work go and so you do get this work hoarding and it takes ages and sometimes you just can’t get co-operation, so have to exit the person, which is awful, I hate it. And it’s very rare we do that, it takes a long time for us to give up on people with sharing and being generous, but generally the answer to the question is you explain why. We are giving all the local government work to this particular person because that’s all she does. She’s building a career in this and she wants to grow in the firm as a great lawyer in this field and she’s not doing any other area of work and we need to feed her and give her a chance; this is about her career. There’s plenty of work for you to do, would be very grateful if you could let her have that chance. We’d like you to work on some matters with her and transition clients, so a lot of people will get that. It works because they all of a sudden get this mentoring relationship, it doesn’t really matter so much if the person leaves, people are going to get hurt along the way when they own a business, when you don’t own the business and you don’t get as hurt if someone leaves and you start to enjoy the relationship, the mentor relationship, so we’ve seen that happen on many occasions where people report to us about ‘my career’s really flourished’ cause I’m not doing all the work I’m helping others I’m seeing them flourish and I’m seeing them build their careers, I can play golf on Wednesdays which I’ve always liked, not very good at it but I’m doing it now, and they see a benefit. I very occasionally get somebody who just won’t; there’s only one way that’s going to end.
DT:I guess it ultimately does come back to cultural features, something we talked about.
CO:

 

 

 

55:00

Cultural features, and that is very different working at the cultural features at the beginning. I’ve made a lot of mistakes, I think I need some people in the end part of it and go ‘oh that one is going to be fabulous’ and that one might be a bit difficult, and I get it exactly wrong, it’s the opposite way round or they’re all fabulous. But you do get better at protecting yourself (both parties in the organisation) by making it very clear what’s expected in writing, it’s not an agreement for sale it’s this is what we expect from both parties and we write it together. We spend a lot more time on this now before a purchase or a merger than we used to.
DT:

 

Craig, that’s a really interesting topic because this has come up in a few different episodes and I think this is, I love talking about this because as lawyers we tend to value the document that’s legally enforceable, so that’s the valuable thing that’s our work product, and anything that’s not legally enforceable well who cares it’s not enforceable. But it’s so important to have those expectations because ideally you’re never looking at whether somethings enforceable or not because everyone’s behaving in accordance with it and we’ve talked about this from an estate’s perspective in terms of a memoranda of wishes, and it’s really interesting to describe it from an acquisition or merger perspective.
CO:As you know most of those documents that describe the sale of business are all about money, dollars, restraints…
DT:Receivables…
CO:

56:00

How you’re going to handle the debtors? That sort of stuff right, but the document you’re describing is vastly important. It starts with RMB seeking to achieve this out of a merger, XYZ seeking to achieve Y out of a merger. The key individual in XYZ in their personal life wants to achieve the following as they get to the end of their career. They want to be treated with respect that I did good work, they don’t want to be put on the shelf, they’re prepared to learn things but don’t want to be pushed too hard on that because it’s harder when you’re 70. RMB wants these people to stay and help us build the succession that hasn’t been able to be built in the business so far, to protect their town and their people and their interests and that’s the sort of document.
DT:

 

That must be so valuable, I think a lot of businesses have a set of values on a wall, writing them down in that environment where you’re talking about this great undertaking that’s so real.
CO:

57:00

 

Whilst not legally enforceable you pull it regularly and ask, ‘how are we getting on with this?’ I thought I’d be down to four days by now but I’m not, do you want to go? Yeah, I’m the one that’s resisting it, you’re right I’ve got to go, I want to go to four days because I said I wanted to become a golfer with a handicap for less than 20. It’s okay we’re not going to dump you.
DT:Going through that process of setting out goals and expectations, has anyone ever put something in that document that really surprised you?
CO:

 

There have been some surprises. You get the usual ones travel, golf, that sort of stuff, the one that surprised me the most is I would want more time to learn more about law and business. The business of law, I’ve never learnt about the business of law, been practising 50 years but I want you to teach me about it, I want to learn about it, I want to study it.
DT:What a fantastic…
CO:Fabulous fabulous, tick tick! When can we acquire your business? It was a genuine comment too.
DT:

58:00

That’s fantastic. We’ve talked a lot about different factors of acquiring and selling firms, we’ve talked about culture, process, financial reporting, sales, recurrent sales, before we finish up, for a lawyer particularly in a suburban or regional area who’s thinking about selling their practise or transitioning to retirement in the next five years, Craig what do you think they should be doing right now.
CO:

 

 

 

59:00

 

 

 

 

 

1:00:00

 

 

Oh terrific, I think they should be taking a long-range view; don’t leave this too late. So, I’d advise them to start to look for who their buyer might be. Look to people and businesses you admire, if you’re not going to sell internally, look externally and look at businesses you admire who you know will treat your customers well. Who you know will treat your staff well, who are probably going to rent the premises that you own yourself and who will treat you well and will make you proud in developing your law firm? Get your business ready in terms of having a few systems in place for staffing, having a little bit in place for scaling up. Make sure you’ve got Wi-Fi, make sure there’s no terrible problem about getting Wi-Fi or you don’t have to update everything, but have a look at who you might like to talk to. Make sure you try and keep your customers happy and keeping value in the business and approach the buyer, the potential buyer, and say, there’s no harm in this, sometime in the next five years I’m happy to sell my business and I want to start considering it now, would you be prepared to talk to me and would you sign a confidentiality agreement, of course. There’s not many people saying no to an approach like that, and even if you’re not ready to sell, 5 years comes around very quickly. The other thing is you can put the work with the broker and explain very clearly the sort of business you want and ask the broker to make the contact. Advertising can work, but I like the idea that they look and say I’d like the business that buys this or merges with me to be this size and quality with a background in regional Australia, background in helping farmers for example, and I want you to tell him that I want to work until I’m 70. Those sorts of things. Go to the potential buyers and say this is what I want, it’s not just about the purchase price, it’s about how I want to practise between now and when I finish, how are you going to treat my stuff, that you’re going to stay in my premises for five years because I need the money, so those sorts of things, get on the front foot.
DT:I think that’s a great point to leave on that we’ve talked so much about what an acquirer looks for in a target, but it is whatever the legal structure of a merger of two businesses and it’s just as important for the target to be happy with who’s acquiring.
CO:That’s right and no one size fits this, they’re all different and you’ve got a lot of power as you should have, in determining what it looks like.
DT:

1:01:00

Craig, thanks so much for joining us on Hearsay.
CO:That was wonderful, really appreciate it, thank you.
DT:

 

 

 

 

 

 

1:02:00

Thanks very much.

You’ve been listening to the Hearsay The Legal Podcast. I’d like to thank our guest Craig Osborne from RMB Lawyers for coming on the show. Now If you liked this episode about business succession for lawyers, try my interview with Dr Beaton about economics for lawyers which I mentioned a couple of times during this episode. Or if you’d like a change of pace, listen to our episode about how collaborative law is changing the way disputes are being resolved in family law and beyond. If you’re an Australian legal practitioner you can claim one continuing professional development point for listening to this episode. Whether an activity entitles you to claim a CPD unit is self-assessed, but we suggest this episode constitutes an activity in the business skills and management category. If you’ve claimed 5 CPD points for audio content already this CPD year, you may need to access our multimedia content to claim further points from listening to Hearsay. Visit htlp.com.au for more information on claiming and tracking your points on our platform. The Hearsay team is Tim Edmeades who engineers our sound, Kirti Kumar who researches our episodes, Araceli Robledo who manages our marketing and me David Turner your interviewer. Nicola Cosgrove is our executive producer and brings it altogether. Hearsay The Legal Podcast is proudly supported by Assured Legal Solutions, making complex simple. You can find all of our episodes as well as summary papers, transcripts, quizzes and more at htlp.com.au. That’s HTLP for Hearsay The Legal Podcast.com.au. Thanks for listening.