March 2007

1. Say Goodbye to Goodwill?
2. The Conundrum of Associate Pay
3. "What's a Web Site Got That I Ain't Got?"
4. The Business of Law^® Teleseminar Series

Articles

1. Say Goodbye to Goodwill?

   Longtime readers of this newsletter know I strongly believe that a law practice has goodwill that can be sold. "Goodwill" in this sense is the client base and client loyalty that the selling lawyer has created over the life of the practice. Firms with bad publicity and malpractice and disciplinary matters hanging over them have little goodwill.

   Until now the issue of whether goodwill exists has been limited to the selling negotiations. Typically smaller firms understand the value of their client relationships and reputations and, when negotiating for the sale of a practice, discuss compensation for goodwill. However, larger firms argue that there is no goodwill and will walk away from a transaction if the "seller" wants to be compensated for their goodwill. The parties may not talk about goodwill; they may say there will be no deal if the seller insists on goodwill. Oftentimes, however, there is a "credit" for a factor that might be analogous to goodwill in terms of the cost of the capital buy-in. There has to be some adjustment for this factor, irrespective of what it is called.

   Now, however, the heavy hands of state bar associations (which long opposed the concept of selling a practice) are creating more problems. The new, and very restrictive, marketing regulations adopted by the New York State Bar specifically assert that "a lawyer in private practice shall not practice under a trade name." If lawyers' names must be used in the title of a firm, as this seems to require, any lawyer who would be interested in purchasing a law firm would either have to "retire" the selling lawyer (and keep the name in the firm "trade name" since the rule enables the name of a deceased or retired member of the firm to be retained), or change the firm name.

   If the firm name is changed, deleting the previous lawyer's name, one might question whether the value of the firm's goodwill is decreased if not actually destroyed. Many buyers assert that clients will not remain with the firm once its proprietor leaves. With this assertion is an offer that is much lower than otherwise would be the case. The selling lawyer then is left to assert that goodwill infers that the reputation of the firm continues beyond the removal of any one individual. With that reputation comes the client list (and access to these clients), the phone number and the on-going nature of the practice (with staff and systems in place).

   What's the result? Negotiations that are already complex become even more so as the parties have to work around the "trade name" restriction. After investing years of hard work and financial resources in growing the practice and building goodwill, the selling lawyer may have to forego the opportunity to reap the benefits of that years-long investment - all due to the myopia of the State Bar. For the sole or small firm practitioner, that's "déjà vu all over again."

2. Should Credit Cards Be "Legal"?

   The importance of collections leads to another issue that I frequently find sole practitioners and small firms supporting and bar associations opposing: the use of credit cards for payment by law firm clients. I've spoken out before in this newsletter, saying that acceptance of credit cards benefits both the client (ease of payment) and the lawyer (quick access to funds), and also recognizes the reality of modern commercial life. Yet the State Bar of California's Standing Committee on Professional Responsibility and Conduct recently chose to ignore these facts in its Formal Opinion Interim No. 05-0009, which concludes that a credit card may not be used in California for advance payment of legal costs.

   The committee was concerned that accepting a credit card payment puts an intermediary (the credit card company) in control over client funds for a short period of time before being moved into the lawyers' control. In my formal objection to the committee's conclusion, I stated that there is very little difference between an intermediary for credit cards and the intermediary for acceptance of payment when checks are used. Neither is legal tender under the law and both require certain processes to be completed before money can be placed into the attorney's accounts. In effect, the intermediary is an agent of both the lawyer and the client. Using a credit card for payment is a voluntary act requiring the participation of both parties. While it may be advisable to apprise clients of any perceived risk of using credit cards, credit cards still remain today's commercially accepted means of payment of obligations.

   The credit card company does not control the funds, even for a second, without being under contractual license to both the client and the lawyer. The credit card company cannot act independently as to the clients' funds. Assuming the worst, that the credit card company will act on its own and mis-direct funds, both the client and the lawyer have recourse against the credit card company, the same as where a bank may mis-direct funds in the account of a lawyer's clients' trust account. Further, since the credit card company, in the case of deposited funds, can be viewed as the agent of the lawyer, the lawyer would still be responsible to the client for the deposited funds. And, for clients, there is an added advantage: the ability to protest a payment even after payment is made. Usually, up to six months, a credit card company will reverse the charge if a complaint is filed by the user.

   The simple fact is that payment by credit card involves little or no risk to clients, and conveys great advantages in the payment of legal fees. For bar associations to expect payment only in cash or by check is absurd. Today email is accepted as correspondence in lieu of mail hand-delivered or posted by the U.S. Post Office. An electronic or faxed signature is accepted in lieu of physically signing a document. Credit cards, likewise, are accepted in lieu of cash virtually everywhere. It's time for bar associations to recognize this form of payment as "legal."

3. Do You Want to Succeed?

   During the holidays I participated in a fascinating email exchange with members of an online listserv for sole practitioners. The exchange concerned quality of life, and in it a surprising number of lawyers expressed real reluctance about successfully marketing their practices and getting more business. Some of these lawyers said they barely had enough time now to meet their professional and personal obligations, and that new business would put them further behind. Others feared that new business would rob them of the flexibility to pursue a schedule and pace that they control and prize as solos. These lawyers all believed that setting limits on how much they could do and wanted to do was the best way to conduct their practices.

   My response was simply, why? Why can't you accept every GOOD client and good matter that walks through your door? True, if you want to be a one-person firm with no staff, there is only so much time in the day. But, if you're so successful that more people come to you than you expect or want, you can take one of two new paths: either raise your fee and earn more revenue per client and thus more revenue for less or the same effort … or hire another lawyer/paralegal to expand your firm

   Growing your firm is what most lawyers want. And if you don't want to grow your firm, then you face other challenges: You will always be an hourly worker - and you must hope you stay healthy because when (not if) you get sick, your revenue ceases. Without growth you will never be able to benefit from the concept of leverage (earning profits from the brow of others' labors - the capitalist ideal). Your firm will also have less, or perhaps little, value to sell or transfer at the end of your career, robbing your of the goodwill from all your years of hard and successful work.

   This is not just a life-style issue in the context of "balance (if there is such a thing, which I don't believe) of life." It is a very serious economic issue for the well-being of both you and your entire family. There is no balance at any single moment of time; the hope is that over time, there would be a balance that fits you and your personality. In other words, at some points in your life, you will be working harder and spending less time with family or in personal pursuits; at other times, you will be spending more time with family; at other times, you will be able to relax and spend more time on personal pursuits.

   My advice to any lawyer who is conflicted about growth is to spend some quality time reviewing your goals and coming to peace with your aspirations and expectations.

4. Are You Keeping Up as Technology Advances?

   As many of you know, I have long felt that WordPerfect offers document processing advantages to lawyers that Microsoft Word does not. But, Microsoft and Word have reached and surpassed a critical mass of acceptance in the legal community. A recent LawBiz Podcast interview with Norm Thomas, Director of Business Development for Microsoft Professional Services Solutions, gave me some new insight on why this should be so. Norm emphasized that Microsoft is committed to outreach and dialog with suppliers, vendors and users to develop solutions for the legal community using Microsoft products. These solutions for lawyers increasingly emphasize the interaction of all the features of the Microsoft platform.

   These were some of the examples of this principal that Norm cited:

   • You can apply the outlining capability of Word to a complex document and use the outline directly in PowerPoint for making presentations.
   • You can combine both handwritten notes and audio notes into text documents through the use of the One Note software. (Norm offered to do our next podcast this way, combining visuals with the audio)
   • You can preserve the integrity of your internal documents as intellectual property through the use of Share point.
   • You can use the new Windows Vista operating system to do text searches across your local drive, your enterprise network, or the Internet itself.

   The point here is not to do a commercial for the folks in Redmond. However, as I've commented before, lawyers have an ethical obligation to meet the generally accepted standard of care in providing legal services - and that includes the use of technology. If your competitors are using the Microsoft platform to the fullest, and you remain committed to WordPerfect alone as your first and only technology, you run the risk of being willfully less competent than your competitors. That's malpractice . . . and business suicide.

   To hear the full text of this interview, go to our podcasts page at www.lawbiz.com/podcasts.html.