Partnering Requires Careful Balancing

by Joel A. Rose

Law partnerships are fragile, volatile enterprises that can easily become unglued, regardless of how careful the partners were at the outset or how financially successful they become.

There is no single reason why partnerships fail, but some general factors seem to exist, the most usual being economics. When a firm is highly profitable, the interpersonal relationships among and between its partners are easier. When cash is in relatively short supply, partners may question each other's contributions or may believe they are not being compensated in relation to their contribution to the firm.

Another typical problem is the partner who allows insecurity, fear, jealousy and competition to interfere with his or her ability to collaborate. If left uncontrolled, these emotions can place partners at each other's throats.

Many lawyers have a tendency to operate autonomously, acting on behalf of the partnership without consulting the other members of the firm on policy issues or on matters that commit significant firm resources.

Good partners are not overly competitive, self-motivated or judgmental and are able to be good team players and balance a drive for personal control of the firm with an appreciation of the diversity and goals of other partners.

Agree to Agree

Careful drafting and preparation of a partnership agreement can eliminate many potential problems. Unsolved partnership problems relating to voting interests and management of the firm can be a serious drain on their practices.

The withdrawal, death, expulsion or retirement of partners are frequently key issues that determine how partners will relate to one another presently and in the future. A particularly difficult provision in any partnership agreement is how to fairly value the firm for purposes of partners increasing and reducing their equity in the firm.

Surprisingly, many firms do not have written partnership agreements. Lawyers are so involved with their work for clients that they neglect their own legal needs. Some firms may have drafts of agreements that partners are attempting to renegotiate when they reach a stumbling block and set the proposed agreement aside. This can go on for years and the agreement never gets finished.

Not only do many partnerships lack a written agreement, but often times, firms having agreements find they are not useful because key provisions are out-of-date.

Agreements vary enormously among partnerships, from simple buy-out arrangements to heavy-duty detailed agreements. Partnership agreements should be updated every three to five years or whenever a major event in the firm occurs, such as adding or losing a partner, merger with another firm or the acquisition of individual attorneys or clusters of attorneys.

Clause Aplenty

More firms are now considering clauses in their agreements to deal with ethical issues. Some firms include provisions for expulsion of members in situations where the involved partner stubbornly refuses to deal with situations that foster an attitude of ineffectiveness within the firm - such as incompetence, dishonesty and chronic alcoholism or some other chemical addiction.

Developments in community-property law suggest that partnership agreements should include clauses that provide a way to appraise a partner's interest in the firm in the event of a marital dissolution. Firms should develop a clear and fair way of calculating the net asset value of the partnership at any time in the life of the firm. The formula should be easy to calculate and the partners might even consider having their spouses approve the proposed formula to avoid added conflicts in the future.

Partnership profits may be distributed according to a great variety of allocation methods. Some firms allocate profits to partners equally across the board. Others have complicated arrangements for dividing the points or percentages of retained earnings.

Firms that distribute the earnings based on performance usually have an annual review by committee. The committee typically evaluates each partner's performance against a checklist of qualities such as origination of new business, production, profitability and quality of legal work, reputation, initiative, seniority, leadership ability, volume of work, and so on.

Team or Individuals

A basic question that needs to be answered before, or at least during the early stages of forming a partnership, is whether the partners prefer a "team" or "individual" approach to the practice of law. The answer to this question will directly affect the interpersonal relationship between and among the partners and several key provisions in the partnership agreement, particularly with respect to the distribution of profits.

Under a team approach, all of the partners may contribute all revenue from the practice of law to the firm and each partner receives a predetermined share of profits. The basic advantage of this approach is that it encourages mutual assistance, accountability, unity and the sharing of both good and bad cases. The basic disadvantage is that extraordinary individual efforts during a given period may go unrewarded.

Under an individual approach, each partner's share of profits is directly related to that partner's production. Under this approach, several star players may rise (and fall) over a period of time, but rarely is there any lasting team spirit that provides a foundation for long-term growth of the firm.

The decision on which approach to follow is a function of the goals and personalities of the partners. Neither approach can be labeled right or wrong. And the addition of new partners and the departure of other partners may change the mix to the point that a change in approach becomes necessary.

Big or Small

Another basic question that should be considered up front is whether the partners intend their firm to grow through the addition of associates and new partners or stay close to its original size. The answer to this question will directly affect several key provisions in the partnership agreement, particularly with respect to the admission of new partners.

The decision on which approach to follow is a function of the goals and personalities of the partners. The firm's approach may change over time as the partners' personal, professional and economic objectives change.

Most partners recognize that growth in the number of partners, associates and support personnel is not necessarily planned but simply happens as a necessity to accommodate new business. The issues of dissolution and withdrawal are often not sufficiently discussed by partners at the inception of the partnership because they do not want to dwell on negative subjects. Yet, attorneys always recommend such provisions in their client's partnership agreements.

When a partner withdraws or the firm dissolves, negotiations are needed to determine a partner's interest in the accounts receivable. Some fees will be uncollectible. The partners' shares of receivables will be greatly affected by whether the firm uses a cash or an accrual system of accounting. Partnership agreements should explicitly identify one accounting method or the other to prevent disagreement.

Vision Is Critical

It is impossible to draft an agreement that anticipates all eventualities. Partners in more successful firms believe that there needs to be a full and honest understanding by the partners of the objectives of the firm and the willingness of partners to subordinate certain of their individual independence to satisfy the collective will of the firm.

One senior partner in a 46-attorney law firm says, "You only find out how strong the partners' commitment is to the firm by putting it to the test. Over the years, our firm has come through many difficult times relatively unscathed by working out problems as they come up. . . . an important part of our culture has been to discuss our problems in a diplomatic and statesmanlike manner. Our partners recognize that collectively we can earn more money and achieve our professional and personal goals than if we were with a smaller firm or practiced alone."

Partners in many firms attribute the bonding of partners in their firms to open channels of communication. Several of the firms surveyed for this article have annual one- or two-day retreats to discuss partnership problems and objectives. The managing partner of one of these firms indicated that his firm has a particular need for an annual retreat because the litigators and the business lawyers sometime become fractionalized.

For a firm to succeed, its partners must have a similar vision of how to approach the practice and what the firm is going to be like. Unless some consensus is achieved about the firm, its objectives and partners' personal, professional and economic goals, the partnership is going to have problems forming and continuing. Money is important, but it should not be the only glue that holds the firm together.

©1999-2017 Joel A. Rose & Associates