Asked and Answered

By John W. Olmstead, MBA, Ph.D, CMC

Q. I am a solo practitioner in Orlando, Florida with two secretaries and I am planning on merging my practice with another attorney in the same office location. He has three staff members. We have both been on our own for 20 years and have enjoyed our independence. We have decided that we want to setup an eat what you kill type of compensation system. We would appreciate your thoughts.

A. While I am not fond of such systems as they lead to separate silos - separate firms within a firm - there are situations where they are appropriate. In some situations, the approach is to simply allocate revenue and use the percentage of fee revenue collected to determine a partner's interest in the profit for the year. A determination must be made as to what the firm means by revenue collected for each attorney - working attorney allocated dollars, originated attorney dollars, or responsible attorney dollars, or a weighting of all of these. This only works if each consumes overhead at the same level.

If you are not consuming overhead at the same level some form of cost allocation must be made and included in the mix. Direct overhead items such as bar dues, auto expenses, CLE seminars, etc. could be allocated directly to each partner with each sharing equally in the rest of the indirect overhead. Then a net figure would be calculated to determine each partner's compensation based upon their share of the profit.

If you want to really get detailed, you can setup a separate profit center for each of you in your accounting system, allocate all revenue and expenses using an agreed to allocation formula and then have the ability of generating a separate profit and loss statement (Click here for sample allocation guidelines). If you are using QuickBooks Pro you can setup classes to accomplish this. Your compensation would be the profit from your profit and loss statement. 

Good luck with your merger.

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John W. Olmstead, MBA, Ph.D, CMC, (www.olmsteadassoc.com) is a past chair and member of the ISBA Standing Committee on Law Office Management and Economics. For more information on law office management please direct questions to the ISBA listserver, which John and other committee members review, or view archived copies of The Bottom Line Newsletters. Contact John at jolmstead@olmsteadassoc.com.