ALBERT EINSTEIN AND THE SMALL FIRM PRACTITIONER
To develop his theory of relativity, Albert Einstein used his mind to conduct experiments that could not be simulated in the laboratory. Einstein envisioned matter moving close to the speed of light and predicted the outcome. This technique is called “thought experiment” and attorneys use similar techniques every day for the same reason: actual experimentation is not possible. (If I make a motion, how will my adversary respond? What will the court do? How will all of this affect the outcome of the case?). To open and nurture a law practice, take a page from Einstein’s book and develop a thought experiment to work through the problems and opportunities of the endeavor. Take heart, for this thought experiment, a/k/a the “business plan”, need not encompass the entire universe, just your little corner of New York State.
The business plan is a working tool, creating a structure to think and analyze, to see both the forest and the trees. When finished, the plan will both envision the big picture and fill in the nitty-gritty details.
The business plan serves multiple functions. The working version will test long-held theories and assumptions (I can do this better then those unimaginative dolts that I work for) and convince its architect (you) to throw caution to the wind, leave that cushy job and start hunting for a living. The external version is a sales brochure that will convince a cautious, conservative banker to lend money to a young upstart attorney.
The business plan is a thought experiment that allows the small firm planner to identify and test her assumptions, take measure of her needs and means, and ultimately, plumb the depths of her resolve.
Like a resume, the business plan need not have a rigid structure, though both always include certain basic and specific information. Both are reflections of your skills and attitude, while the business plan is a prospective analysis of future endeavors, goals, and challenges, built on the skills and accomplishments summarized in the resume.
Looking for a shortcut? There are software programs for drafting a business plan. Unfortunately, these mass-market programs are designed to help evaluate an entirely different set of problems and challenges, based on acquiring and selling an inventory of widgets. Such plans are unable to encompass, for example, the strategic differences of locating a practice in a storefront on the Grand Concourse in the Bronx versus the 87th floor of the Empire State Building in Manhattan. The output from these programs is stilted and goofy. Unfortunately, they just don’t work for attorneys. Save a thousand hours and a hundred bucks; start from scratch. Here is the recipe:
Start with a summary abstract- a page or two providing a convincing argument that the business will succeed, based on the summary of the analysis and data set forth in the rest of the business plan.
Next, provide a background and description of the practice including, but not limited to, the purpose, history and goals of the practice. Describe the background and strengths of the principals of the practice. Demonstrate the “sensibleness” of the overall plan. If the plan is to develop a part-time practice out of the basement until the kids start high school, it will look very different than if the goal is to become the Immigration Queen of Kings County or the Intellectual Property King of Queens County. Make the objectives clear, crisp and detailed.
Describe the form of the firm (LLP, LLC, PC, partnership or sole proprietorship) and discuss the efficiencies and tax benefits of that form of practice. Evaluate the different structures and determine which is best for the specific strengths, needs, and goals of this unique law firm.
Develop and describe the firm’s marketing strategy (and do not pretend that it is anything other than marketing, and here the product is this fledgling law firm). Identify and analyze the target market: who are the prospective clients, where are they, how will the firm find them and how will they find the firm? Include a description of the firm’s location; consider how that location affects the client base and other strategies. If this part makes you too queasy, keep the day job, because getting clients is key to maintaining a practice.
Create an implementation time schedule, starting one year from the day you plan to open the practice and working forward. Plan the start-up requirements, including space, furniture, hardware, software, research databases, insurance, staff and stationery. Determine the cost and source of funds for all of these initial outlays.
Determine how much money each member of the firm need to live. Add up the cost of repayment of student loans, child support payments, candy and ice cream needs, bail money, and all other reasonably anticipated expense. Be realistic. While this part of the plan will be omitted from any document submitted for outside review, such as for a bank loan, it is very important to the working plan used to design this firm around the particular needs if its members. This personal financial assessment will enable a determination of how much will be drawn from the firm every month and will be part of the calculation for the breakeven analysis to determine the firm’s “horizon of doom”.
But enough about you, how much money does the government need? Tax costs are probably the biggest landmine waiting for small business owners. Don’t step on this one. A lawyer may be able to live on $60,000 take-home, but if that amount calculated as gross income creates a tax liability of $25,000, will the firm be prepared to pay it? Plan for it.
How much money does the practice need to support itself? Some expenses will be fixed, like office rent; some will be variable, such as court fees and travel costs. This is truly where the thought experiment is in high gear. Consider every anticipated expense, from the salary for the receptionist to the fee for filing a Note of Issue in a contingency fee case.
Give some thought to what is a luxury and what is a necessity. Depending on the nature of the practice, an expense like advertising may be an absolute must or it could be ego indulgence. Know ahead of time.
In order to estimate a profit margin, it is essential to determine these fixed and variable costs. That figure is the “nut” or the amount of revenue the firm must generate to stay afloat. Create a budget and break-even analysis. Make income and cash flow projections monthly for at least one year.
Once it has attained some capitalist momentum, a practice will produce more than it consumes. Then comes discretionary spending. Whatever comes in beyond the “nut” can pay for the flat TV, grow the practice, or be squirreled away for future use.
Develop financial plans for the first five years of the practice.
The plan will be based on various assumptions. Some assumptions are obvious (the firm will be retained by clients). Some are not so obvious. For example, many novice planners assume that the law firm will make money the first month of business. Consider whether this assumption is reasonable. What will happen if the firm does not generate income the first month, or even the first three months?
The lawyer-proprietor must identify the known aspects of the plan as well as what is unknown and even unknowable. This thought experiment is intended to pinpoint and test the validity of the hidden assumptions of the business plan. Indeed, one of the most critical and useful aspects of developing the plan is identification and analysis of such assumptions. Here the thought experiment enables one parse the business plan to find and solve potentially fatal flaws in the theory of how to run a law firm, before the investment of several hundred thousand dollars and several years of sweat equity.
Einstein’s theory of relativity includes an apparent paradox. This law firm thought experiment also contains an apparent paradox: to successfully start a practice, one must make a business plan, yet, that business plan will never actually be fully implemented. Because the vagaries of reality will intrude, and the variables of practice are too many to predict, the plan must be designed and articulated, but cannot be fully achieved.
But do not worry, Grasshopper, this is not a problem, because knowing and planning for the inevitability that business never happens exactly as anticipated will allow for a flexible, creative response and the development of “Plan B”. Remember that the ultimate strength of every successful small businessperson and attorney is mental flexibility. However staid is your business suit, your mind looks like Brittany Spears (or at least Madonna in her 40s).
 For a discussion of the formation and efficiencies of the various forms of a law firm see Weighing Options On Organizational Structure, Martin S. Klein (NYLJ, November 10, 2003, Page 7, col. 1); For a discussion of the tax advantages of the various forms of a law firm, see Professional Corporation Status Has Tax Advantages In New York, Cole H. Oram And Jeffrey Bernstein (NYLJ November 24, 1998, page 5, col. 1.) For a discussion of the protections offered by the various forms of practice, see Limited Liability Partnerships Seen Restricting Exposure Edward A. Adams, NYLJ, July 14, 1994 Page 1, col. 1.)
 See Consultants Tell Attorneys: Coffee Is For Closers Anthony Lin (NYLJ, March 12, 2004 Page 1, Col. 3)
 See Space Options for Small Firms, Laura Gentile (NYLJ May 2, 2003 Page 16, Col. 1)
 Figuring Your ‘Horizon Of Doom’, Laura Gentile (NYLJ, August 3, 2001, page 16, col. 1
 Capitalism works on a Small Scale, Laura Gentile (NYLJ October 12, 2001, page 16, col. 1.
 The faster someone moves approaching the speed of light, the slower time passes for her, relative to someone who is not moving.