37+ Behind Closed Door Reasons Why Your Small Law Firm May/Will Fail!

Every year, some of the nation’s 45,000 to 50,000 law firms (about half of them are solo practitioners) go out of business

Law firms don’t just go bankrupt—they collapse. Like Dewey & LeBoeuf, Heller Ehrman, and Bingham McCutchen, law firms often go from apparent health to liquidation in a matter of months or even days. Almost no large law firm has ever managed to reorganize its debts in bankruptcy and survive. This pattern is puzzling, because it has no parallel among ordinary businesses. Many businesses go through long periods of financial distress and many even file for bankruptcy.
But almost none collapse with the extraordinary force and finality of law firms. Why?

We argue that law firms are fragile because they are owned by their partners, rather than by investors. Partner ownership creates the conditions for a spiraling cycle of withdrawals that resembles a run on the bank.

As the owners of the business, the partners of a law firm are the ones who suffer declines in profits and who have to disgorge their compensation in the event the firm becomes insolvent. So if one partner leaves and damages the firm, it is the remaining partners who bear the loss.

Each partner’s departure thus has the potential to worsen conditions for those who remain, meaning that as each partner departs, the others become more likely to leave as well, eventually producing an accelerating race for the exists bank. This kind of spiraling withdrawal is sometimes thought to be an unavoidable consequence of financial distress.

But if law firms were not owned by their partners, this would not happen. Indeed, the only large law firm in the history of the common law world that has ever survived a prolonged insolvency is also one of the only large law firms that has ever been owned by investors.

These insights have extensive implications for how we understand law firms and corporate organization more generally. Review: https://law-economic-studies.law.columbia.edu/sites/default/files/content/docs/why_law_firms_collapse_11.0.pdf

Do you Know the Signs Your Law Firm Is Failing or is in Danger of Permanently Closing?.

According to the American Bar Association, approximately 70% of lawyers in private practice work in law firms with 10 or fewer attorneys. Another 48% are solo attorneys. Because law firms of these sizes are considered small businesses, and only a third of small businesses survive 10 years or more, let’s examine why a few law firms succeed and most law firms do not.

In business, you are either getting better or getting worse. Successful law firms are getting better. Unsuccessful law firms are getting worse, if they are even in business.

The time that small law firms lawyers say they spend practicing law has dropped to a new low, the report shows, with lawyers reporting that they spend an average of only 56% of their time practicing law, compared to 60% just a few years ago.

Much of this continued erosion is due to the increased workload involved in managing the administrative business of their law firms and trying to recruit new client business.

Indeed, administrative burdens and client acquisition were the top two challenges small firm lawyers say they’re facing.

Nearly 80% of firms report they have not yet determined how to address the problem of spending too much time on administrative tasks. Only slightly more firms have implemented a plan to address their business development challenges.

The State of US Small Law Firms report indicates small law firms are largely failing to take action to address major challenges, such as acquiring new clients or reducing administrative burdens. Top concerns are getting paid by clients and the constant importance of maintaining cashflow.

Typical Signs Your Law Firm Is Failing or is in Danger of Permanently Closing

Small law firms continue to occupy perhaps the most dynamic sphere of the legal market today, as they are much more dependent on individual consumers than are their larger firm counterparts, and therefore more susceptible to the economic winds sweeping Main Street at any one time.

No attorney wants to engraved on their shingle, “FAILURE”. 

There are sometimes outward indications that a law firm may be at risk of closing its operation. Such things as:

Lack of Differentiation.

Those that fail do not offer anything unique to differentiate from other law firm competition, or what they are using to differentiate themselves is not significant enough to make a client choose them over a competitor.

Lack of Understanding Of Client’s Needs.

Unsuccessful law firms treat their clients as a file or number. When clients provide valuable feedback such as requesting a meeting to discuss their bill or to discuss the direction of their case, unsuccessful law firms refuse to meet or ignore them entirely. This type of client treatment puts you on the fast track to being out of business.

Poor Choice of Location.

Successful law firms are in locations that in close proximity to their clients or potential clients. For example, criminal defense attorneys have law offices near the criminal courthouse. Successful law firms also find locations that will create the perception of success to a client. If you have an office that is hard for your clients to visit or that looks rundown and uninviting, then your location will cause clients to choose another law firm.

No Focus.

Unsuccessful law firms fail to set short and long-term goals or focus on achieving them. They also fail to focus on the big picture, which is to get clients, keep clients, and do the best job possible for clients. They fail to focus on what matters. Instead, unsuccessful law firms are entangled in non-income producing activities and other time-wasting matters that do not help them achieve their goals.

Lack Of Financial Management.

Unsuccessful law firms fail to learn how to monitor cash flow, read WIP (Work In Progress) reports and ledgers regularly, and study accounts receivable and accounts payable. They fail to constantly monitor their financial health. They fail to manage their finances, which eventually leads to the law firm’s demise.

Lack of Perseverance.

Unsuccessful law firms fail to understand that success is a road that is always under construction. Unsuccessful law firms crack under pressure and fail to persevere when the going gets tough.

Failure to Learn and Change.

Unsuccessful law firms fail to understand that learning and changing when necessary are the keys to surviving and thriving. Unsuccessful law firms fail to learn from setbacks or fail to make changes to their systems and processes when necessary.

Disharmony Among Partners

The theory is that bringing in a partner shares the risk, creates synergy, and doubles the odds of success. The reality is that many law firm partners spend all their energy fighting for a bigger share of a pathetic little pie.

We just finished advising a lawyer to extract himself from a partnership because the two lawyers couldn’t stop squabbling over money. The “successful” partner is grossing under $200,000 a year. The “failing” partner is grossing $130,000.

If you’ve got a really good reason to form a partnership (like you’re married to a lawyer and they insist) then go for it. But be aware: getting along with your law partner often proves more challenging than building a successful practice.

Door Law

What kind of law do you practice? “Whatever walks in the door.” For many lawyers it’s an accurate description of their practice. Door law fails us in numerous ways. It prevents us from gaining traction in our market. While “door law” sounds funny, it doesn’t get people talking about us. There’s no word of mouth for door lawyers. It’s hard to tell the story of our practices because our practices have a murky story.

Door law fails when it comes to expertise. We can’t learn any one thing thoroughly when we spend our days doing small amounts of everything. We can’t level up on knowledge or experience. We’re always scrambling and never climbing higher.

Finally, door law inhibits our relationship-building. Because we’re always advocating in a different venue or forum, we never build the relationships that are essential to create trust. We don’t have time to get to know the judges, bureaucrats, and others who could help us help our clients. Without trust, we’re just ghosts drifting through the process. There’s no human connection, and that hurts us.

Pick a service you can master and become the best in the world at delivering that service. Stop answering the door unless the prospective client knows the magic words for entry and needs exactly what you offer.

Bad Pricing Decisions

The practice of law is a business. We buy low and we sell high. When we price wrong, we’re buying low, selling low, and eventually we’ll go broke. You can’t do the work for free. You’ve got to cover your costs–even if that simply means your food, shelter, and student loans.

It’s common to fall into a pattern of getting desperate, taking any fee offered, then taking on more low-fee cases, getting buried in the busyness of too many low-fee cases–and drowning.

Once the cycle starts it’s hard to stop. Low-fee clients refer other low-fee clients. The lawyer loses confidence and won’t ask for more money for fear of being rejected. The lawyer feels the financial pressure to pay the bills incurred from running a money losing business and accepts more low-fee clients to increase “cash flow.” It’s painful to watch and it’s hard to recover.

Taking on a client who can’t afford to pay is worse than not having a client at all. It’s a major source of law firm frustration, burnout, and ultimately failure.

Start with a pricing structure which allows the business to thrive. If the market won’t support the fees required, then improve your marketing so that it will attract clients who can afford what you offer, or offer something different. Losing money on every sale is a perfect way to lose lots of money.

Poor Marketing

Marketing is a systematic process. It’s shockingly similar to getting married.

  1. Create a Tinder account
  2. Do some swiping
  3. Meet up for drinks
  4. Stir in a combination of time, proximity, and self-disclosure
  5. Keep staring
  6. Get married

Same deal with getting clients. Get people talking about you and telling your story. Amplify the talk with content marketing, advertising, networking, etc. Meet people and stir in a mix of time, proximity, and self-disclosure. Get clients. Marketing requires a marketing plan. The plan doesn’t have to be complicated or sophisticated. It can be as simple as swiping on Tinder.

A marketing plan does require focus. You’ve got to stick with it and follow your plan. Execution is key. The biggest cause of poor marketing is lack of effort. We lose focus, get distracted, and stop taking action on the plan.

Marketing only works if it’s part of your day, every day, all year long. It’s essential that you make the effort or you’ll end up accepting that job offer and closing up shop.

The saddest part (aside from the personal disappointment you’ll feel when you pull down your shingle) is that the new firm will insist that you get busy marketing. Ultimately they’ll kick you to the curb if you don’t generate some business. Welcome to the practice of law, unless you go to work for the government.

Why not get on with the marketing now, if you’re going to end up doing it anyway?

Come up with a plan, take small steps each day, and score some victories. Marketing needs to be the first thing you do each day, even if it simply means making a couple of calls to arrange lunch dates. When you don’t put marketing first it nearly always gets put off and shifted forward on your calendar. Do something small each day and you’ll see the results.

Fear

We don’t like to talk about fear. Those of us who feel afraid often describe it as a “lack of confidence.” Call it what you will. Personally, I have a “lack of confidence” about snakes and alligators. My wife gets a “lack of confidence” when she has to walk along the high edge of tall atriums.

When you’re:

  1. Afraid to ask for money
  2. Afraid to ask for help
  3. Afraid to follow up with prospective clients
  4. Afraid to cold call potential referral sources
  5. Afraid to stand out from the pack with your marketing

You’re doomed.

Fear doesn’t work for small law firm owners. It’s a stone-cold killer. You have to get out there and face your fears. You have to be willing to make things happen. Do whatever is required to face the fear. Smile at it. Dance with it. Fake it if that’s what you have to do. But don’t let the fear stop you. Push forward into it and soon it becomes a way of life. What used to scare you becomes routine as you move on to bigger and more challenging efforts. Push past it.

Passion Deficit

Passion is the antidote to fear. It’s what gets us going even when we’re not sure how we’re going to get there. Passion is energy. Passion is commitment. Passion is bravery. Passion comes from complete commitment to our cause. We’re 100% invested. The game is on and we’ve burned the bridges behind us.

Lack of passion is evident when the lawyer keeps scanning for employment in a another firm. Lack of passion is evident when the lawyer has opened a practice, not because she wants to do it, but because she has no better options. Lack of passion is evident when she can’t decide what to do or how to do it, and won’t jump in and start.

Passion sometimes makes us blindly optimistic. And that optimism is necessary, because there are inevitably dark moments when things go badly. But our passion lifts us up, fills us with energy, and presses us forward, because it’s the only path left to follow.

Some lawyers seem impartial, emotionally disconnected, and lacking in energy. Those lawyers will struggle. The lawyers with enthusiasm, commitment, drive–passion–they are the lawyers who succeed. Let yourself feel it. Turn it into energy and burn it as fuel to keep you moving.

37 Additional Signs of Failure Range From 

1. The defection of key partners to a glut of partners and not enough associates

2. Hiring without a strategy

3. Rotating the post of managing partner among senior partners

4. The biggest recurring reason for law firm closings is ineffective leadership

5.  Underperforming finances

6. Not making tough decisions and, most importantly, acting on them

7.  Ignoring [problems], hoping that they will go away

8. Reliance on a few key producers while associate and partner salaries are at the top of the market

9. Failing to periodically meet with law firm clients and provide them with “state of the market” information or services 

10. Failing to act on tough decisions, including unprofitable practice areas

11. The defection of key partners

12. The fragile environment of law firms to begin with.

13. Too many practice groups that compete with one another which can influence the strategic direction of the firm.

14. Trouble arises when clients grow and demand more services than the firm can provide.

15. Attorney departures

16. Failure to deal with fixed overhead costs, which can account for 70 to 80 percent of expenses

17. Failure to put a business plan in place for management succession.

18. Failure to effectively delegate recruitment and marketing to see who has the skills to do them.

19. Picking managing directors because: ‘I am a senior partner, and it is my turn to do this’ or “I haven’t done this before”

20. Problematic survival if firm has many more partners than associates

21. Failure to have all attorneys contributing to the firm’s bottom line. All need to be productive so resentments do not build up among key rainmakers.

22. Hiring without a strategy. Good leadership entails strategy, rather than based on personality or mere market perceptions.

23. Hiring someone because they may have a book of business and a practice with a future is a recipe for disaster. “Due diligence has to get done.”

24. Not recognizing clients are “owned” by partners and firm 

26. Not using teams of lawyers to handle work. They becomes less vulnerable to losing a client if some attorneys leave.

27. Amassing debt. Successful firms are cash­ and carry.

28. Continuing money ­losing practices because it is a key partner’s practice area, or it is considered “a good practice to train the associates.

29. Reliance on a single industry

30. Reliance on a small number of clients who might suddenly disappear

31. Lack of marketing, business development and productivity activities and incentives.

32. Put resources into ineffective marketing materials. Marketing materials do not sell a law firm; people do.

33. Lawyers not engaging in various marketing activities to build their practice and contribute to their law firm.

34. Not using strategic thinking.

35. Applying systems and strategies to eliminate the increased competition and less loyalty from clients.

36. Not being the best in the area where clients need legal services. 

37. Preventing clients from working with three or four different law firms instead of your firm.

These Are Not the Only Reasons

There are plenty of ways to fail and I’m just hitting the highlights. Some lawyers hire too early and run out of money. Others fail miserably at accounting and go broke without even realizing it. They measure their success based on whether the ATM will give them more cash today. Some lawyers won’t talk to their clients and end up with piles of negative online reviews. We could go on and on. You probably could too.

But success is not only possible, it’s likely if you put in the effort. Most lawyers who set out to build a practice are successful at creating a business which sustains them. With a bit more focus, a good marketing plan, better pricing, less fear, and more passion, they become dramatically more successful.

When you move beyond survival mode and get serious about growth, it’s time to add a comprehensive vision that will keep you moving in one direction over the long term. Then you can flesh out your marketing stories so others will spread the word for you. That’s when the revenue growth accelerates and you start to build wealth.

There’s very little drama when a small firm fails. It’s hardly noticed. But a successful law firm gets recognition and reward.

Reason Why Your Small Law Firm Will Not Fail

Hopefully, this report has provided you with some strategic direction and prevent your firm from confronting the challenges that may jeopardize your future profitability, success or closing.

In the end, a lawyer needs to be more than just a legal adviser. Lawyers must be a counsel, confidant or coach and know their business inside and out.

Be someone for advice in any situation. Your client’s business may depend on it.

By: Michael Kissinger

Universal Law-Business Results Expert-Offering Proven Business Profit Optimization Results, Cash Flow Maximization, Funding, Marketing, Sales, Management, Leadership Coaching. Helped 10K+ Owners Earn/Save $1 Billion+

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Live Long and Prosperously,

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Sydney and Michael
Text: 650-515-7545
Email: mjkkissinger@yahoo.com

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