Law firm partnerships: what the CFO should know

How banks can help law firms retain a valuable resource

The single most important asset a law firm partnership, or for that matter any professional service firm, has is its people. Law firms today are faced with a relatively new challenge: persuading their brightest associates to become partners instead of leaving for other jobs elsewhere. One way to smooth the transition is by helping arrange financing for incoming partners to buy their equity stake in the firm.

That's why some firms are turning to a trusted local financial institution to establish a financing arrangement to help new partners fund their investment. According to David Coughlin, Senior Vice President for Specialty Lending at SVB Private, in addition to obtaining a working capital line of credit with the Bank, along with their usual deposit and cash management services, this could also include a partner buy-in program.

"This financing is important because the firm does not want to lose a talented employee," Coughlin said. "It's a way of structuring the transaction that enables the new partner to get the financing required, but also gives the firm some control in how that debt is handled. In this way, the firm can provide a smooth transition from retiring to new partners without the firm experiencing a serious talent shortfall."

A need for new partners

With baby boom-aged partners now retiring on a regular basis, most firms need to prepare for the next generation of firm leaders. However, the business world is attracting more top attorneys to its ranks with generous pay packages.

In fact, a recent study from the American Bar Foundation showed that an increasing number of associates are choosing to skip the partnership route and instead are heading into jobs in business, ramping up pressure on law firms to retain their best talent. In 2003, only 8.4 percent of lawyers were working for businesses, but by 2012 that number had risen to 20 percent. Furthermore, the percentage of lawyers working in private practice dropped from 68.8 percent to 44.1 percent.

That's why a financing arrangement with a bank can offer a strong incentive for a talented lawyer to stay with the firm. At the same time, it's important to have an established financial relationship with a trusted financial partner so that the firm's CFO doesn't waste time dealing with a number of financial institutions.

"There is a benefit to the firm's CFO in that they are coming to a bank that knows the firm and its financial position instead of having the new partner running around trying to find a loan," Coughlin said. "That's going to make the CFO's job a lot easier and the transition a lot smoother."

Making the arrangement

When an associate is offered a law firm partnership, the bank arranges to provide the new partner with a loan issued under a committed facility to the firm. The loan to the partner is collateralized by the partner's equity stake in the firm and is guaranteed by the firm.

Don Murano, Senior Vice President for Specialty Lending at SVB Private, said this kind of loan is an attractive proposition for young lawyers.

"They're buying into the firm, but they haven't yet accumulated a lot of wealth," Murano said. "Having the availability of a resource like this financing arrangement is helpful to them and makes a compelling case for staying with a firm that assists them in this way."

Typically, these loans are amortized over five or six years and are usually paid directly by the firm from the partner's monthly or quarterly distributions.

A benefit to the firm

Before setting up the committed credit facility, the firm's management has to be sure that all the other partners are comfortable having the firm guarantee loans to the individual new partners.

What if the partner fails to make repayment of the loan? If that happens and all other measures to be repaid fail, the bank will sell the partner's equity back to the law firm and pay off the loan with the proceeds.

Coughlin said that once a firm has a "guidance line or committed facility in place, it is a simple procedure for both the firm and the individual lawyer."

"When an associate becomes a partner, in many cases we will have already put in place a facility to accommodate these loans," he said. As a result, the transaction can proceed quickly without having to shop around for a willing lender.

With the bank's help, obtaining the necessary financing becomes a much easier task for a busy lawyer who is becoming a new partner. And the law firm benefits, too, by retaining its top talent.

Learn more about how SVB Private can help your firm.

The views expressed in the article are those of the author and/or person interviewed and do not necessarily reflect the views of SVB Private or other members of Silicon Valley Bank and SVB Financial Group. The materials on this website are for informational purposes only, are subject to change and do not take into account your particular investment objective, financial situation or need. Since each client’s situation is unique, you should consult your financial advisor and/or tax planning professional before acting on any information provided herein