Create a Business Plan for Your Small Law Firm

Step-by-Step Guidance

Step 1: Confirm that you are ready to start your own practice.

Whether you are starting your own firm because of a tight job market with few options, or because you have substantial experience and want to run your own firm, it is possible to find success in starting your own practice.

Some factors to consider:

• Do you have adequate start-up funds and money to pay personal bills (approximately six months’ worth)?
• Are you self-motivated and entrepreneurial? Do you excel at time management and organization?
• Do you have a practice niche and potential sources of business?

Complete the Self-Assessment for Starting Your Own Law Firm.

Step 2: Determine the concept of your new firm.

Think about how your firm will be successful: What can it offer that other firms do not? Will your firm offer a new service, a more efficient service, or something unique?

Also, consider the following questions:

• Business entity. See the How-To Kit Choose a Business Entity for Your Law Office.
• Firm Name. See additional practice guidance.
• Organizational structure and management of your new firm. Will you have employees? Will you have an office manager? Where will your office be located?

Complete the Starting a Law Firm Practice Concept Worksheet.

Step 3: Ensure that there is a market for your services.

Do research about the need for your services in your geographic area.

Do a market analysis, examining who your clients are (target market), who your competition is, and why your service will be better than that of the competition.

Write a marketing plan, including a budget for marketing. See additional practice guidance for more information. Also see the How-To Kit Create a Marketing Plan for Your Small Firm.

Step 4: Determine how your law firm will actually operate.

Think about how your law firm will run on a day-to-day basis. This will help you prepare for actually running your office in addition to helping inform your financial requirements. Your assessment should encompass the following:

• Facilities: What are the location and attributes of your office? What office amenities are needed? What are the most desirable lease terms?
• Production: Consider your process for completing your work. Will you outsource certain tasks, or do it all in-house?
• Staffing: How many people do you need to manage your practice and complete all the necessary tasks?
• Law office technology: What kind of technology is required? Consider all aspects: desktops versus laptops, mobile devices, printers, scanners, copiers, networking, information security, software. If you will hire staff, what equipment will staff need? Will you hire a computer consultant? See the Law Firm Technology Checklist. See additional practice guidance on technology.
• Office furniture and office supplies: Will clients be coming into your office? What kind of furniture is appropriate? What kind of office supplies will be necessary?
• Disaster planning and insurance: See additional practice guidance on insurance.

Complete the Law Firm Operations Assessment Worksheet.

Step 5: Prepare your start-up budget.

Create a forecasted balance sheet. This shows how much your practice is worth. A balance sheet shows your assets, your liabilities, and your net worth. If you have not started your practice yet, it will all be projected, so be sure to use solid reasoning. Complete the Law Practice Balance Sheet.

Create a forecasted income statement.

• Your income statement is also called a profit and loss statement, and it shows how much money your practice will make after you account for all of your expenses. Unlike the balance sheet, it does not show what your company is worth. And it does not show how money flows in and out of your practice as a cash flow statement does.
• You build your income statement from the top down. Start by recording your projected collections. Then, line by line, deduct your practice’s expenses. Be careful to include all of your costs, including salaries, employee benefits, office supplies, marketing, travel, meals and entertainment, insurance, maintenance, communications costs, filing fees, annual license fees, and your own professional services such as marketing consultants and accountants. In addition, you should account for depreciation and amortization as expenses.
• Complete the Law Practice Income Statement.

Plan your cash flow. This is your budget.

• To increase your chances of surviving beyond five years in your own practice, you must establish a solid estimated cash flow statement before you start, and then maintain accurate cash flow records and review them frequently throughout the life of your practice. That way, you will be able to structure your practice so that the money is collected in time to pay the bills that are due.
• Your practice’s cash flow statement is actually your practice’s budget. It shows what you expect to collect and when you expect to collect it. It also shows what you must spend to pay bills and debts, and when they are due. Really, creating a pro forma cash flow statement is not that difficult even if you have never run a business before. If you had a paper route to earn spending money when you were a kid, or if you saved your allowance to buy a special toy, you have experience developing a budget.
• Complete the Law Practice Cash Flow Statement.

Identity your Capital Needs. You will need three types of capital: (1) working capital—money you need each month to pay your bills; (2) growth capital—money used for acquisitions or expansion; and (3) equity capital (stock)—used for permanent needs. See additional practice guidance on sources and uses of cash.

• Consider your sources of funds:
  1. Owner financing—Do you have the start-up funds? Are you willing to risk your assets for your new venture?
  2. Friends and family—Be sure to consider the impact on your relationships.
  3. Debt capital (financial institutions)—Be prepared to make a personal guarantee and to provide additional collateral to secure financing from a bank.
  
  
  See additional practice guidance on sources of funds.
• Complete the Law Practice Capital Needs Assessment Worksheet.

Write down your assumptions. Your financial estimates must be based on facts and decisions. For example, if you have estimated a certain amount of collections for your first year, you should be able to show that the market will support that amount of business, that you will be able to secure the appropriate percentage of that market, and that you will be able to collect the fees due from the business generated. Make your assumption sheet clear and concise, and don’t include detailed descriptions or explanations. Complete the Law Practice Financial Assumptions Worksheet.

Get professional help when you set up these statements and be sure to establish good financial procedures at the start.

See additional practice guidance on financial statements and sources and uses of cash.

Step 6: Write the executive summary.

The executive summary is the first section of your business plan. It may be the only section that will be read by potential lenders.

Build an effective executive summary using the following steps:

1. Briefly describe your practice.
2. State your mission.
3. Describe where you have been.
4. Determine where you are now.
5. Outline where you are going.
6. Include a brief overview of financial statements.

The executive summary gives a clear, bold, and compelling condensation of the contents of your business plan. Whether or not you are seeking outside funds, it is often the only part of the business plan that an outsider reads. That is why you write it last, but place it first.

See additional practice guidance on mission statements.

Step 7: Compile all the components of your business plan.

• Title page
• Executive Summary
• Practice Description
• Market Analysis
• Operations
• Finances

See the Sample Law Firm Business Plan (General Practice) and the Sample Law Firm Business Plan (Small Business Law Focus) to get a feel for what a completed business plan should look like.

Step 8: Update your business plan as necessary.

Has your firm changed its focus? Have you added partners or changed business entity? Have you made significant changes to your marketing plan?

If you have made changes to your practice, it is a good idea to update your business plan to reflect your current business. Use this update as a time to reevaluate your assumptions, your marketing efforts, and your operational needs.

When to Use

This How-To Kit explains how to draft a business plan for a solo or small law firm. It is geared toward a lawyer or lawyers starting a new practice, but it is also useful for lawyers with firms who may not have previously gone through the exercise of drafting a business plan. The kit includes worksheets for each section of the business plan and two sample completed business plans.

Using these materials is not a substitute for the attorney’s independent judgment, drafting, and research.

Other Resources

Books

• Michigan Basic Practice Handbook (see chapter 1)

Other How-To Kits

• Choose a Business Entity for Your Law Firm
• Create a Marketing Plan for Your Small Firm

Additional Practice Guidance

Firm Names

If you are starting your own firm, you must think through the legal, ethical, and practical issues before you choose a firm name. You will want to check the availability of your proposed name by doing a Michigan Business Entity Search and a Google search to see if your name is available. Also, read the State of Michigan’s publication, Choosing a Business Name, which covers basic trademark searches.

You should also check the State Bar of Michigan Ethics website for rules and opinions covering law firm names. Solo practitioners must take particular care to ensure that the firm name is not misleading about the number of lawyers at the firm. See MRPC 7.1, 7.5.

Marketing

Your marketing plan and budget should include the following: announcements; traditional marketing tools like paid advertising, firm brochures or newsletters, and business cards; Internet marketing; teaching and publishing; and in-person networking. For more information on marketing specifics, see the How-To Kit Create a Marketing Plan for Your Small Firm.

Technology

Your start-up office equipment will, at a minimum, include computer hardware and software, a printer, a copier, a fax machine, a scanner, and backup. For assistance in determining when technology you will need to purchase, see Law Firm Technology Checklist.

Insurance

Types of insurance you should consider purchasing for your new practice include malpractice, business, health, life, vehicle, liability, property, and disability. You should purchase malpractice insurance immediately. Your insurance coverage should protect your business if a failure or loss occurs. For instance, life insurance should be obtained for all partners. Business interruption/overhead insurance should be included in disability policies. Property insurance should be purchased to cover office theft, fire, or other casualty. Worker’s compensation insurance is mandatory in Michigan, and verification must be filed with the state worker’s compensation board.

Your Sources and Uses of Cash

You will need money to start your practice. You may need a little money, you may need a lot of money, but you will need money. And, you will need money for different purposes. Before you can identify your sources of cash, you must identify your capital needs. What, indeed, are your capital needs?

First, you will need working capital. Working capital is the money you need every month to pay your regular bills. Ordinarily, you should have at least enough money to pay your bills for one full year even if your firm does not collect a single dollar from a case. Working capital is repaid from your ordinary collections.

You may also need growth capital. As your practice matures, you may find yourself able to generate revenue and profits but unable to generate enough cash to fund a major acquisitions or an expansion. Growth capital is usually repaid over a short (several year) period. When you apply for growth capital, you will be expected to show how the money will be used to increase your business profits and that those profits will be sufficient to repay the loan.

Equity capital is otherwise known as stock. Your ability to use stock in a law practice is limited to the confines of the professional corporation. However, partnership interests can be used in a similar fashion. Equity capital is used for permanent needs.

Sources of Funds

Once you’ve identified the types of capital that you need, consider the possible sources of that money. There are three different general sources that are commonly used to finance a law practice.

Owner Financing. Ask yourself whether you really need additional funds to start your practice or can you simply change the way you manage money that you already have? Are you willing to risk your assets for your new venture? If you are not willing or able to put your own assets at risk, look to another source for your start-up funds.

Friends and Family. It can be much easier, faster, and less expensive to obtain a loan from a friend or a family member, but the emotional costs can be very high. Even one late payment can make your Thanksgiving gathering very uncomfortable. What if your endeavor fails and you cannot repay the loan? Applying for and receiving a traditional loan can be more expensive, time consuming, and difficult, but your family and friends will not be affected by the ups and downs of your business.

Debt Capital (Financial Institutions). If you cannot finance the practice yourself and you decide not to look to friends or family, the next source of financing is a traditional lending institution. The bank or finance company will want to see a completed business plan, but the loan officer will be less interested in your personal exit plan than in the institution’s exit—that is the final repayment of the loan along with the interest and any fees. They want to make sure that the practice will generate sufficient cash flow to ensure timely payments. Be prepared to make a personal guarantee and to provide additional collateral (such as a lien on your house).

Financial Statements

Your financial statements contain five elements:

1. The balance sheet shows what your practice is worth.
2. The income statement shows whether your practice is profitable.
3. The cash flow statement illustrates whether your income is sufficient to pay your bills.
4. The sources and uses statement shows where you will obtain the money that you need and how you will allocate it.
5. The assumptions sheet explains the hypothetical basics that you used to build your forecasts.

Since you are embarking on a new venture, your financial statements will be pro forma financial statements. In other words, your financial statements are going to be based on a number of hypothetical situations, and they will contain a number of assessments. If you are looking for a loan, or if you are hoping to attract partners who will invest in the venture, be sure to label your figures as pro forma or as estimates.

Your financial estimates should emphasize your firm’s objectives (for example, is your firm profit oriented, or are you focused on limiting risk?) They should also serve to measure your firm’s performance and help your reach your goals for costs, profit ratios, timeliness, and even the quality of work that you do.

There are six key guidelines for developing your financial statements:

1. Use a good accountant.
2. Choose the right accounting method. You have a choice of using a cash basis or an accrual basis. Usually a cash basis is the best choice for a small law practice.
3. Stick to the standards. Use standard forms and software. Don’t make things up.
4. Be conservative. Making the most optimistic projections for income and the most advantageous estimates for expenditures will just set you up for failure. Almost everyone makes less during their first years in practice than they hope, and almost everyone spends more during the first years than they expect.
5. Be honest. You will have to justify your numbers to someone at some time—if only to yourself.
6. Be consistent. Use the same assumptions and decisions for all of your financial estimates. Otherwise the estimates will be of no help to anyone.

Mission Statements

What is your quest? What is the essence of your desire to start your own law practice? What is your reason for being? That is your mission statement. Make it strong. Make it loud. Make it clear. Repeat it over and over. Let it be what starts you going in the morning and what gives you satisfaction at the end of the day.

This is the sentence or two that will tell your clients, your employees, your suppliers, your bankers, and the community what you are all about. Your mission statement should be one simple statement in plain English that explains why your law firm exists and what you will accomplish. Your mission statement should

• state your purpose in a way that inspires commitment, innovation, and support;
• describe what you do;
• motivate everyone who is connected to your firm;
• be utterly free of jargon;
• be easy to understand;
• be convincing; and
• be short enough so that everyone can remember it.