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How Much Money Do You Need to Start a Law Firm

May 2009
It's a question many of us ask, but few of us can answer. Erik Mazzone offers practical advice for attorneys ready to set out on their own.

Imagine for a moment that you are planning to summit Mt. Everest.

You, like nearly all of the people who attempt to summit Everest, will require supplemental oxygen to make it. You're extremely fit, an experienced climber, you've studied the routes, and you've hired an excellent guide. You are well prepared in body and mind to make the climb.

Part of this preparation has included determining how much bottled oxygen you are going to need and planning how to apportion it on the climb. After all, what could be more frustrating than spending years preparing for this climb and then failing to summit because you blew through your supplies of oxygen too quickly?

To bring this metaphor back down to sea level and into your budding law practice, the bottled oxygen in a new law firm is start up capital. The scant oxygen available at 29,000 feet is nascent cash flow. Somehow between start up capital and cash flow, the new law practice must be stay in the black. The one in a million climber who can summit Everest without supplemental oxygen is marketing guru who has clients lined up to hire her before she opens her firm. If you are that one in a million, feel free to skip the rest of this article, though be aware that the name for the highest part of the mountain (above 23,000 feet) is called "the death zone."

As part of my job as a practice management advisor, I work frequently with lawyers starting new law practices. I have come to believe that under-capitalization is one of the two primary causes for the failure of new law practices. (The other is a failure to market, but that topic must be saved for another day.) Like the climbers attempting Everest, to attempt a new law firm without adequate start up capital is, in nearly all cases, to ensure defeat. Perhaps the most insidious part of defeat due to under-capitalization is that it doesn't strike in the early honeymoon months of opening a practice, but only after months of hard work have been sunk into a losing effort.

So, how much money do you really need then to make a go of it?

The conventional wisdom on this topic is that you need twelve months of expenses saved up to give yourself a fair shot at success. This estimate is probably as good a place as any to begin the analysis, but it's just like figuring out how much oxygen you need to make the summit; the better you are able to exist in the thin air of high altitudes, the less bottled oxygen you need.

Capitalizing your new law firm is the same: how much start up capital you need depends on how fast you burn through it and how efficiently you generate new business. How much money you need is a question that you, and only you, can answer. It depends entirely on how quickly you can acquire positive cash flow.

Getting your practice to a state of positive cash flow depends on a lot factors, such as:

  • How many new clients your marketing drives to your door
  • How effectively you turn initial consultations into new clients
  • How much start up capital (or loans) you amassed
  • How much you bill
  • How much you collect
  • How much you pay in overhead
  • How dependably you reinvest revenues into your firm

If you are a gifted marketer or bring a roster of paying clients with you, you may be in positive cash flow long before twelve months goes by. If you are determined cost cutter who pinches a penny until it yelps, you may need very little revenue to get into the black. If you have no clear plan on how to develop new business but a very solid idea of what your firm logo will look like and which smart phone you will use, you may be in for some hard lessons.

Here are five tips to keep you on track:

  • Inventory your strengths (and weaknesses) and feed your strengths. If you are a born salesperson, don't scrimp on investing in business development. If, on the other hand, your greatest strength is the ability to get by on very little, focus on keeping overhead so low it should be called underfoot. The key here is to know yourself; that's ultimately what allows you to play to your strengths, and de-emphasize your weaknesses.
  • Create a budget. Budgets can be sobering. Once you create yours, you might not like what you see, but at least it may stop you from paying $5000 for a conference room table that you could have used to keep the doors open longer. Budgets are about prioritizing how to deploy finite resources to accomplish objectives. They're no fun, but they are essential.
  • Stick to the budget. Many a budget (and business plan, for that matter) are created in the high optimism zone of the days before the firm opens for business, when all seems possible. In the days of stress and hard work that inevitably follow, plans far too often give way to the perceived exigencies of daily law practice. Before long, the budget that was scrutinized and labored over sits forgotten in a lonely file folder in the metaphorical dust bin of a hard drive.
  • Analyze the cost-benefit on everything . Your start up capital is precious. Rigorously evaluate where your dollars are going and make sure you are getting a lot of bang for your buck and spending your money on nurturing the bottom line. Priority should be given to the life-sustaining (utilities, rent, representing existing clients, etc.) and the life-promoting (finding new clients) above all else.
  • Check your ego at the door. Some start up law firms are vanity projects. They are started to make a point, to say "I told you so" to a former employer, to satisfy familial demands, or for a million other possible reasons. You can spot them a mile away: they are the lawyers eager to show you their new logos and cutting-edge smart phones who turn noticeably vague when discussing where their first ten clients are going to come from. Starting a law practice is hard enough when you have your eye on the ball. Don't make it harder by focusing on peripheral issues that will not ultimately help you succeed.

Three final words of advice: measure, measure, measure. There is an old management bromide that says "that which gets measured, gets done." Keep one eye on your start up capital and how fast you are burning through it, and the other on where your next new paying client is coming from.

Your oxygen needs to last you all the way to the top.

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About the Author

Erik Mazzone is the Director of the Center for Practice Management at the North Carolina Bar Association. When he is not expounding on the virtues of bar association membership, he can most likely be found hunched over his computer yelling at his fantasy football team. He can be reached through his blog www.lawpracticematters.com.

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