Don't Leave Receivables in Limbo
Collecting Receivables
The financial lifeblood of any law firm is receivables - the bills that firms send out to and collect from clients for work done. In addition to the traditional challenge of collecting receivables, two new dimensions have been added by ongoing trends spawned in the Great Recession: partner de-equitization, and law firm bankruptcies.
Partner De-Equitization
Before a partner is de-equitized or otherwise terminated, the firm should understand what that partner's amounts are in receivable, and know how much they depend on the partner to bring in the receivables. Ensure that there are incentives for the partner to collect the receivable before he or she leaves and finds a home elsewhere. Addressing this issue should cover:
Make certain that time sheets are current.
Send billings to clients immediately even if the totals are off or need adjustments later.
Monitor payment history of the partner's client and exert special effort on the partner to ensure that final invoices are sent out.
Ensure that clients pushed for payment cannot claim negligence by the departing lawyer.
Communicate with the client if payment is not received promptly.
Law Firm Bankruptcies
A different issue arises from law firms, like Howrey and Heller Erhman, that went into bankruptcy and had to collect funds to pay their creditors. Companies that file for Chapter 11 do this by selling off operating assets - equipment, facilities, entire operations. However, in a law firm, the major assets are the lawyers themselves. Computers, furniture and real estate are of minimum value, if any, in a law firm. Accounts receivable are a major asset. But what if the lawyers who billed for them have moved on to other firms?
When Partners Go to New Firms...
When partners for any reason go to new firms and clients follow them, they generally take their books of "unfinished business." Clients of course have a right to seek their own choice of lawyer. But it can be argued that the profit to the new firm truly belongs to the former firm (or its bankruptcy trustees) for providing the intellectual property and physical resources behind the billing. When a firm needs to come up with cash, it can make a very plausible argument that billables which walked out the door with its former lawyers belong to the originating firm itself.
...Don't Leave Their Receivables in Limbo
The moral is clear: don't leave a departing partner's receivables in limbo. Make sure a lateral partner's receivables are settled before they leave their old firm. Otherwise, the new firm may have no choice but to settle a receivables claim in order to go on with the new lawyer's business.
|