Heard About The High Margins And So You Want To Invest In A Law Firm?

Dr. Larry Richard, seen by many as an eminent expert on the personality profile of lawyers, has pointed out the following characteristics of lawyers in the past:

very skeptical; disproportionately high degree of negative thinking; low in sociability; low in interpersonal sensitivity; low in resilience; high in urgency; and, very autonomous. But let's move on from their traits for now and talk about "margins." When clients and other for-profit companies talk about net income before income tax they are speaking of a number after which the salary and bonus pay for all of the executive team has been deducted. This is unlike a law firm, where when the partners talk about net income it is an amount before they have paid themselves anything.

To put it on comparable footing, the law firm would have to treat partners' income distributions as salary and then compare the return on revenue after the distributions had been deducted.

While I recognize that exceptions would exist, the vast majority of law firms' return on revenue would be worse than for-profit companies.

To some degree driven by the income tax treatment of partnerships, there is the high need/demand to pay out all of the earnings sooner rather than later. Paying income tax on monies not received is a very difficult sell to partners at the best of times and when for investing in innovations, the results of which cannot be guaranteed, nigh impossible.

The money companies leave on the table is for re-investing in innovation (competitive edge) and creating a return for their shareholders. The return many investors weigh on evaluating companies to invest in is the combination of the return (dividends) and the appreciation in the share value.

If a company is not earning a return other than just appreciation in share value, its attraction as an investment is diminished. It is further diminished if potential investors don't see there being any incentive tied to the company's results for management to take it beyond expected results.

So in order to make investing in a law firm generally attractive to non-lawyer investors the following are a few of the compensation changes that would have to occur:

Salaries would have to be assigned to each partner that would obviously be less than their current draw; A bonus plan would have to be embraced that did not guarantee further income to all former partners but to only those qualifying under the bonus plan and that the proceeds under the plan may not be...

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