There comes a point in time when experienced attorneys consider breaking out on their own or with partners. This can be an exciting yet daunting decision. Surrounding yourself with a team of trusted advisors, creating a detailed business plan and budget, and obtaining adequate financing are important steps that will ease the road to success.
If you have spent some time thinking about this, or have already decided to take the step, this article will provide you with factors to consider during the process.
Select Trusted Advisors
Just as with any other venture in life, you are as successful as the company you keep. A key step prior to launching your firm is to surround yourself with a valued team of experts for guidance. Your team of trusted advisors should include a Certified Public Accountant (CPA), an insurance agent, a banker, and a business lawyer. An experienced real estate agent will also be important early in the process to help you identify the proper office space. Attorneys may be hesitant to hire outside counsel to handle the business aspect of incorporating the new firm, but a properly drafted operating agreement in the beginning can be a lifesaver down the road. The drafting of these documents should be entrusted to an unbiased party.
Take time early in the process to discuss with these experts what type of operating structure best suits you and can shield you from personal liabilities. It is also very important to select a structure that addresses any foreseeable tax consequences.
Expense and Revenue Forecasts
As you navigate down the road to starting your firm, you should also be prepared to answer some important questions:
- Have I created an accurate budget detailing start-up and operating costs?
- Do I have a realistic revenue forecast based on the existing and expected pipeline?
- Do I have sufficient capital saved for equity needs?
- Can I sustain my lifestyle as I wait for operations to ramp up without the trusted paycheck?
Creating a budget can be an overwhelming task for most, yet critical to the success of your firm. Important items to consider when creating a budget are leasehold improvements for office space, capital expenditures for computers and software, furniture, and operating expenses. Operating expenses include rent, salaries, insurance and utilities.
Personal living expenses during this process need to be considered, given that your income will be unknown over the first few months of the new venture. It’s recommended to have savings to sufficiently cover 4-6 months of living expenses (not including the capital set aside for the business).
When creating your budget and forecast include current cases, also factoring in pipeline and client billing. Forecasts for the first and second year are important, as they will provide you with a clear picture of your projected profitability.
Cash Flow Management and Proper Financing
In order to provide adequate cash flow for your practice, as well as peace of mind, carefully discuss the financing options available to you with your banker. We recommend new firms obtain a term loan to finance equipment cost. Typically, the term loan will help finance up to 80 percent of these costs and will amortize over three to five years. When seeking financing, keep in mind to tie long-term capital expenditures with long-term debt (long-term debt being defined as longer than 12 months). It’s important to match the useful life of the asset with the time period of the financing.
A separate loan should be created for start-up costs. Banks will finance anywhere between four to six months of start-up costs. The loan should be provided on an interest-only basis for the first six months (the interest-only nature is to be mindful of cash flow demands). The loan should then amortize over the remaining 54 months.
The first two financing tools listed above tackle the capital and start-up costs. However, the daily management of working capital needs is critical, and can be addressed with a line of credit. This line should be revolving in nature to allow you the flexibility and encourage the discipline of paying down the debt as revenue is generated.
To have a speedy turn-around on the financing request, you will need to have following financial information readily available:
- Business plan, including expenses and revenues forecasts
- Current personal financial statement
- Three years of personal tax returns
- Depending on the type of law you practice, you may be asked to provide an aging of accounts receivable or a case list
At Sabadell we have more than 35 years of expertise helping attorneys establish and grow their firms. We specialize in assisting law firms with both their lending and account needs. Our ability to craft customized lending solutions have made us a key player in the local market.
Our firm is not only able to provide the financing for the start-ups, but also analyze your personal financial situation using a holistic approach, which includes trust and estate planning, wealth management and private banking. Your success is our success.
Mey-Ling Perez is Senior Vice President, Private Banking and Wealth Management at Sabadell United Bank. She is responsible for assisting clients with private and commercial banking needs, as well as investment and trust services. Perez can be reached at 305-376-2469 email@example.com www.sabadellbank.com
South Florida Legal Guide 2016 Financial Edition