An Different Exit Technique – Legislation Division Efficiency

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In July 2016, I published a column titled “The

Barbarians1have passed the Gate” (http://www.appliedstrategies.ca/documents/barbarians.php).

In this column, I made the hypothesis that “Big Law” did

not believe they needed a dog in this fight as the law firms

operated by the big accounting firms appeared not to be initially

focused on high-value work. Based upon this hypothesis, I

conjectured that it was the mid to small law firms that should be

more concerned as the impact was twofold:

Unlike most law firms, the Barbarians see investing in their

future as a “no brainer decision” (and not subject to a

consensus decision making process).
The work they appeared to be going after was the “sweet

spot” for mid to small size firms.

Both the progress by the Barbarians and the reaction by mid to

small size firms have been underwhelming (a.k.a. complacent). Roll

ahead four and a half years and all four major accounting firms

have their law practices up and running, with varying degrees of

success.

One of the major hurdles continues to be the cultural gap

between accountants and lawyers and how they conduct and manage

their practices is real and palpable (remember Donahue &

Partners). This over-dependency on an accountant’s approach can

cause a stressful “we versus they” environment (e.g.,

length of time to become a partner; titles in an accounting firm

are much more important than a law firm and thus respect for them

is quite different).

Until this issue is addressed to everyone’s satisfaction

there could be a “revolving door” affect at these law

firms.

Despite this challenge I have a growing sense that accounting

law firms might become a leading alternative exit strategy for sole

proprietors and small firms? First the statistics from the 2018

Federation of Law Societies states:

Less than 1% of the firms in Canada are over 50 lawyers.
Over 34% of the members have been practising for more than 25

years. This group appears to be growing faster than the number of

new lawyers being admitted (as well, 10% have been practising

between 21 to 25 years).
Over 72% of the firms are sole proprietorships.
Over 24% of the firms are 2 – 10 lawyer firms.
With most firms being sole proprietorships or less than 10

lawyer firms, often the “exit strategies” have been

limited to:
- Wind up their practice following the local bar society
  
  regulations, or
- Find a younger lawyer willing to buy their practice – often on
  
  an “earn-out basis” – which is a percentage of future
  
  revenue for a fixed period (a hybrid of a referral fee),

Rarely do either of these approaches result in partners being

compensated for the “goodwill” they have spent their

practice life building up (this “goodwill” relates to the

law practice not to the individual person and is commercially

transferable).

The accounting law firms offer to a specific group of

practitioners and their firms an alternative “exit

strategy” that does result in their being paid for the

goodwill their efforts have created. These firms have restricted

its focus to areas of law that are supportive of its

multi-disciplinary approach towards client service.

These core areas of practice include2:

Deloitte Legal Canada LLP:

Tax litigation and controversy
Tax advice
Corporate and commercial law
Employment and labour law
Data privacy and cybersecurity

PwC Law LLP:

Tax law
Immigration law
Tax dispute and resolution

KPMG Law LLP:

Business law
Employment and Labour Law
Estates and Trusts
Immigration Law
Tax Law and Tax Litigation

EY Law LLP:

Corporate and commercial
Corporate secretarial services
Business immigration
Tax planning
Tax controversy

It is deliberate on the part that of these firms that they are

not seeking to grow a Personal, Civil, and Commercial Litigation

practice (other than management side tax and employment

litigation). In part, because of the very nature of their

relationship the magnitude of likely conflicts would render these

types of practices financially unviable.

Like any opportunity, this exit strategy3 has both

pluses and minuses, and firms must weigh the full offer to see if

it works for them (the following are the general pluses and minuses

which will vary depending on what your practice / firm has to offer

and what each accounting law firm is looking for).

The perceived general pluses include (in no order):

Dealing with an entity that has the financial wherewithal and

stability to not only fund the transaction but future investments

in professionals, the technology required by practitioners wishing

to practice law at the highest level and the internal resources to

provide the personnel support to sustain the desired level of

client service.
Receiving payment upon execution of deal – varies from

firm to firm but generally there is an upfront payment and a future

payment.
Two-part purchase price:
- A multiplier4 is applied to the deemed
  
  “transferable revenue”5 , plus
- Dollar for dollar of Work-in-Progress (“WIP”) at the
  
  time of the execution of the deal.
All other assets (including accounts receivable) and

liabilities are left for the acquired practice to wind up as the

accounting law firms are generally acquiring the practice and not

the firm (e.g., so no issue if the partner(s) have other assets in

the practice).
They will interview all employees. Those brought over to the

accounting law firm, any future severance liability transfers to

them. Severance liability for employees not hired by the accounting

law firm remains with the acquired firm.
Partners in the acquired practices will normally be offered

either income or equity partner positions6.
The criteria their compensation systemin corporates are

different (not better or worse) than your typical law firm having

reached the next plateau of incorporating team play and cross

selling.
Most offer flow-through capital accounts via their equity loan

program with national banks that the accounting firm does not

audit. The partner borrows from the bank; pays the interest on it

(standard is prime plus ½ to 1 percent), and when they

retire, the money is paid back to the bank (unless, of course, the

lawyer has already paid the loan off). There is an offset as the

accounting law firms generally pay the partner prime plus½

to 1percent on their capital account balances, so it nets out

(unless the lawyer can negotiate a better rate at the bank and then

the lawyer can be in the money).
Lawyers looking to practice law without being drawn into firm

management but want consistent execution of management policies

will see a benefit. Accounting law firms are generally analytical

organizations (no surprise) where decisions like – staffing,

pricing, continued investment in areas of practice, etc. –

are largely driven by data generated by their systems and less on

instincts (heavier on the analysis).
From my discussions and readings, it is apparent that

considerable thought has been spent on developing a strategic plan

for these accounting law firms. Unlike many firms, this is not a

“static” strategy (if it in fact it even exists) that

sits on a shelf to be dusted off every 3–5 years. These firms

have embraced what appears to be a dynamic strategy where the plan

is a continuum rather than an absolute.

The perceived general minuses include (also in no order):

“Transferable Revenue”:
- Because these firms do not embrace a litigation practice (other
  
  than management side tax and employment litigation) lawyers will
  
  not receive 100% of the revenue you have built up.
- Practitioners will not continue to practice with long-standing
  
  colleagues if their chosen practice area is not one that the
  
  accounting law firms are pursuing.
- The practice’s current and future client base could be
  
  reduced because of “auditor independence” rules. Although
  
  in fairness given the targeted practitioners / firms’ size, any
  
  SEC and other public companies conflicts are likely minimal.
- The accounting law firms tend to adjust any future purchase
  
  payment for any shortfall that occurs in reaching the agreed upon
  
  transferable revenue number.
The mandatory retirement age could result in the firm’s

largest business generators not being admitted to partnership and

potentially taking their “book of business” elsewhere

which directly impacts the lawyers currently benefiting from the

senior’s practice.
The practice of law in many law firms is not a team sport and

so the introduction of performance bonuses, both firm and

individual is somewhat of a foreign concept.
While the average realization rate may equalize the hourly

rates between accountants and lawyers, the standard (rack) rates

are substantially different (accountants’ rates are normally

significantly higher). Therefore, quoting higher standard rates

(even while offering discounts) may drive current and potential

clients to competing law firms.

Like all exit strategies, the foregoing “alternative exit

strategy” will not work for every practitioner or firm. But it

has sufficient merit that it is clearly worth exploring.

It is also my impression that everything I described is open to

negotiation as part of any eventual deal.

I would be remiss to not address what is in it for the

accounting law firms. Their goals appear to be:

Better service for their existing client base,
Increase the share of client professional fee spend by offering

them one-stop shopping,
The accounting firms provide many referrals to other law firms.

By building up their own law firms, they can keep this work

in-house, and
Leverage existing external relationships.

Deloitte Legal Canada LLP (4), PwC Law LLP (6) and EY Law LLP

(7) indicate a presence in the major metropolitan cities in Canada,

whereas KPMG Law indicates they have offices in 41 locations (which

includes those cities).

If you think your individual practice or firm loosely fits

within the above parameters and wish to obtain a fuller

understanding of the possibility of joining one of the accounting

law firm as an exit strategy, I suggest you contact them directly

(websites have contact information) or if I can be of assistance

please do not hesitate to contact me.

No matter which exit strategy you and/or your firm chooses,

remember the age-old axiom:

“In business, you don’t get what you deserve, you

get what you negotiate.”

Footnotes

1. The word originated with the Greeks

and later, the Romans used the same term to describe anyone who was

not Roman.

2. Taken from websites

3. Deloitte Legal have basically been

cherry picking individuals and growth has been slow but strategic

as a result their financial offerings may not be the same as the

other accounting legal firms (e.g., buying WIP)

4. The multiplier will depend on several

factors but normally is reflective of the marketplace and position

of the practice in that marketplace.

5. This means only fees for clients that

meet the core practice areas, and are not conflicted out by

“auditor independence” regulations for SEC and public

companies, as well as some private companies that might already

engage the accounting law firm’s services

6. The accounting law firms like the

accounting firms do have a mandatory retirement age of. However,

they will likely consider “Of Counsel” type positions for

a 2 – 3-year term for partners over the retirement age at the

time the practice is acquired

Stephen Mabey is a CPA, CA and the Managing Director of

Applied Strategies, Inc. Stephen’s focus is on law firms in

general and on small to medium size law firms. He has written about

and advised on, a wide range of issues including –

leadership, business development, marketing, key performance

indicators, strategic planning, mergers, practice acquisitions,

competitive intelligence, finance, mergers, practice transitioning,

compensation, organizational structures, succession and transition

planning, partnership arrangements and firm retreats. In 2013,

Stephen was inducted as a Fellow of the College of Law Practice

Management in recognition of his sustained commitment to the

highest standards of professionalism in law practice management.

For more information, visitappliedstrategies.ca or connect with

Stephen Mabey on LinkedIn.

The content of this article is intended to provide a general

guide to the subject matter. Specialist advice should be sought

about your specific circumstances.