Click on the video to watch part 1 of Mr. Swanson’s interview with Christian Scranton of Scranton Law Firm in Concord, California, as he discusses how being a pilot makes him a better plaintiffs’ attorney.
It is important for the partners of a law firm to personally review their trust account and operating account bank statements each month. Ideally, the statements should be mailed to the managing partner and be opened by the partner, not a member of the staff. The partner should then examine the statements for anything that looks out of place and should spot check a portion of the payments flowing out of the account for proper documentation. It should be made known amongst the staff that the statements are being carefully reviewed and will be questioned from time to time as a preventive measure against potential fraud.
Also, if the firm has access to any lines of credit or has its own credit card, those monthly statements should also be personally reviewed by the managing partner. This is a critical issue. Over the years, we have seen several instances of fraud at firms involving seasoned, trusted personal friends employed by the firm. I am talking about personal friends of the partners, people they might have gone to church with, embezzling money over time to the tune of hundreds of thousands of dollars –over a million dollars in a few cases we’ve seen.
If you have adequate staffing, put checks and balances in place so that the same people who are writing checks for the firm are not the ones signing them. Also, put in place a system where whoever is writing the checks for the firm is not the person who opens the bank statement and reconciles the account at the end of the month.
Sadly, it is often the person on your team that you trust the most that ends up surprising you with fraudulent activity. Better to create a situation whereby it is as difficult as possible for someone to perpetrate such acts. Everyone wins when fraud is prevented.
My experience has been that the partners of contingent-fee law firms consistently overestimate the market value of their law firm. They are often content having all of their net worth tied up in the firm. But the reality is that a typical contingent-fee law firm has very little equity value in and of itself. The balance sheet typically shows little in the way of assets. So the net value of a law firm – (also referred to as book value), which is the difference between the assets and the liabilities – is extremely low. Often the book value is zero, or even a negative number.
Of course it’s natural for the partners in the firm to think they have a very valuable entity. It is financially valuable to them because it generates cash flow and provides a living for its employees and its partners. But that does not mean it has a lot of market value because the market value of anything is the price at which the asset would trade in a competitive auction environment. Realistically, what would a contingent-fee law firm sell for in an auction environment? The continuing presence of the named partners in the firm is so important to the brand that I think most firms have a minimal market value if the partners are try to sell out. The firm might be able to sell its cases to another law firm, or transfer them, but the value of the cases would be very subjective and open to interpretation. Most likely the payments made by the new firm to the old firm would be made over time and would be based upon the actual success of the cases themselves.
Therefore…build net worth outside of your law firm. Get professional investment advice and then put in place a system of saving money and investing in assets in outside ofyour firm (but ideally not in assets that take your time away from your firm, such as other businesses). Create a realistic personal financial statement at least once a year. Simply list everything you own (based upon current market values) and subtract out everything you owe. Is it a positive number? Is it growing from year to year? You want to accumulate liquid, tangible net worth that can be easily valued in the marketplace. Later in life you’ll be glad you did. And your access to future capital will be greatly enhanced.
Do you know what your credit score is? You should!
Set a tickler in your calendar to remind yourself to check your credit score at least once a year. Free services like www.FreeCreditReport.com are available to make it quick, easy and free.
You don’t want to wait until it’s time to apply for a loan or a lease to do this. You may find that your score has dropped due to an error at a reporting agency or by your bookkeeper. That lower score could result in costly delays or higher rates of interest paid. It could even result in your application being rejected since many banks have been steadily raising their minimum credit-score requirements over the past few years.
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*The views expressed in this book are not necessarily representative of the views held by AAJ. Furthermore, the donation of profits from the sales of the books to the Seventh Amendment Fund does not imply that AAJ has endorsed Advocate Capital, Inc. or the book and the views and information contained therein.