Law firms making capital calls on partners

Has your firm asked you to pony up money? Have you faced a capital call recently? Are your partner distributions being reduced?

A recent (January 29th) Wall Street Journal article discusses the new phenomenon. Several top law firms are asking their partners to increase their capital accounts and/or are reducing the partner distributions, all in an effort to raise more cash for the law firm. Why? Because the new focus is on reducing law firm debt and increasing liquidity in an era where banks are restricting their loan portfolios, even for "favored customers."  With revenues and profits constricting, law firms are wise to review their debt structure.

When the law firm cannot open the bank’s loan window, or doesn’t want to abide by the many restrictions and covenants that are attached to any bank loan, the firm will look to partners. And, for those partners who are themselves financially thin, they may have to be the one asking the bank for help in order to satisfy the capital call. To get the personal loan needed to fulfill the capital call, the lawyer may have to mortgage his/her home, pledge other assets as additional collateral or even get guarantors.

Solo and small firm lawyers experience the peaks and valleys of compensation as a normal course of business. To survive tough times such as we currently are experiencing, reduced debt and a reservoir of savings is essential to survival.

Perhaps it is not unreasonable to ask yourself the question, "Do I really want to be a law firm partner?"  Do the benefits outweigh the risks?

Categorized in: Management