Secrets of the Business of Law – Opening Your Own Office: What Will It Cost?
by Ed Poll
Like many lawyers today, you might be feeling a call to go solo, to open your own office, and to build your own destiny. It's a tough decision to make. And as those who make it know, there's so much to do and so little time to do it, it's hard to know where to start should you choose to set out on your own. To help guide your thinking, let's take a look at the major expenses of opening a solo practice.
Obviously, you need a place to practice. Today, there is more than one option. First, you can work out of your home. This is the least expensive route since you are already paying rent or a mortgage, and you will not have to duplicate the expenditure by renting separate office space. But there are distinct disadvantages, such as being out of the mainstream of lawyer and client contacts, as well as having to convert living space into an office that is separated in an effective way so that you can concentrate and perform your work. This approach may also increase your marketing expenses by increasing your travel costs to reach clients and compelling you to go outside of your home to a restaurant or other facility to meet clients and prospects as well as to interact with other attorneys.
Another solution is to rent barrister or executive space from landlords who specialize in short-term rental agreements with lawyers and other professionals. The cost of this space is less than that of a full suite of offices, but more than the cost of working out of your home. In an executive space arrangement for an office and secretarial bay, plus a telephone, library and photocopy services, figure on about $2,500 per month. Since each geographic area has its own cost scale, use this figure only as a guide or starting point.
Yet another option is renting an office in an exist ing law firm on a month-to-month basis. The law firm reduces its cost of operation this way, and, depending on the practice areas of both the sub-tenant (you) and the tenant (the law firm), there may be an opportunity to refer work back and forth. Also, in this arrangement you may be able to offer a certain number of hours per month (10, for example) in exchange for the space. This approach would clearly reduce your monthly cash outlay.
Equipment, Supplies and More
After you've obtained the space, you'll need to furnish it. In some cases, you will be able to rent a furnished office. If not, you'll need to either rent or purchase furniture. That furniture will include your desk and chair, client chairs (two minimum), a couch, filing cabinets, side table and other related items depending on the size of the office and your personal taste. (Suggestion: Do not use your couch and chairs to store your "active" files, no matter how tempting!)
If you are in your own office, as opposed to a suite with other professionals, order the requisite number of telephones: your primary office phone on your desk, another phone on the side table in easy reach for your clients to use, and a phone for the receptionist. Use a phone system with all the bells and whistles and learn how to use them; this will make you money! The telephone is the least-expensive mode of marketing. Pay attention to both it (the phone system) and your telephone policies.
Start-up costs also include stationery and other office supplies. Don't scrimp on stationery or business cards; these items should convey your professionalism to the world. They are often your image before the prospect ever sees you. About $500 should be sufficient here for your initial supply, perhaps slightly more if you include print ed announcements.
Library costs used to be a large expense item. Today, you can get much of your research needs without books (and without the real estate space to house them) by contacting Thompson West, Lexis, Loislaw and others for electronic access to huge libraries of information. You may still want to acquire some books in hard copy and keep them close to your desk for frequent use. These include form books, treatises in your specialty practice area and the like. The space required for these books will be substantially less than in earlier days.
Technology represents one of the largest start-up costs. The latest and greatest versions of a computer (PC or laptop with built-in fax), printer, monitor, scanner and related items can, depending on your needs, be purchased for less than $5,000. This hardware typically comes with some software for word processing, spreadsheets and other basic office applications already installed.
Other software requirements will vary depending on your needs. The price can go from a few hundred dollars for the basics, including QuickBooks or another accounting package or practice specialty item (family law, for example), to several thousands of dollars for technical or uniquely specialized programs (litigation support programs and so on). And here, don't be fooled by the initial cost of the software. The real and larger cost is the time and effort required to learn how to use the software effectively and efficiently. Also, don't forget to add in the time necessary to get staff over the initial learning curve.
Let's turn to the Internet. Clearly, in today's world, you need to be connected. While this charge may not be more than $50 per month, that is just the first step. You should build a Web site and maintain it. The design cost here may be as little as a few hundred dollars or as much as $10,000, depending on the nature of your practice and the level of sophistication of your prospective clients; the greater their sophistication, the greater must be the sophistication of your site. And then there is the monthly or yearly site maintenance fee that should include periodic, but simple, changes to the site. This may cost another $100 and up per quarter. A very valuable feature is the capability to make content changes yourself instead of having to go back to your Web programmer each time. But this functionality must be built into the site from the beginning and does make the initial cost of the site more expensive. And, again depending on your prospective clientele, you may need. to get into the more sophisticated, and more expensive, intranet capability.
"Road warrior" equipment such as cell phones, personal information managers (PIMs), personal digital assistants (PDAs), related portable peripherals and the like can also add significantly to your expenses. Even combining a cell phone and a PDA can, by itself, still cost a few hundred dollars in today's market. The monthly charges to operate these units can vary significantly depending on your usage.
Before you open your doors to business, there is another major expenditure: errors and omissions insurance. Many lawyers are not currently attracting enough business in terms of fee-paying clients to meet all their expenses on a regular basis. They are thus forced to go without malpractice insurance, also called "going bare." If you have nothing to lose, or if you have no assets such as a house or securities account, then your downside may not be that great if you are sued by a client and have a judgment entered against you. However, this is not an appealing prospect.
It is better to carry an insurance policy. Consider it just another cost of doing business. If you're a new lawyer, there are insurance companies that provide coverage at nominal rates because they fi gure you don't have a long history of mistakes behind you, and you're probably as current with the law as anyone can be, having recently left law school. If you've been in practice for a while, the cost of the insurance coverage may be upwards of $2,500 per year, depending on your practice area.
Other important insurance policies that should be considered are: general liability, sexual harassment, and business interruption. These three, separately or together, will add to your protection and should cost from $500 to $1,500 total.
While you could practice truly alone for a while, you will eventually want a secretary and, hopefully, a fi ling clerk and paralegal. In the early stages of your practice, staff personnel can be hired on a part-time basis for, say, 20 hours per week, spread out during the week.
Later, you may want to engage another attorney, with out the concomitant overhead. One way to do this, at least until you bring in enough work on a regular basis to afford hiring a full-time associate, is to hire contract legal work. There are lawyers who, for lifestyle or other rea sons, don't want to work full-time. They are good lawyers and are willing to work for fees in the area of $50 per hour. When you can charge your clients $100, or more, for this work, you are way ahead of the game. You not only save on overhead, but you avoid a long-term commitment before being ready to make it because of the lack of certainty of repeat business.
Another out-of-pocket expense item is the cost of marketing. Marketing, also called "practice development," simply means getting and keeping clients. Advertising, developing and distributing brochures and announcements for your practice, travel and entertainment to network with prospective clients, public speaking, leading seminars, publishing newsletters, maintaining a Web site … these are all marketing activities. And they all cost money.
While marketing is an essential part of starting and maintaining a law practice, the key to controlling its costs is this: Marketing has to be carefully planned. Don't make decisions to spend money on advertising or brochures on the spur of the moment. A well-conceived marketing plan takes into account the fi rm's goals and direction and considers all marketing options in coming up with the most appropriate strategy.
The Cost of Accounts Receivable
Another expense in starting a law practice that is little discussed is the impact of creating and carrying accounts receivable. The average length of time it takes a client to pay a lawyer's bill is about 120 days, according to several statistics I've seen. Let's see how this develops.
First, it takes you 30 days to do the work and get a billing statement out of your offi ce, assuming the best of circumstances. It will take the client at least 30 days to process payment. That's 60 days. And if it takes you, or the client longer to process the statement or payment, voila, you're at 120 days. There are ways to reduce this fi gure, but let's work from the average so we can assure your survival and success. Thus, for at least the first four months, you will not be collecting any revenue! And that assumes that you can get a fee-paying, economically viable and satisfied client on the first day (or at least the first few days) of opening your door. This absence of revenue, while not an expense, must be considered in deter mining the cost of opening your law office.
One way to soften this blow is with a reserve of funding. Whether from savings or a loan, a good rule of thumb is: After your initial start-up costs, have a reserve of money equal to your anticipated first six months of cash outfl ow. That amount should be calculated by using both the office expenses anticipated and your living expenses (taking into account that there will be no com pensation from the law practice during this time).
All this expense (and revenue) information should be plotted onto a spreadsheet month by month for the next 18 months, and maintained on a rolling calendar basis. When you get the information for last month and compare the actuals with the projected, you then go to the end of the 18 months and add the next month, thereby always maintaining an 18-month projection.
Psychologists tell us that we tend to achieve what we visualize. Or, said from the perspective of the avid cyclist that I am, my bike tends to go where I look. If I look only at the road directly in front of my wheel, I can easily crash. If I look farther down the road, I will reach that spot even if there is a curve in the road.
A final cost consideration for opening a law offi ce is not really financial in nature. You must have the support of your family, your spouse or your significant other. Without their emotional support, you will not have the peace of mind necessary to succeed. Do not dismiss this aspect as being assumed or insignificant. With the emotional (and sometimes financial) support of your loved ones, you can conquer the world.
© Copyright 2011. Edward Poll. All rights reserved. Reprinted with permission from Edward Poll.
Ed Poll, principal of LawBiz Management Company, is a nationally recognized coach, law firm management consultant, and author who has coached and consulted with lawyers and law firms in strategic planning, profitability analysis, and practice development. Mr. Poll has practiced law on all sides of the table for 25 years-- as a corporate general counsel, government prosecutor, sole practitioner, partner, and law firm chief operating officer and been a consultant to small and large law firms for 20 years.
The opinions expressed in this article do not necessarily reflect the opinion of ILW.COM.