March 4, 2013
Law firm branch offices seem to open and close on Main Street with some regularity. Small firms want to branch out and grow, but their efforts are often unsuccessful.
What should a law firm consider before opening a branch office?
Like any business opening a new division, the law firm should analyze its reasons for wanting a branch office and plan carefully for the costs and opportunities it might provide.
For smaller firms, the decision to open a branch office is often a marketing decision. A lawyer or small firm wanting to develop business in a neighboring county, for example, might decide the best way to make that happen is to open a storefront in that county.
Small firms in particular often make the decision based upon emotion, not logic. In a quest for new clients, a firm will conclude that a branch office will create a perception that the law firm is local to the branch location.
Based on that perception, a firm might expect to draw a new demographic of clients to the firm, while the existing client base will remain intact. This can be short-sighted because it often fails to take into account real and hidden costs.
The obvious costs
The firm will surely be alert to certain obvious costs. Real estate costs will increase, as will property and liability insurance premiums, telephone and communications systems, furniture and fixtures, signage and all the usual cost elements of opening a new location.
Additional legal research library materials must be considered, whether in hard copy or Internet-based. The firm also will have to invest in computer hardware and might have to add or expand its computer networking infrastructure, which is hard to quantify.
The firm will have to make practical decisions about how files will be shared between locations, how electronic information will be shared (i.e., email only, networked file sharing, etc.), and how the remote office will be staffed.
Although the office location itself might be a marketing draw, the firm will have to advertise its new location. That might mean buying telephone or Internet directory ads, sending mailers, changing business cards, and personally attending conferences and events such as Chamber of Commerce or local bar meetings.
Staffing is a delicate issue. Some firms will determine that simply having the office with limited hours is sufficient. That discourages walk-ins, which might defeat the marketing purpose of the store front.
Others will at least want to have a support staff in place during business hours, which mandates additional billings to support the staffing costs.
Opportunity cost and lost billable hours
Often overlooked is attorney opportunity cost. If the branch is to generate additional net income, the attorneys working out of the branch office will have to achieve new billings sufficient to cover the branch costs and a profit margin, or the firm will have to recruit new attorneys to cover the branch full time.
Any time spent by firm attorneys managing the new office or traveling between offices is lost billable hours, which must be replaced with enough new billings to cover those lost hours plus branch office costs. Newly recruited attorneys must cover branch office costs, their own compensation and the costs of office management.
An attorney’s revenue is based on a finite number of hours worked. Any hours devoted to new, nonbillable branch office management will diminish revenues unless the new location is concentrated in more profitable practice areas.
Local bar politics and market share
It’s difficult to tap into some markets. A local bar might be biased against outsiders, for example. This is especially true if the attorney is not seen regularly around town, in the courthouse, or at local meetings or events.
If local attorneys are not welcoming, or if the market is already thin, it will be tough to integrate and generate referrals.
Working capital is crucial to success. Whether it comes from existing cash, loans or other sources, the firm must have sufficient working capital to ensure that it can survive the initial year or so as the new branch office settles in and develops a client base.
Profits won’t come immediately and, if there isn’t enough cash to cover new expenses, the branch office is certain to fail.
It can be tempting to open a branch office to increase revenues, but firms mustn’t forget the obvious and hidden costs. Neglecting to consider possible local attorney opposition, market share or working capital needs can mean almost certain failure.
Firms should consider all of the real and opportunity costs when deciding whether a branch office is appropriate.
This article was originally posted on March 4, 2013 and the information may no longer be current. For questions, please contact GRF CPAs & Advisors at email@example.com.