I’m considering leaving an Amlaw 200 firm as an income partner to join a small firm as an equity partner. I’ll hopefully be bringing all of my work with me. This turned out to be the case when I made my last move. Outside of vetting the personalities of the partners I am potentially joining, what landmines should I be on the lookout for in the upcoming discussions? Any other advice from someone that has made a similar move?

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Have you looked at their books? Are they profitable?

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Is there a partnership agreement? Are there any large debts that you are signing up for? Is there an exit strategy for older partners that will create unreasonable financial constraints? Is there any concern they are bringing you there to absorb your business and get rid of you?

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Look carefully at the partnership agreement and any debt they have and how it's handled.

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Any particular red flags to look for?

The problem with being an equity partner at a small firm is the financial stability of the firm. You are not likely to want to spend the money to have the financials scrubbed by a qualified accountant (and that assumes that your new firm would let you).

It doesn’t take a lot to hide bad stuff in small firm’s financials and there are some fundamentally dishonest people out there. You are most likely not going to get to peek under the tent and even if you do, financial statements don’t always tell the whole story.

30 years ago, I became a partner in a small firm where my specialty was institutional lending. It was only after I arrived at the new form that I discovered that the senior partner was in default of a dozen or so commercial loans to as many major banks. That put a damper on my business development, and that small fact was not evident from my due diligence on the firm’s financial statements.

Just thinking out loud — Can you get a limited indemnity for “extraordinary liabilities” (say, any one unanticipated liability of more than $10,000 and an aggregate of unanticipated liabilities in excess of $25,000?) perhaps further limit that indemnity to 12 months? You need to protect yourself against a firm that may be bringing you in solely to share responsibility for the sinking ship.

The biggest problem you will have is that your new firm partners are likely to object to any protection you might request, no matter how reasonable. You won’t know if the objection is based on some realistic concern they may have, or just general personal offense.

For that reason, I think it’s more challenging to join a small firm and it is to join a large firm. That said, you need to find a way to balance your desire and objective to leave your current environment and go to a new environment.  Not easy.

Great suggestions

How do you plan on vetting the personalities of the potential partners? Curious because I’m in a similar boat.

Thankfully I have worked with them on matters in the past, so that helps. I am also inquiring with attorneys that I can trust that have been on the other side of matters with them.

Do they have debt and if so how much?

Find out what their formulas are for paying equity partners. What do they do with retired partners. How much debt is there and are you expected to sign onto it. Probably less an issue with a small firm. How is origination handled.

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