The previous winter at Avanti Law Group had been a slow one, and with January quickly approaching, the partners didn’t want to sit around and wait for business again, managing member Raquel A. Salas said. So they bought an accounting firm housed in the same building as their Michigan law firm. Hear Salas discuss her experiences as an ancillary business owner with ABA Journal Podcast moderator Stephanie Francis Ward, as experts in legal ethics and marketing weigh in.
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Stephanie Francis Ward: Economists often say business owners should diversify their money. Does that advice work for attorneys as well? I’m Stephanie Francis Warren and that’s what we’re discussing today at the ABA Journal podcast. Joining me are Larry Kohn, the president of Kohn Communications and the author of , Raquel Salas, the managing member of Avanti Law, a Michigan firm that recently purchased an accounting business, and Mark Tuft, a San Francisco lawyer who defends attorneys facing professional responsibility and state bar matters. Raquel, let’s start with you. Could you tell us a bit about the accounting firm that your firm purchased and how you guys decided to do that?
Raquel A. Salas: Absolutely. We started our firm in May of 2010 and our first winter was very slow. And we held on and decided to look into what options we had and how we can improve our business and walk-ins for the winter months. And around that time we found out that an accountant was selling their practice, and we figured hey, why not? We have the space at our building.
And we figured that everybody has to prepare their taxes during tax season, and it was a great opportunity for us to have more walk-ins, and people get to know more about the business without having to have the cost associated with the marketing. And that’s how we decided to look into the opportunity and see if our building would be able to host an accountant firm. And it has worked out pretty good.
Stephanie Francis Ward: So this was the first year. Tax season has passed. So this was the first year that you guys had it, right?
Raquel A. Salas: Correct. It took us a whole year to set it up and be in compliance with all the rules and regulations for the IRS. And also we had to contact the Michigan Bar Association to find out if there were particular ethical rules that were applicable to our practice and make sure that there was no violation or intermingling of the two businesses, seeing the fact that they were going to be in the same building.
Stephanie Francis Ward: So how did this first year go? Have you seen any–I mean, have you gotten any clients from it? Or is a profit? How is it going?
Raquel A. Salas: It actually turned out to be a really good idea. Basically because we do immigration law and we also do bankruptcy law. As you might know, in order for you to apply for immigration benefits, you have to have your taxes in order, same thing with bankruptcy. So there’s a lot of cross-selling between the two practices. And we also have the opportunity to have new clients that never heard of the law practice and started using the business of the accounting and now are clients of the firm.
It turned out really good because the practice that we purchased had 200 clients in existence. So those people are new to the firm, and most of them did not become a client of the firm, but those that did are very happy with the services of the law firm. And those that did not become clients of the firm are now aware of the fact that they can also get legal service at the same place where they do their taxes.
Stephanie Francis Ward: When you purchased the accounting firm, did you do any direct marketing?
Raquel A. Salas: We did not, actually. Well, let’s see: direct marketing. Only thing that we did is that we used the database of the clients that they had in existence and sent them letters letting them know where the practice was going to be now and the fact that we also had a law firm in the same building. So that would qualify as direct marketing, I think.
Stephanie Francis Ward: Okay, so, Larry Kohn. If you had a client come to you and say that I have this law firm and I’m going to purchase an accounting firm, what kind of advice would you have for them, in terms of marketing and letting people know?
Larry Kohn: Well, marketing for an accounting firm is very similar to marketing for a law firm because you’re really offering a service. And so the most important thing for marketing any professional service business is really making sure that you have the ability to meet a lot of really good targets or have access to them. Because the greatest weakness that all professional services have is that they always need to meet more people. It’s the thing that most lawyers and other professionals forget about; they want to be good at their practice.
So the primary focus is lead generation. How are you going to meet new people? So there are so many ways, of course. There’s going to events and reaching out to people. If it’s a CPA firm, you might even want to do advertising. Some law practices might be effective at advertising, and one of the greatest techniques is the technique that you’re using right now, Stephanie, and that’s webinars and blogs and using technology as a way of reaching out and introducing yourself to people.
Stephanie Francis Ward: Okay. Let’s go to Mark next. Mark Tuft. Do you have any people coming to you as lawyers who want to have ancillary businesses like this? And if so, what sort of advice do you tend to give them generally?
Mark L. Tuft: Well, the answer is absolutely. This is a very wide variety of ancillary businesses that lawyers are engaging in. And before I give any cautionary advice, in terms of some of the ethical consequences and risks, let me just say that the kind of thing that Raquel was talking about is not only becoming common in terms of the more diverse services that lawyers are involved in, but it’s age old. As long as we’ve had lawyers, we’ve had what we’ve come to call “dual professions” or “ancillary business services.” So there’s nothing terribly new about lawyers offering what are called legal services and either law-related services or distinct non-lawyer services.
The challenge for those that wish to offer ancillary businesses in addition to law practice is whether or not the services are going to be offered are indeed distinct from the provision of legal services, or if they are not distinct; whether the lawyer is going to be able to undertake the reasonable measures our rules require, to assure the consumer of the non-lawyer services that the protections of the lawyer/client relationship don’t apply. That’s the challenge. It is certainly manageable. It is doable. Lots of lawyers are able to do it. But someone comes to me and says, “You know, I’m thinking of acquiring a CPA firm,” such as Raquel’s doing or going to some related business service, we would go through a check list of questions.
And I would be giving advice on how to either structure that business to comply with our rules, or provide some practical advice on how to avoid the kind of confusion that can easily arise in the minds of consumers in using the ancillary business as opposed to the lawyer’s legal service. And one last comment I want to make–and we’ll get into this, I know, as we proceed–but in addition to deciding how to structure the business to either comply with the rules or make sure that our ethics rules aren’t applicable to the non-lawyer services, whichever way you choose to go, the other big issue, which we’ve already touched on, is using the ancillary business as a marketing tool for the law business.
And we call that the cross-selling you mentioned, those raise additional ethical issues that I’m sure we’ll talk about, but the answer to the direct question: Yes, it’s common. There’s a very wide variety of businesses. They range from lawyers who have a travel agency, which is totally unrelated to legal services, to lawyers who have tax services like Raquel is talking about, that frankly do have some relationship to the provision of legal services. So it’s a wide topic, but very common and historically quite common.
Stephanie Francis Ward: Mark, I’m curious, are there some businesses that they might be perfectly fine under the professional rules, but perhaps one should be cautious of them because they might raise red flags, like to the IRS? Like say you’re a successful lawyer and you open a restaurant or a bar. I mean, are you just asking for an audit?
Mark L. Tuft: Well, I always tell my clients who wish to have a separate business–let’s just take your example. It’s a restaurant. It has really nothing to do at all with the provision of legal services. It’s quite distinct. Are there still ethical risks to worry about? The answer is, of course there is. I always tell lawyers in that situation: Keep it separate, keep it straight. In other words, avoid the risks of any confusion. If you use the restaurant as a feeder for your law practice, well then you’re going to run into some ethical issues. If you keep it really distinct and separate, you’re not going to run into any serious ethical issues with one exception.
This is probably a good time to raise this. No matter whether you’re related to the legal profession in your ancillary business or not, there are rules that will apply in the disciplinary context of whatever we do as lawyers. So if we do something, heaven forbid, in an ancillary business that is dishonest for example, we can be subject to discipline as a lawyer just because we’re licensed as a lawyer. So we’re never completely divorced from the ethics rules. But we can manage the business to eliminate the application of many of the rules, if we choose to do so.
Stephanie Francis Ward: Okay. And Raquel, I am curious with your new business, how does the firm–do you check for conflicts with both? Have you had to turn away any clients because it would have been a conflict either from the law firm or the accounting business?
Raquel A. Salas: So far there has been no conflicts. We use Clio to check conflicts at the law firm and we have been extremely careful. We did a lot of research and we’re in communication with ethics rules for the ethics line for the bar association to make sure that before opening, things were separated and we were following the ethical rules to make sure that everything was in place, because we were aware of the potential conflict and the potential issues that could come up. Making sure that since we were going to be in the same building, what do we have to do to make sure that there was no access between the staff for the accounting firm and the staff of Avanti and the mix up of the files and stuff like that.
So we did spend quite a lot of money making sure that all the doors were secure, that there were passwords and that things were separated to make sure that we were in compliance. There’s no staff from one firm that is staff of the other and we worked really hard with the bar association to make sure that we’re in compliance. But yeah, it could be a problem if the attorney decides to go into the business and not do the leg work of making sure that they’re potential rules and conflicts that will come into place. I just want to mention that we actually assigned an attorney to specifically work on the ethics issues with both IRS and the bar association to make sure that everything was in compliance.
Stephanie Francis Ward: Can you give me a sense of about how much time this took from you and your partners? Well, you’re a small firm and you’re running a growing law firm and also to open this other business too. What sort of time commitment was it?
Raquel A. Salas: The main time commitment initially was deciding whether should we do this? Should we invest both money and time doing this and who was going to take the lead making sure that things are taking place? We’re going to keep the staff that the other accountant had or we’re going to put our people? And we decided–it took us about two months to decide we wanted to do that or not. There were a lot of meetings among the partners looking into the financial aspect of it. Does it make sense? What are the benefits? What are the pros and the cons? So the hardest part, I think, was making sure that everybody was on board with the investment.
And once we all agreed to do this, then I took the lead of all the negotiations with the accountant. I assigned one of our business attorneys to be the one in charge of making sure that everything was being done by the book, and then it took us about five months to set it up because then we needed to apply for a different applications for IT numbers and numbers, and there were a lot of things that we needed to get done in order that the firm’s universal income taxes and accounting services would be qualified to actually prepare taxes. And that was the hardest part, I will say.
But what we did, we hired an accountant to handle all that, and we had regular meetings twice a month to make sure that everything was in compliance with the check list that we created of deadlines and making sure that everything was getting ready. We did encounter a problem towards the end that we needed to have an additional staffer, which we didn’t budget for. And we ended up having to hire another staff to help with the tax preparation services, but that all worked out well in the end. But it was a total surprise for us, because we thought that with the staff that we had in place, that things were going to work and then we had to make some last minute changes. But it worked out pretty good.
Stephanie Francis Ward: Could you give me a sense of how did you prepare for operating costs?
Raquel A. Salas: The good thing about the tax season is that it’s only for about four or five months. Next year we are expanding, because a lot of clients are asking for bookkeeping services and other kind of services that the firm can provide. We’re just not ready to go on a full year, 24-hours full office all year round. But basically what we did, we estimated the income based on the past performance of the accounting firm and budgeted the costs. It’s pretty simple, in there’s not a lot of cost involved other than the basics that we–we didn’t have any costs that was not already estimated in the budget, which is pretty different than the law practice.
Because the law practice, especially when you have contingency fee services like we do, costs can sometimes be estimated. You think you will spend $3,000 on a small case and then end up with a bill of $15,000 because of depositions and stuff like that. With the accounting firm, it was very different, in the sense that once you pay all the license fees and once you have the program, there were not really a lot of costs other than staff. And we budgeted really well before the firm opened the door to the public.
Stephanie Francis Ward: What were your partners’ hesitations about this, if any?
Raquel A. Salas: I guess the main thing was that what happened with our firm was that we grew too quick, too fast. We started business in May of 2010, just three attorneys and a secretary. And five months after, we are 15. So we were still going through accommodating our own growth for the firm, and it was probably like kind of too much for us so early in the life of our firm to get into another business. But at the same time, we knew that those two months–like December, January, actually January or February and March–are very slow for our practice, and we are a firm that is debt free. We don’t have any loans. We don’t owe money to anyone.
And we wanted to keep it that way, but we knew that if we were going to go through another winter the same way we did in 2010, it was going to be hard for us. And we really wanted to keep it without having to take any loans or any equity lines. We didn’t want to take any loan that was personally guaranteed by any of us; so it was easy, in that sense, but at the same time it was “should we really get into this at this time when we are growing and still trying to put a lot of procedures and a lot of rules in place?” because there were a lot of things going on.
When we originally only had one staff, now we have five associates working for us and about five support staff. So we’re growing too fast. And there were a lot of things happening at the same time, and we didn’t know if we really wanted to get into this, which was more work for us. But it was the best decision.
Stephanie Francis Ward: It wasn’t like a super safe easy thing to do. This was a risk. I mean, it seems like a risk that paid out well, but it was a bit of a risk is what I hear.
Raquel A. Salas: It was.
Stephanie Francis Ward: First couple of years you start a firm, and with your practice you don’t know when the money’s coming in.
Raquel A. Salas: And that is still right, but we already knew that winter months were very slow, so the options were just to wait for another winter months to come; or spend more money on advertising, without knowing whether it will have any return investment; or invest in a business that we knew for a fact that those 200 clients were likely going to come, and we knew that tax season will happen every year no matter what. So it was a risk, but it was more of a–some sort of certainty attached to it that made sense to us. And that’s why we decided to go on and take the risk on that one; just because it was a risky move, it was also one that came with a lot of certainty.
Mark L. Tuft: Stephanie, if I may comment, I think that the way that Raquel’s describing this is quite good. There seems to be a natural distinction between the nature of the law firm’s practice and this ancillary business, so some of the risks are clearly manageable in that regard. There could be some crossover she mentioned, but it really is a question of managing the risk. They’re doable, they’re ethical, they’re not prohibited. But as she’s laying out for us in real terms, there’s a lot of hands-on management responsibilities that are ongoing and it sounds like she’s done it quite well.
The problem comes up, I think, in other types of relationships, where there’s a much closer nexus between what the law firm does and what the ancillary business does. So then the risks, I think, become a little more demanding. But all of this is doable as long as you have lawyers who are willing to spend the time and the dedication to managing these risks, from an ethical point of view, it’s all quite doable.
Larry Kohn: I, Stephanie, would like to chime in here. What Mark’s addressing I think is really important from a marketing perspective, because a lot of the lawyers I know that are in, are creating separate businesses, are businesses that really do blur the lines. For example, a very common area would be to go into a consulting practice, where let’s say you’re doing environmental consulting but you’re also an environmental lawyer. So it’s very easy to spill over from one to the other and I think that that’s a very common thing to do.
And not only are there ethical issues that you have to be concerned about, but the point that I want to make is that if you are going into a business to diversify, which is a completely different business and has nothing to do with your legal practice, then that’s a financial investment and that won’t create a risk in terms of your ability to generate business for your own practice. But if you, for example, go into environmental consulting, then you become a competitor to all the other environmental consultants who might normally refer business to you.
So one of the things you have to think about is, are you going to be going into a business that competes with the people that could be your best referral sources? So not only are there ethical concerns, but there are marketing concerns that might, in fact, hurt your ability to get referrals, because you become a competitor to the people that would normally be able to send business to you.
Mark L. Tuft: Let’s talk about that just for a second, if we can. The major ethical risk when the businesses in a law practice are closely aligned or related is the distinction between clients and non-clients. So that would be a huge issue to address. Whether you’re rendering, say, the environmental consulting services to people who happen to be also recipients of legal services of the firm. Then that’s going to take you down a road where there’s a number of ethical concerns and they’re all manageable and they’re all doable, but you’re probably going to be under the rules at that point with respect to a lot of the services unless you really do a lot of things.
On the other hand, as Larry just mentioned, you can have marketing and services for clients or consumers who are not clients of the firm, and you can avoid a number of the ethical requirements that would apply to those consumers. If you take these steps that the rules outline you must take to make sure that person, whoever that person may be who’s not a client, understands that they are not a client and that they are not getting the protections of a attorney/client relationship. And the burden is going to be on the law firm, so the more closely aligned the business is with the law practice, the more demanding the risks are. But they are, again, manageable if you’re wiling to pay enough attention to them.
Stephanie Francis Ward: Raquel, let’s go back to what Larry said; I am curious. Were there accounting practices that referred you guys business before you opened up the accounting practice?
Raquel A. Salas: Yeah, that’s something I was going to mention too, because we have problems in that area; but we were offered the opportunity before to get into the insurance business and it happens that most of my biggest referral sources come from financial planners, financial advisors who are also providers or underwriters of insurance. While I was pretty excited, because it was like an additional source of income and I saw all the potential in it, I right away realized, “Oh my God, if I do that I will be competing with the key players that are always referring business clients to me.”
And business clients are very important to us because they’re the ones that come with repetitive business and that’s why I let go of that opportunity to go into the business sector, into the insurance area. And no, I haven’t had any problems with the accounting part because I don’t generally get a lot of referrals from accountants. That’s not our focus for client referrals; we haven’t really explored that opportunity so far. We’re pretty new; we’ve been focusing more on financial planners and financial advisors and other key players of our community to get referral sources from them. So I didn’t see that as a problem, because we don’t have a lot of relationship with a lot of accountants out there.
Stephanie Francis Ward: And I guess, in closing, Raquel, if someone was thinking about starting a business like you and your partners did, what sort of advice would you have for them?
Raquel A. Salas: I will say two things. First I will always ask them how important is their business of actual practicing law for them. And the reason why I would ask that as a first question because I’m a member of the firm and I spend about 50 to 60 percent of my time doing administrative tasks. And at the beginning, I just wanted to be 100 percent of an attorney, but it got to the point where it required a lot of more work. And either we hired someone to do it or we identified the partner that was in the best position to do that, and since I have a business background we all agreed that it was better for me to take that lead: to allow the firm the opportunity to grow until we are in a position to actually hire a third party to come and do that work. I think that would be the first thing.
If the person just wanted to practice law, and it’s really about keeping track and being on top of all the administrative staff and they do not like that, then I would surely recommend them to reconsider their position, because once you go into business, there’s a lot of administrative legwork that has to be done. And to be honest with you, the best person that can do that is the owner, at least the first couple of years, because there’s a lot of nurturing of the relationship. There’s a lot of heart that you have to put into places, a lot of nights, a lot of long work.
And also, if money’s a problem, then they have to be very careful because there will be dry months. I mean, there’s no doubt. Like any business, cash flow is always going to be a problem. And if it’s a person that has a family and they have a need of a fixed salary or constant money coming in every month, you need to understand that what makes a business owner an entrepreneur is that risk factor. You have to take the risk, and that means that you need to know that there will be times that you’re gonna work more than ever and you’re gonna come home with no money in the pockets. So if they’re willing to overcome those two big issues, then they’re ready to go.
Stephanie Francis Ward: Okay. Well, I think that’s everything that I had for everyone. Does anyone want to add anything else?
Mark L. Tuft: No, this is just a very broad topic and I hope this discussion in no way discourages lawyers who want to venture into non-lawyer services. It’s perfectly permissible. It’s age old; we’ve had dual professions in law related services for many decades. But there’s some serious ethical and managerial risks that I think we’ve accentuated here today.
Stephanie Francis Ward: Okay. Thank you all so much for your time. I appreciate it.
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Stephanie Francis Ward
Larry Kohn, an executive coach, is president of Los Angeles-based Kohn Communications. He’s co-author of Selling In Your Comfort Zone, which was published by the American Bar Association. Kohn Communications’ blog about business development for lawyers can be found at http://www.kohncommunications.com.
Raquel A. Salas, a lawyer in Wyoming, Mich., is the managing director of Avanti Law Group. She and her partners recently purchased Universal Income Tax & Accounting Services, which is also located in Wyoming.
Mark L. Tuft is a litigation partner with Cooper, White & Cooper in San Francisco, and he is a certified specialist in legal malpractice law. He is a co-author of The California Practice Guide on Professional Responsibility and the vice-chair of the California State Bar Commission on the revision of rules of professional conduct. He is on the editorial board of the ABA Center on Professional Responsibility. He is also an adjunct professor at the University of San Francisco School of Law.