Where does money come from? While not as esoteric as the chicken-or-the-egg dilemma (the long awaited answer), the question may seem just as perplexing when you’re figuring out how to finance your firm. As attorneys, we’re constrained by ethical Rule 5.4 “Professional Independence of Lawyers,” which precludes non-lawyer equity investors (to date I am not aware of any U.S. J.D. VCs), forcing us by design to bootstrap through the process. Bootstrapping refers to start-ups funding businesses with their existing resources. This inherently leads to creatively lean operations to minimize expenses and build cash flow. Funding can be obtained through savings, loans and credit; with the eventual goal of being revenue-run. To understand how many of these resources we must tap to survive, the first step is to draft a thoughtful, thoroughly researched, and realistic budget.
Putting a one-year plan on paper detailing your start-up needs and their associated costs is a mandatory exercise. Open a spreadsheet, skip a space and fill in numbers 1-12 in their own cell across Row 1. In Column 1 make a detailed list of everything you might, could, may possibly need to start and grow your firm over the next 12 months. Research your tools. Read reviews, ask your colleagues, search for sales, and collect online coupon codes. Cheapest is not always best. Three broken printers add up to a lot more in time and money than one efficient device. Make sure you are keeping a paper trail of the data you collect. After researching your anticipated liabilities and their associated expense, fill in the cost under the corresponding month of when the charge must be incurred. Some of these expenses will recur monthly. Survival time can be calculated as revenue + savings – cash burn.
Year one is survival stage, so what are the things without which you cannot subsist?
- Malpractice Insurance. Mandatory, even if legally not required. Make sure you get quotes from numerous providers, including your personal insurance agent. Find out who your colleagues use and check out any affiliations that your bar associations may have (you will probably need to be a member of the bar association to participate in their program). Ask for an explanation of the proposed coverage and costs and look for any options to lower the quote, such as taking CLEs or adjusting the percentage of time spent on a particular practice area. Don’t forget this line item will increase annually.
- Office/Meeting Space. Do you need a daily office or can you work from home or another no-cost location? Are you willing to offer sweat equity in the form of hours to another attorney to use their space? How often do you meet with clients in person? Can you use a virtual office or other shared space? Ask around. Your colleagues may be willing to let you use their conference room, address, or even an extra office at much less than the advertised spaces.
- Phone and Fax. Yes, your clients will want to call you, people still ask for your fax number (I have no idea why), and no you don’t have to give out your personal cell or make room for a fax machine. Obtain a free Google Voice number and have it ported to your personal cell. For outgoing faxing, try GotFreeFax which allows you to send up to two three-page faxes a day for free, with a pay-per-use option starting at 98cents per 10 pages. For incoming faxes, eFax has a free incoming-only option (but if you’re looking for a more thorough incoming /outgoing option, MyFax is a better price). If you want a more sophisticated phone system, RingCentral provides free efax with your plan.
- Marketing. Your promotional spend can be modest, but you want to announce your existence in a memorable fashion. A professional logo that will be your lasting brand is worth the investment. Try 99designs and get around 30 options for $300. Websites can be built on WordPress by using a free or low cost template; creating interesting content is key. If you want something more professional, try finding a freelancer on Upwork. You do need business cards and can order 250 for $10 from VistaPrint using your own design or one of their hundreds of templates. E-mail announcements are acceptable but make them more interesting than just plain text in the body. If you can create a digital announcement with a web address, the hyperlink can be pushed out via your social media channels (a free, must-have means of marketing).
- Salary. Do not forget to pay yourself a living wage. Your plan does not work if you are hungry or homeless.
Personal Financing or Friends and Family?
So how can you afford the aforementioned before you make any money? First, turn to your personal finances. How much cash on hand do you have to invest in your endeavor? It is common for entrepreneurs to take other jobs, even outside of their industry, to fund their passion projects in the beginning. The next “ask” may come of friends and family, but consider how money may affect the relationships, and keep it professional by securing a note in writing, even if the terms do not include a due date or interest.
Credit will likely play a role in financing your endeavor. Research business credit cards and make sure the terms and rewards make the most sense to you. Do you travel a lot for business and want bonus miles, or is cash back your best bet? Use credit cards sparingly and make sure to get debt paid off as quickly as possible to eliminate wasted money on interest. When you open your business bank account, make sure you seek a line of credit. Whether you use it or not, it is a useful rainy day fund. You may also be able to finance some of your equipment, but again consider what is vital for your operations. If you can use your law school laptop there is no need to buy an office device right away.
Small business loans are not as readily available as they once were, especially if you have no collateral to offer, as is usually the case for a service-based start-up. Preparing a professional business plan when you go in for the “ask,” highlighting your projections of just how and when you will be able to pay their money back, does make a significant difference. Shop local banks and credit unions. Consider a personal guarantee (though not your best bet, sometimes your only option). Try to borrow as little as possible, pay it off as soon as you are able (unless the rate is amazing), and never miss a payment.
And finally, profit. What is the magic number which means your business is actually making money; your break-even point? Underneath your laundry list of liabilities, add one critical row – collections. Law firms should track their finances under the cash method accounting principal, tracking income once received as opposed to billed. These numbers will only be projections, but be thoughtful in analyzing how much you anticipate to collect monthly. If you are operating under an hourly model and you are lucky enough to have a client in month one (don’t count on it), what type of matter is it and on average how many billable hours would be spent? If you bill 10 hours at $250/hour, at the end of month one after sending an invoice you would transfer from your trust account $2,500 and enter $2,500 in the collections/month 1 cell (assuming you took a retainer, which you always should, otherwise you would not enter the amount until the check is cashed). Build out your projections over 12 months and compare lines until your collections exceed your overall expenses. This is your break-even point. It may not realistically happen in year one.
In building your budget, you should envision your firm in the future. What is your end game? You’re writing your roadmap to get there. How do you define value and success? In dollars, in volume, in matters, in happiness, vacation time? How much do you need to be happy? Having your own practice is often equally rewarding and challenging, but if you have a plan you can flip the scales tipped toward happiness, and the value of happiness is priceless.
About the Author
Sofia S. Lingos is the principal of Lingos Law LLC, a business law firm in Boston. She can be reached at 617.695.0009 or on Twitter @SofiaLingosEsq.