How to find out how leveraged firms are? Forum

[Anonymous User]

How are people getting this sort of info?

[blurbz]

NALP forms have the number of partners and number of associates.

[DarkwingDick]

NALP forms have the number of partners and number of associates.

Can you explain more? I don't see how this explains how much debt a firm has?

[IAFG]

NALP forms have the number of partners and number of associates.

Can you explain more? I don't see how this explains how much debt a firm has?

When we say leverage, we mean the partner:associate ratio. It's one indicator of how difficult it will be to make partner.

[Citizen Genet]

But, some firms use the term leveraged in the classic since of the term, as opposed to the partner:associate ratio that is used here. Some firms reference it on their websites. Almost inevitably they will bring it up with new summer associates so if you want to find out, try to talk to someone who has worked for them. Two firms I can think off of the top of my head that claim to be completely free of outside obligations (other than rental payments) are Gibson Dunn and Jones Day.

EDIT: And this information can be very useful. Firms like Latham who leveraged themselves to kingdom-come are firms most at risk for laying people off when economic hardships hit.

[Anonymous User]

Ahhh, you're talking about FINANCIAL leverage.

For this, you'll need a balance sheet showing how much debt (from the bank) they have versus paid-in capital (from the equity partners). Law firms aren't public companies and so this is not readily available.

There are a handful of CRUDE metrics to get a sense ...

Crude metric #1 - the bigger the law firm, the more likely they'll have leverage (cause honestly they need it to pay the bills). A variation of this is to look at the number of offices. More offices, more likely more leverage (again need to pay those bills).

Crude metric #2 - firms that laid off a lot of people in the financial crisis (mostly, they had more leverage - again they needed a way to pay the interest on the loans)

Crude metric #3 - look for large swings in profits (both UP and DOWN) - financial leverage magnifies the UPSWING and the DOWN SWING.

[daesonesb]

Ahhh, you're talking about FINANCIAL leverage.

For this, you'll need a balance sheet showing how much debt (from the bank) they have versus paid-in capital (from the equity partners). Law firms aren't public companies and so this is not readily available.

There are a handful of CRUDE metrics to get a sense ...

Crude metric #1 - the bigger the law firm, the more likely they'll have leverage (cause honestly they need it to pay the bills). A variation of this is to look at the number of offices. More offices, more likely more leverage (again need to pay those bills).

Crude metric #2 - firms that laid off a lot of people in the financial crisis (mostly, they had more leverage - again they needed a way to pay the interest on the loans)

Crude metric #3 - look for large swings in profits (both UP and DOWN) - financial leverage magnifies the UPSWING and the DOWN SWING.

All good advice. I would add that for firm health in general, try and find out revenue per lawyer. If that measure is pretty low, you can bet that the firm will need to start getting rid of people in another downturn. NOTE: what is high or low depends on the market your firm is in. Smaller markets often mean rpl may be a bit lower (they just can't bill at the same rates as an NY firm).

Or you could ask the partner you have a contact with about the firm's debt structure. If you have an offer, it's not an out of bounds question. They will simply think you are doing your due diligence. Look to see if they give you a straightforward answer. For firms without long term liabilities or high interest short term liabilities, they will look on their conservative debt structure as a selling point to you. They will probably talk to you about this in plain english terms, and it won't feel like they are couching their language in lawyer-ese. With some other firms (think very large) I got the feeling that they started making excuses for the practice when I asked ("Well when you are our size, you have to grow." Or, "When you open new offices internationally, you expect several years of loss before growth begins." Or, "We only borrow what we need to meet such and such year-end costs, and you know we meet all those liabilities in the next accounting cycles" which is another way of saying we do have long term debt on our plate.)

[DarkwingDick]

Ahhh, you're talking about FINANCIAL leverage.

For this, you'll need a balance sheet showing how much debt (from the bank) they have versus paid-in capital (from the equity partners). Law firms aren't public companies and so this is not readily available.

There are a handful of CRUDE metrics to get a sense ...

Crude metric #1 - the bigger the law firm, the more likely they'll have leverage (cause honestly they need it to pay the bills). A variation of this is to look at the number of offices. More offices, more likely more leverage (again need to pay those bills).

Crude metric #2 - firms that laid off a lot of people in the financial crisis (mostly, they had more leverage - again they needed a way to pay the interest on the loans)

Crude metric #3 - look for large swings in profits (both UP and DOWN) - financial leverage magnifies the UPSWING and the DOWN SWING.

All good advice. I would add that for firm health in general, try and find out revenue per lawyer. If that measure is pretty low, you can bet that the firm will need to start getting rid of people in another downturn. NOTE: what is high or low depends on the market your firm is in. Smaller markets often mean rpl may be a bit lower (they just can't bill at the same rates as an NY firm).

Or you could ask the partner you have a contact with about the firm's debt structure. If you have an offer, it's not an out of bounds question. They will simply think you are doing your due diligence. Look to see if they give you a straightforward answer. For firms without long term liabilities or high interest short term liabilities, they will look on their conservative debt structure as a selling point to you. They will probably talk to you about this in plain english terms, and it won't feel like they are couching their language in lawyer-ese. With some other firms (think very large) I got the feeling that they started making excuses for the practice when I asked ("Well when you are our size, you have to grow." Or, "When you open new offices internationally, you expect several years of loss before growth begins." Or, "We only borrow what we need to meet such and such year-end costs, and you know we meet all those liabilities in the next accounting cycle.")

Very helpful. Thx.

[Renzo]

NALP forms have the number of partners and number of associates.

Can you explain more? I don't see how this explains how much debt a firm has?

Why do you care how much debt a firm has? I'm not sure to what end it could possibly be relevant.

[daesonesb]

NALP forms have the number of partners and number of associates.

Can you explain more? I don't see how this explains how much debt a firm has?

Why do you care how much debt a firm has? I'm not sure to what end it could possibly be relevant.

You don't want to go to a firm that is going to Howrey if we have a double dip in 2012.

[Renzo]

NALP forms have the number of partners and number of associates.

Can you explain more? I don't see how this explains how much debt a firm has?

Why do you care how much debt a firm has? I'm not sure to what end it could possibly be relevant.

You don't want to go to a firm that is going to Howrey if we have a double dip in 2012.

That has nothing to do with how much debt v. equity the firm has. It has to do with how the firm is managed, how much business they are bringing in, and how likely the rainmakers are to remain at the firm.

There are two ways a firm finances itself: the firm can take out loans directly, or it can make new partners take out loans to make capital contributions. The end result is the same: the partners of the firm, either together or alone, borrow money to operate it.