There is a problem with this view by attorneys that the practice of law is not a business. It is a profession. We are professionals. That we are, but it is also a business. When that aspect is denied a lawyer does so believing the profession is not subject to the same business pressures with which most small businesses must endure. So yes, by all means wear a coat and tie, meet your deadlines, be polite to your clients and opposing counsel, show up to court on time, keep your money and your client's money separate, and do not sell yourself on TV like Crazy Eddie.
Once lawyers get acclimated to the idea that they are not immune from the same business pressures as everyone else -- get past the ideas that the World is flat and the Sun rotates around the Earth -- then they can accept the key to most business failures and deal with it at the outset.
The two most common culprits for a small business failure are undercapitalization (a cashflow crises) and overexpansion.
Now, as to the first factor, I know almost all lawyers come out of school or another law firm with not much in the way of resources. Therefore, the common statement is that all new lawyers are undercapitalized. Maybe so. From this perspective, I was undercapitalized when I started out in the practice of law. But, undercapitalization is more than the amount of money you have in the bank to run a business at a deficit or to pay for start up cost. It is more than the amount of cashflow coming into the practice coffers each month. The truth of the matter is that if most lawyers had a bunch of money to start out, they would waste it on nonessentials like nice office space, a new desk, fancy and expensive tech, a law library, and all of the trappings they believe they need to present an air of being established. In short, most lawyers starting out spend money (either money in the bank or debt) to create a business lie. They are not being honest with themselves and they are not being honest with the public. The problem with this, and why it is so wasteful, is that in this day and age it is so unnecessary.
Further, cashflow and the act of not running a deficit is really relative. It has as much to do with money coming in as it does with both a lawyer's personal and business overhead. In short,we are talking about the cost of doing business, as well as the cost of doing family. Together, business and family overhead is as important, if not more important, than cashflow in the concept of undercapitalization. And, it is an adverse affect that can creep up on lawyers if they are not extremely careful.
The family part of this discussion is probably beyond this post. After all, it involves so many emotions and decisions. The business part is easy. You are not undercapitalized, or at least less undercapitalized, if you keep your start up business expenses (and especially those monthly and recurring business expenses and debt) to an absolute minimum. Office? Do not need one, or at least one that you have to rent or pay for each month. Phone system? Nix it. Use Google Voice. Copy machine or access to high end business equipment? Hell no. New car (convincing yourself it is a business expense you can write off)? Give me a break. New computer? Try your old computer. Broadband? I bet you are presently getting that at home to watch movies and HDTV, so do not repeat that cost. Legal research? Unless you are a research attorney, it can probably wait until you actually need these service. Consultant? Try an informal set of mentors. Attorneys will help. Forms and pleadings? Google, the county law library, your mentors, the files of similar cases at the courthouse, or just make it up.
In short, undercapitalization or a lack of cashflow has to do as much with money and earnings as it does with overhead and debt. If you have no or little debt and you have no or little routine overhead, then you need a heck of a lot less cashflow to tackle that family component with which you must deal. I talk to attorneys every day that make the same mistake. When they tell me they are substantially undercapitalized, I then take them down the list of what they have done or committed themselves to do in opening their proverbial door. They incorporated. They signed up for a legal research site. They purchased full access and unlimited business software. They rented executive suite space for a monthly fee. They got a series of phone numbers. They purchased broad based malpractice insurance. They got office furniture. They got letterhead, paid for website design, hired an assistant, retained a phone answering service, committed themselves to a virtual office component on their website, and they did it all without having one viable client. Now, I guess it can be argue that some of this is necessary. Maybe so, but the point is the more a lawyer spends, obligates, commits and debts, the worse or the more profound the concept of undercapitazation will be. Further, the effects will last longer.
Second is the issue of overexpansion. Most attorneys starting out do not view this as a problem because they are just trying to open one office, they do not have inventory like many small businesses, and advertising costs and marketing is minimal. Most attorneys are not looking at building multiple offices. Most attorneys view the concept of overexpansion as a physical phenomena. They ignore the intellectual property aspects of the practice of law when doing so. In reality though, overexpansion is maybe the biggest killer because what it represents is a lack of focus in a law practice context.
Look at it from a small business standpoint. Let us say that as an individual you decide to start out doing yard work to make a living. Then before that is successful and you have enough business, you notice roofing problems while cutting grass and decide to start doing roofing projects, while still trying to cut grass. Fixing roofs and cutting grass you notice that homes need to be painted. Then before having enough yard care accounts or roofing contracts, you decided to open a small paint store. Then while working you pass a wreck on the side of the road and decide to get into the auto towing business. Then when trying to tow a car you notice a broken window and decide to add auto window replacement. Then you think that if you are going to do that you might as well open a small used car lot. While cleaning up a car for sale on the new rented lot, you think what is needed is an car washing and detailing business. The car washing business leads to an idea for a limo service. This leads to an airport transportation business. While putting a TV in the transport vehicle you decide that an electronics store would be potentially profitable. People who need home entertainment need furniture, so then that is the new venture. Meanwhile, one of the vehicles towed was a ambulance so the thought of an ambulance transportation business arises. One of the people transported needed kidney dialysis. This leads to a dialysis center. The dialysis center leads to the purchase of medical equipment, which leads to medical equipment sales. While setting up home medical equipment the you notices the elderly person needs help cutting her grass. And, then the person is back where he or she started.
Call it a knack for business ideas, a desire to find something good at which you are good, a search for something that makes money, envy or whatever. Who would do this and think they could find the time to work, market and promote, and establish all of these competing ideas without going broke in the build up? Call it the grass is always greener on the other side of the fence. As Erma Bombeck once wrote, The Grass Is Always Greener Over The Septic Tank. This case of the overcommitted business person would be an exaggerated case of overexpansion.
Yet, as exaggerated as this might be, this is what too many lawyers too often do starting out. Each practice area is only loosely related. It not only covers a lot of law, but each practice area or niche covers many different marketing, procedural, costs, and constituency issues that take much time and knowledge to master cost effectively. So, when the lawyer sees law generically as a practice type, and decides to practice "dead presidents" law, the lawyer suffers from overexpansion. Since we know that overexansion leads to business failures overall, then we know that trying to be too much to too many different constituents, in too many practice areas, at one time, will also lead to law practice failure. At least it will lead to a degrading of expectations of what the practice of law should mean.
Asked often how to start a law practice, I ask if the lawyer has a phone, a computer, broadband, and some means of transportation and a place to live. The answer is always yes. My point is that they are in practice. It is all they need. This handles the biggest part of the undercapitalization issue.
For the overexpansion issue, my point is to find a niche or stick to a practice area and build it aggressively through networking and referral marketing. Everyone has a limited amount of time and energy. Too many practice areas are distractions that can kill all areas of which you might have an interest. It leads to burnout. It will drive you broke. But, the rewards of limiting your practice is that you can become hyper and aggressively competent in all aspect of the practice.
It is really a matter of limits. Avoid overcapitalization by greatly limiting your practice overhead. Avoid overexpansion by greatly limiting your practice area. Limit your practice in both ways and the chance of satisfying and sustained success is greater.
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