Solo Flight: Lesson #5 – The Economics of Going Solo

This is lesson #5 in our ongoing self-directed coaching program, Solo Flight, designed to help lawyers and law students decide whether to open their own solo law practices. After the next and final lesson, the series will be revised and edited into a free PDF e-book, available for download.

Cold, Hard Cash

Yes, it’s time to get practical and left-brained in our evaluation of whether going solo is the right course of action for you.

We’ve already examined the “first things first” issues – our desires, our fears, and our expectations about going solo. But while those issues are crucial, and must be looked at before considering other aspects of this huge decision, they aren’t the end of the inquiry, by any stretch. Like it or not, we live in a material culture that requires us to have a certain amount of money on an ongoing basis in order to meet our obligations and maintain a quality of life – and standard of living – that suits us.

That means it’s time to count some pennies.

Step 1: Your Financial Picture

The first step is to examine your current assets and liabilities. First, write down all sources of income. Make a note of whether they’re static or variable (i.e., the same amount every time or varied depending on certain factors, which you should also note). Write down also whether each source would continue if you opened a practice, or whether it would go away.

Now, list your assets – all of them. Break down your assets into liquidated, convertible, and unliquidated. Examples of liquid assets: cash, bank accounts, stocks, retirement funds. Nonliquid assets: your law degree, experience, relationships, a book of clients that you can port to your new practice. Convertible assets are simply those that would require some extra step to convert into cash; examples would be real estate, antiques, a killer designer purse collection you can sell on eBay (not that I’d know anything about that last one – ahem). You may want to create yet a fourth list at this time, too – a separate list of all assets that you don’t want to sell but that can be brought into your practice to serve some purpose there. Examples could be things like computer equipment, peripherals, office furniture, filing cabinets, and the like.

Now, the grim part: list your liabilities. The easiest way I’ve found to do this is to gather all your bills and statements, your checkbook, and any ATM receipts you’ve accumulated. (Actually, the easiest way to do this is to have created the habit of writing down everything you spend, from 50 cent papers to $1000 mortgage payments, in a small portable notebook that you always carry with you – about twelve months back. But if you didn’t do that then, you can get in the habit now. It will serve you well in the long run, regardless of whether you go into practice for yourself or not.) Break down the liabilities as follows:

• Frequency of payment. If less frequently than monthly, you’ll want to convert that amount to a monthly one. To do that, simply take the yearly amount you spend on the item, and divide by twelve. That’s the amount you should be amassing each month to satisfy that obligation.
• Set vs. variable expenses. If your mortgage or rent remains the same every month, it’s set. Your light/utilities bill, however, would be variable. List it as variable, but make sure you also jot down the “average” based on the last year’s figures.
• Revolving vs. closed-ended accounts. A revolving account, like a retail credit card, will remain an obligation (though you certainly don’t have to keep using it). A close-ended account is something like a car loan – there’s an end in sight (though it might seem a long way off sometimes).

Now that you’ve got a good grasp on what you’ve got coming in versus what goes out in monthly terms – take a break. Seriously. Put this aside for a day or two – or more – and come back to it later.

Step 2: Playing With the Pieces

Now that you’re refreshed and ready to get back to it, take a new look at what you’ve already done. Look first at the income. When you take away the items that disappear with a new practice, what’s left? Jot that figure down – but don’t fret. That’s just the starting place.

Now, look at your liabilities – skip over assets for a bit. Tally up any expenses that will go away if you open your own practice. These are expenses directly related to your current job (parking for instance – don’t look at expenses like commuting that might or might not decrease, depending on where you set up shop just yet).

Staying with the liabilities, take a look at the expenses that might change if you open your own practice. Here’s where you’d list things like commuting costs, dry cleaning (you won’t be wearing suits every day, necessarily – one of the perks of being your own boss is setting your own dress code), and the like. These are your question marks.

Now, take a look at all the expenses – especially the higher-end variable ones. Things like groceries, eating out, clothing, utilities – make a separate list of all these, together with the monthly average (estimate on the high end, if you can). Play a game with yourself, and the name of the game is “How Low Can I Go?” You win the game by figuring out how deeply you can trim the expense without making life too grim. Make a note, too, of expenses you’re not willing to give up – a child’s music lessons, for instance, might be so important to both you and your child that eliminating it is out of the question. (But make a note of it and research ways you can trim the expense – perhaps a different teacher, or perhaps the current teacher would be willing to offer a discount if you pay in advance?)

Based on what you’ve done with the “game,” create a proposed new budget. The trick is that you’re doing it without regard to income. This is hard for a lot of folks – we have a tendency to spend what we make. This is a brand new approach. You’re figuring out what you need first, and that will determine how much you need to earn. Now you’re thinking like a business owner!

Guess what? Time for another break!

New Expenses

Ah, joy. Here’s where you start racking up the costs of going into business for yourself – at least, on paper. This can be an eye-opening experience, and a stressful one for some. So, bring your deep-breathing techniques and vow to take some stretch breaks if it starts to get too much.

Your personal expenses have already been tallied. What we’re after now is the business side of the accounts payable – what new expenses will you incur? Here, as with our personal expenses, we have several categories:

• One time expenditures – necessary upgrades to computer equipment, books, fees, dues, etc.
• Periodically recurring expenses – office supplies, business cards, subscriptions, etc.
• Monthly recurring expenses, further divided into static and variable expenses (as we did with your personal expenses above)

How do you know what items will cost? Here’s where you have to do a bit of research. Some resources you might want to use:

• Office supply catalogs. You might get a better price than your local bricks and mortar store shelf price if you ask for the business catalog. Also, shop around online. But remember, you’re not actually looking for “the best price” – you’re looking for an average estimate for budgetary purposes. Precision isn’t required, but a “best guess” is.
• Other solos – one of your best resources! Consider your three AIR interviewees (especially the local one) as experts in running a business, especially for expenses like rent, utilities, and local ad costs.
• Phone inquiries. Just pick the phone and ask if all else fails!

Now, how do you know what you’re going to need? Here’s where a bit of thoughtful planning can come in very handy. Don’t just rely on stock checklists from print resources. Take a critical look at such lists and really ask yourself – do you need this item? Or can you think of a way to do without it? Moreover, even if you can do without it, do you want to? Is it in your best interests to have this item, or would it be better to wait, or to select a lower-priced option for now? Consider, too, the option of leasing equipment versus purchasing.

Don’t spend too much time on this portion of the analysis. Keep reminding yourself – this is to get a ballpark set of figures for decision-making purposes; not to actually create and stock your company.

Some categories that people often overlook in this exercise:

• Dues and expenses your former employer picked up
• Taxes (for that rarest of birds, a helpful government site, see http://www.irs.gov for assistance with this issue)
• Malpractice insurance
• Costs of setting up your business entity (you don’t have to decide on your format – just research the issue on your state’s Secretary of State website and out of the various options, pick the entity with the highest cost to cover your bases)
• Health insurance that you might lose if you quit your job

Break time!

Putting It All Together

Now it’s time to put what you’ve learned to work. Exclude your one-time expenses (deposits on rent and any start up expenses, anything that can’t be paid over time), and start by asking these questions, answering them based on your numbers:

1. How much money do I have to make to maintain my standard of living – the highest level of expenditures?
2. If I trim as much as I’m willing to, how little can I make to get started and still pay my bills?

These two answers give you your range – the income you’ll need to pull in over the course of your first year in business. You’ll need to keep these two answers in mind as we finish this exercise, so jot them down at the top of a new page like so:

$2,250/month – $4,780/month

Underneath that, draw a line down the center of the page. The left side will represent the “bare bones” financial picture; the right side will represent your “best case” scenario. Work through the following steps for each figure:

1. Write down the assumptions this scenario is based on (expenses trimmed or eliminated, office space rented or working out of home, etc.).
2. Compute the average hourly rate you’ll need to charge, bill, and collect (based on 20 billable hours per week, to be conservative) in order to meet this goal.
3. Add 30% to that figure (it’s a rough way to take into account an AR nonpayment rate of 30% – remember, we’re trying to be conservative).
4. Recalculate the hourly rate based on the new figures.

Now that you have a pretty good idea of what it will take to make ends meet as a solo lawyer, go back to your start-up expenses list. Can you afford those expenses? Based on your current disposable income, how long would it take you to save up enough cash to swing those expenses? While I encourage you to think of creative funding mechanisms, I don’t advocate financing a startup on credit cards. It merely creates additional stress you just don’t need as a new solo.)

One last task: consider a part-time startup. Can you see your way clear to opening your practice on a part-time basis at first? That is to say, keep your “day job” but engage in private practice “on the side”? Bear in mind some practice areas don’t lend themselves well to a part-time practice, but if you can do any portion of your practice areas’ key tasks during non-business hours (i.e., weekends and evenings), this might be a good option for you to consider. It allows you to get your feet wet, without risking the benefits and salary your current job bring you.

Another option: consider reducing your hours at your current job in order to free up time for a part-time (or full-time) practice. Think carefully about this before you propose this, however. Make sure you’ve thought through all ramifications, including potential conflicts of interest, workflow and accessibility issues your current employer might have, and how you’d handle timing conflicts that might pop up. If you can solve the accompanying problems, though, it’s rather an ideal solution to the problem of not having enough funding on hand.

Wrapping Up

Time to put away the calculator, and get honest with yourself! The question isn’t “can you afford to go solo?” but “how long will it take?” and “are you prepared to make the necessary sacrifices?” And, truthfully, the real question always remains the same – considering all that you know now, do you still want to go solo, knowing what it would mean to you financially?

Consider this: you know it is possible to make a living doing what you do. You already make that living. You also know it’s possible to make a living as a solo lawyer – thousands of lawyers do it every day. That’s never been the issue – be honest! The issue has always been – and always will be:

Are you prepared to do what it takes to make it work?