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Two firms up partner contributions

Despite recession others holding off capital increases

Heather Cole//February 20, 2009//

Two firms up partner contributions

Despite recession others holding off capital increases

Heather Cole//February 20, 2009//

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Stinson Morrison Hecker talked for three years about increasing the amount equity partners must pay up front to buy into the firm.

The firm took action this year, increasing the upfront amount for capital contributions for its two levels of equity partners to $14,000 and $35,000, up from $10,000 and $25,000, respectively. It was the first time since a 2002 merger of two Kansas City firms created Stinson Morrison that the amount was boosted, said managing partner Mark Foster.

The economy made the decision “more of a pointed effort,” Foster said. “Certainly the economy was in the back of everybody’s mind, but it was not a primary moving force.”

In Missouri, Stinson Morrison and Shook, Hardy & Bacon increased the capital contribution amounts required from partners as they had in previous years, but four other large Missouri firms – Armstrong Teasdale, Husch Blackwell Sanders, Polsinelli Shughart and Spencer, Fane, Britt & Browne – said their requirements were unchanged.

“We’ve always been very conservative from the perspective of how we run and the cash flow of the firm, so we have not changed our capital requirements of partners for some time,” said Armstrong Teasdale managing partner Michael Chivell. St. Louis-based Armstrong had estimated net revenue of $113 million in 2008.

The capital contribution amount for new equity partners is around $40,000, Chivell said.  

Nationally, some large firms are asking for more capital from partners as it becomes more difficult and less desirable to depend on bank loans for operating costs.

Across the industry more firms have been requesting more paid-in capital from their partners over the course of the decade, said Cindy Tambourine, managing director and senior client adviser for Citi Private Bank, which has a division that caters to lawyers and law firms.

The average paid in capital has grown from $137,000 in 2000 to $252,000 per partner, according to statistics from a 139-firm database maintained by Citi. The increases have put the industry on a little stronger footing than it was in past downturns, Tambourine said.

More capital means less reliance on debt, but firms also have increased capital requirements in response to profits per partner increases over the last ten years, she said.

“Firms learned in the previous downturn that when income is shrinking, it’s very difficult to get additional contributions in capital,” Tambourine said.

Capital contributions can range for large firms from 10 percent to 33 percent of compensation. An attorney who is required to pay 20 percent and expected to make $200,000, for example, would pay a capital contribution of $40,000. Firms also may help new partners with loans for the contributions. Armstrong Teasdale, for example, will guaranty new partners’ loans for a set period of time, Chivell said.

Stinson increased the overall amount partners are asked to pay for a capital contribution. There was no such increase in 2008, but there were increases in 2007 and 2006, Foster said, because the firm tries to increase its capital as revenue goes up.

This year marked the sixth in a row that Shook, Hardy increased its capital contribution requirements, said Chairman John Murphy. It’s “almost a given” that capital is going to increase when a firm’s revenue increases, Murphy said. Shook, Hardy’s revenue in 2008 was up by 4 percent to 5 percent over 2007’s $316 million.

Murphy declined to give figures for expected capital contributions at the firm, but said the contributions traditionally have been lower than other large firms nationally, because Shook Hardy doesn’t carry as much debt.   

“We expect our equity partners to have an ownership interest in the firm because that’s what they are – they are owners,” Murphy said. “That’s not to say it’s divorced from the economy. We had increases in capital before the (poor) economy. Having them in the face of the economy is probably a good business model.”

Conservative business models that include low debt were cited by several leaders at firms that avoided increasing capital contributions this year.

Kansas City firm Seigfreid Bingham Levy Selzer & Gee adjusts its capital annually, but found no need this year to increase what’s being asked of new partners, said Joe Hiersteiner, managing director. All the partners at the 40-attorney corporate firm are equity partners, Hiersteiner said.

“We don’t borrow very much money, if any, and we try to keep overhead as low as it can be,” Hiersteiner said.

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