Your Law Firm Is Profitable. So Why Aren’t You Building Wealth?

Hey, everybody, welcome back to another episode of the dominate law podcast, where we empower attorneys as entrepreneurs. I'm your host, Angie. And today, we are tackling one of the most quietly frustrating experiences in legal practice. Your law firm is making money. So why aren't you building wealth? Before we dive in a big shout out to our sponsor, Equa Marketing. Here is what runs underneath today's whole conversation.

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Book it at www.dominatelaw.com slash MSM. Now into today's deep dive. Across five key pillars, we cover the real difference between revenue and wealth, why tax strategy goes far beyond compliance, how financial anxiety quietly shapes decisions, how to build your firm as a long term saleable asset, and the professional team every firm owner needs around them. Joining us today three of the most experienced voices in this conversation, Ali Katz, CEO and founder of the new law business model and personal family lawyer, lawyer, author, speaker, and entrepreneur who has built and rebuilt multimillion dollar businesses and now teaches attorneys how to do the same.

Courtney Redmond, firm operational partner at Legacy Contracts. Courtney helps law firm leaders identify operational bottlenecks, improve accountability and build systems that let firms operate more effectively. And Jasmine Daya, founder of Jasmine Daya and Company, lawyer, entrepreneur, author, investor, and host of the Law Girl podcast. Let's get into it. So the first question for you, Ali, is when a firm produces strong revenue, but the owner's personal wealth barely grows, what's going on underneath the numbers?

Yes, I think the best way for me to answer this is to take it back to when I built my law practice from scratch into a million dollar a year business in three years. No, I didn't know anything about business. I had figured out how to make money, but I didn't know how to take care of that money. And in the first year that I made a million dollars in revenue, it was 2006. So it's hard to believe it's 20 years ago now. And I was reviewing my tax return from that year, because I remember feeling like I'm bringing in all of this money, but I didn't feel as if I was keeping any of it.

And I couldn't figure out where it was all going, because I really didn't have any way to look at my numbers. And I think that's one of the biggest challenges for lawyers generally, as many of us don't have the kind of business experience that's necessary to be able to look at our numbers. And then later, I went, I ended up building two million dollar businesses, a second million dollar business training lawyers, and I still felt broke.

And I noticed that no matter how much I earn, I'm still feeling like I'm not building wealth, my own personal wealth doesn't feel like it's growing. Ultimately, I identified something that I call money dysmorphia. And money dysmorphia is this distorted view that we have of our financial reality, that causes us to sacrifice our time, our energy and attention and service to money, which is infinitely renewable. When we're lawyers, if we have the right business model, money can be infinitely renewable.

But because we don't know how to look at it, we don't know how to think about it, we sacrifice these non-renewable resources, which is exactly what I was doing. Because I didn't know how to look at my numbers. I didn't know what to be looking at. I didn't understand the business side of the business. So I just had to think, just let me just make more money, I'll make more money, I'll make more money, but it just kept going out the door and none of it was actually sticking in my family reality.

And ultimately, the, you know, fix was to get really into right relationship with my business model, with my goals, to really be able to look at the numbers and track where do I want to be three years from now, not just from a revenue standpoint, but how much I'm taking out of the business. And how much am I growing in my leadership? And ultimately, how much am I freeing up my time, energy and attention in service to being able to live the life that I really want?

Ali, I think that distinction is very important. So, Courtney, that leads into another challenge many owners face, even when the firm is successful, how do they make better decisions around hiring, spending and investing back into the business? So when financial visibility is weak, what breakdown most often pushes managing partners towards reactive hiring or spending decisions that their teams later have to absorb? Yeah, that's a really good question.

I think the way that I look at it and how my business approaches things is through that connection between those financial numbers and the operational problems that may be recurring or maybe, you know, coming to the surface with the increase in revenue. So it's taking those times to look at all of the things that are underneath the surface that are the foundation to your firm. It could be inefficient workflows, it could be, you know, different decisions that are staying with people that should belong to other people, it could be unclear responsibilities, it could be duplicated work.

It's trying to find where those gaps are. And it's also acknowledging where certain things may be leaking. So making those connections between that breakdown of the finances, connecting it to the operational problems and seeing where you're spending more money than you would like to, and trying to figure out where are you, where do you want to go and what operational foundations can get you there. And a lot of those have to deal with, it may be a lot of administrative tasks, but it also may be with like, you know, delayed billing, which also goes into the financial aspect, it could be issues with payroll, revenue gaps, revenue caps, you know, different areas that leak into operations and financial breakdowns with how you're trying to direct your firm.

Where do you think this lack of financial visibility usually begins inside a growing law firm?

I would say it kind of is a balance between understanding what your revenue is, how much you want to spend, where, if you have any vendors, you know, what that looks like realistically, and making those achievable goals, but also understanding what is the operational cost and the direction behind that as well. So I think it's it kind of like teeters in between the two, and creating a consistent, sustainable goal that you can hit, whether it's monthly, quarterly, or yearly, and making sure that those two align together.

All right, thank you, Courtney. Jasmine, let's come back. That brings us to taxes, because many owners only look at their numbers when tax season arrives. So at taxing time, where do profitable firms most often discover that last year's compliance returned little guidance for this year's financial decisions? So I should start off by saying that I am from Canada, we have a very high tax rate. And so you are constantly trying to figure out how to minimize tax.

So there's, according to tax law, there's tax evasion, which is illegal, and tax avoidance, which is perfectly legal. And so I believe for any business owner, and yes, that includes law firm owners, you have to constantly be trying to minimize your tax burden, because you do not want to leave money on the table. There is not enough money to leave on the table after you cover your fixed expenses, your overhead, the cost of running a firm is usually not cheap.

So you have to be smart about that. And in order to answer your question, yours is more, you know, you've done what you need to do, now what about the future? And I think a lot of people fall into that category. It's not a fault. It's just that you're so busy running on that treadmill, to nowhere, just working, grinding. And then you realize that, okay, I'm not stopping. What do I do? Like, okay, I saved money, Jasmine told us tax, tax avoidance.

So you saved money, but now what? And I think that the key is to recognize, and this came with experience for me that what fits for one person might not fit for you. What the advisor is telling you might not be for you, what your friends are doing might not be for you, because everyone has different goals, different desires. Some people are okay with less money, and less working hours. They're fine. They're totally happy.

Whereas some, they're going to keep working until the end, because they want this fabulous life, and they feel like that's what they need to do. And that's why I do. But the planning, depending on what your desires are, what your goals are, what makes you happy, that's how you have to structure things. And so for me, going back to the advisor example, when I was a younger, new lawyer, they were always telling us to put money into our registered retirement savings plan, kind of like in the US, your, I think Roth IRA thing.

And so I was saying, Okay, well, that's great. I have sheltered my tax, so I pay less tax. But then when you withdraw it, usually it's when you retire, then you are going to get taxed at that time. And most people when they retire are in a lower tax bracket. So it's beneficial. So you've shielded that income from paying the higher tax. Now when you're making money, and you pay it later when you're making less money, but I'm like, but I'm in Canada, the taxes just keep increasing number one, and number two, putting that aside.

I don't want to retire. I mean, if I am forced to for health reasons, that's fine. Yes, I would like to retire from stress. That's my goal, and work for fun, which we can talk about. But I love working. And so I would like to always have an income. So what am I? Why am I struggling to save this money for and shelter it when I could really use it now to do something else. And that's an example of how that advisor is giving advice of one, one, one size fits all.

And I am not one size fits all. I'm very different and unique. So I don't know. I can tell that you're different and unique. I am as well. So it takes takes one takes one to know one. And I think that your point is, is really important. You know, when when I started as a baby lawyer, I was at a big law firm, and got a paycheck. And they came in, and they handed me this piece of paper. And they said, Congratulations, you have a 401k.

And now you need to choose your investments for this 401k. And I literally looked at the paper, and I did not know what all the words on the paper meant. And I was too embarrassed to ask anybody. And I felt a lot of shame because I graduated from Georgetown Law, I'm at this big law firm, Charlie Munger's law firm, and I'm working on tax transactions. And I don't know what this paper says. And I had all these letters on it, which I now know were ticker symbols for exchange traded funds that I can invest in.

So I literally closed my eyes and put my finger down on the paper to select my investments. Because I was too embarrassed or ashamed to say, I don't know what this means. And back then, of course, we didn't have AI, we couldn't look it up. I don't even like much on the internet, too. We didn't have the phone, right? And I'm not that old. I don't think but like, what law firms had like one homepage, and it was usually really tacky.

Like, that's it. Yeah. And so I think that, you know, the starting place is to be able to say, I don't, I need to learn legal insurance, financial and tax, I call this lift, right, we get these lift foundations in our business and in our lives. And, and we need to make a commitment to ourselves and to our families to learn about legal insurance, financial and tax matters, so that we can build the kind of wealth that we want.

Because making money as a lawyer, ideally making money is not the issue. Right? If you have the right business model, you're you're charging for your services in the right way, ideally not hourly, flat fee agreed to in advance, you've got packages, like that part. For every lawyer, money should be infinite, as long as you're using your time, energy and attention wisely. The revenue, yes. But the net could be a loss. Exactly.

The taking care of it, the knowing how to take care of it. And so I think that so many lawyers are just thinking about, well, I just got to make more, more, more. And you might need to actually change your business model. And then okay, look at why am I earning this money? What do I want to be investing in? And Jasmine, I heard you say before we started that for you, that was real estate. Like I want to be investing in real estate.

And okay, great. So that's the you know, kind of you've got your your business. And then what do you want to be investing your resources in outside of your business? And also, think about your business as your number one highest value asset that ideally, you're going to be able to sell one day. So I sold my law firm. But I did not know anything about selling a law firm. And I ended up selling it to the wrong person. And an asset that should have netted me $500,000 minimum, ended up creating a $250 ,000 debt.

Because I didn't know how to sell my business the right way. I didn't know how to ask for support. I had to learn it the hard way. So I would say ask for the support that you need. Don't be ashamed when you don't know things. Be willing to ask the right questions. And get really clear that you are building an asset, a business that one day you can sell, and hopefully sell for a lot more than a big pocketful of debt. Yeah, what you were saying about, you know, don't be don't be shy.

It's, it's, it's difficult. Did our moderator just leave us? I think she I think she froze and went out. Okay. So I, I remember that, again, going back to the early days, and the advisors, and I, I was like, you have to do your questionnaire first with the advisor, you know, to figure out your risk profile. And I would answer, you know, I, I said to them, I went to business school before law school. So I have degrees in economics and finance, I'm like, treat me like the elderly lady who can't afford to lose money, because that's what they teach you in finance, okay, because someone young and vibrant should be risk takers and try to grow their money and because they can absorb the losses if there are, whereas the older person, they can't afford to do that, because what they have is what they have, it's finite, and they need it to the end.

And so I'm like, treat me like that person. They're like, No, but you're young. I'm like, No, but I don't want to put my money in stocks. I don't have the stomach for it. It's like gambling. And then I have to have the lecture of how stocks are not gambling. And I said to him, I go, is it last time I checked, I earned this money. You didn't earn it. It's my money. Don't be upset and offended that I'm not following your advice with my money.

I want to put it in a GIC, which is a guaranteed, guaranteed investment certificate, which is in Canada, it's like, it's like a tiny, tiny, tiny interest rate. It's like putting money in a big account with a tiny little interest rate. And it's safe. And that's it. And I forget about it. And he's like, well, it's not going to grow. And I'm like, well, that's for me to worry about. And so I think that it took a few conversations with people like that, where I had the courage to come out and say that.

But the truth is, it's your money. Do what you want to do with it. Figure out what works for you. And don't feel like you're pressured by that advisor that graduated yesterday. Or that graduated 50 years ago and thinks he knows everything. Thank you, Jasmine. That naturally leads into another major decision owners face, what they should take out of the business versus what they should continue in investing back. So how should a firm owner decide what to take out versus what to leave in and should be making that call?

So you should be making that call. Just as Jasmine was saying, it's your money. But you do have to have a framework and a methodology for making that call. And the way that I have liked to do it throughout my entire business life, and just to give you a sense of kind of where I've been, so you know, you know, what is my experience with this? As I said, I built my about $2 million businesses. And after that, I filed for bankruptcy.

I walked away from everything I was doing. And I was like, I'm not going to do this. I'm not going to do this. The only thing I'd created and filed for bankruptcy that was in 2012. So however, 14 years ago now. And I did that because I didn't know the things that we're talking about today. And, and I wasn't even sure that I still wanted to be a lawyer. I was like, you know, I'm not good at business. I don't even I know how to make money, but I don't like how I'm doing it.

I'm just going to walk away. We all go through that, that moment. Right? Yeah, exactly. I'm going to move to a farm. That was my escape fantasy. Sunshine and palm trees. Right. Well, and I was in Southern California. I think you were also outside built my practice in Redondo Beach. And I was like, I'm going to move to Boulder, Colorado, I'm going to get a farm, live the simple life. And I spent a year there, only doing what I would do for free.

And in that time that I was only doing what I would do for free, it turned out that what I would do for free is be a lawyer, I would help people solve their problems. their problems, and I would help people navigate conflict. And what I realized during that time is what I didn't like about being a lawyer before that is that I didn't feel as if I was really helping my clients. Even though I was doing estate planning back then, I'm still doing estate planning now.

Today, I have a network of over 900 law firm leaders. We call them personal family lawyer firm leaders that we have trained in a business model that they love and their clients love. And this came from this year that I spent in this question of what would I do if I was only working for free? And I would serve clients in a truly meaningful way. And so when I came back out of the bankruptcy process, I had to rebuild everything from scratch.

And along the way, what I discovered is that the starting point for me was to take out the least I possibly could. What is the minimum that I need to pay just my personal expenses, my non-deductible personal expenses, and run everything else through my business, make as much as I could tax deductible through my business? So for example, I never again have hired a nanny. I only hire executive assistants. Executive assistants are tax deductible.

Your nanny, not tax deductible. So I only have an executive assistant, not a nanny, as an example. And there's so many ways that as a business owner- Holly, you're doing it wrong. You're supposed to have the nanny come to the office and scan a few papers. Exactly, that's exactly right. You got to have a contract as an executive assistant though, you know, in order for that. So it's like, you've got to get creative as a business owner so that you're taking out as little as possible personally, right, this is good tax planning, you're taking out as little as possible personally, paying as much as you can through your business, categorizing it as business expenses, writing off as much of your life as you possibly can, and get smart about how you structure your business and your life.

But I will tell you, your CPA is not gonna tell you to do that. You have to learn, okay, how can I get smart, structure things in the right way so that I can take out as little as possible. And then of course, you know, as Jasmine was saying, her advisor said, you can max out all of your retirement accounts. And you can do that for sure. But again, that's a choice. And then once you start making profit beyond what you can deduct, and more than you need for retirement funding and your personal expenses, then you start investing in other assets that are high value assets that can grow in value and ideally can never be taken from you.

I'm gonna say something that might seem surprising to hear, because people think, oh, like the stock market, oh, like, you know, these traditional investments, but I'm gonna say that if you start with investing and up leveling the value of your services, number one, then you invest in your kids, you invest in your community, you invest in land, you invest in other types of businesses that can generate revenue for you, that's going to be sometimes your best investments that you can have, because again, you can create this tax efficiency and you can create these structures for yourself that ultimately are going to be assets that can never be taken.

I learned that through my bankruptcy, you wanna be invested in assets that can be never taken from you. And you have to recognize yourself as the steward of your family wealth. And that in fact, you're running a whole family office. And oftentimes we think about family office just being for billionaires like, you know, Warren Buffett, I was working on his tax transactions when I was a baby lawyer. But really we all have the same functions in our reality that Warren Buffett or any billionaire has as a family office.

And yet most of us are running our own family office just very poorly because we're outsourcing to the financial advisor, to the tax guy. None of them are talking to each other. They're all using, you know, the traditional strategies. And you've got to recognize yourself as the steward of your family office and start to make your decisions through that lens. Thank you, Ali. Courtney, this also connects to the emotional side of decision-making because uncertainty can often influence the choices owners make.

So when financial anxiety rises despite healthy revenue, decision framework helps a managing partner distinguish a real business constraint from uncertainty about the numbers.

Yeah, that's a really good question and point. I think it's worth looking at what the foundations are, what your goals are and how you kind of want to navigate the financial anxiety about the framework of your firm, you know, where you want to go, where you are and the steps that it takes to get there. I know a lot of attorneys try to look long-term but because there's so many different aspects and things going on in their firm, it makes it hard to have even time to sit down to look at the financial decisions, look at your goals, assess where you are and where you want to be.

And so it's just look or trying to, you know, figure out or even get to the foundation of why you're doing what you're doing, where you want to be at within the next year, two years, three years, five years and how you can take those steps, build that framework and work through the operational decision-making strategic plans and goals and ideas to get to where you want to be at.

That's a great way to put that out, Courtney. How can owners tell whether they have an actual financial problem or simply a visibility problem?

That's a good question. I think it kind of comes down to looking at it from two different frameworks, whether, or I guess we can assess like the data first. If you look at everything that you have coming in, whether that's your revenue, your payroll, billing, invoicing, any type of workflows that you have that feeds into that kind of getting all that unbiased data kind of out there to begin with and then assessing what your initial goals are and then kind of comparing and contrasting the two.

If you have like a month's worth of revenue, you're looking at how consistent your invoices are going out, how consistent your clients are paying, if they have any issues or if they're just paying your bills and being able to kind of work through what that does with attorney burnout, with, you know, employee questions and then being able to look at all of that data and assess, is that helping to get you to where you wanna go at?

Are you capped with where you are in your structures and does it need to be reassessed and refigured? Or is it just, does it need to be refined? And looking at those, all that data kind of compiling everything and then being able to assess from that point, is this an emotional standpoint of where we are and am I just worried about the future? Or is this something that we need to kind of tweak and move forward because it's an operational problem, it's a workflow hiccup, or it's just, you know, some things that are going on within the firm that we are capped at and we need to kind of make space for more revenue, more growth to get us to where we wanna be at.

All right. Hearing you say that Courtney, one of the things that I, you know, have noticed with working with so many law firm leaders over the years and you may notice this as well is that we're always in this dance of needing more clients and then needing more capacity to serve the clients. And so you're right going to be going back and forth between that. And when you're needing more clients, what you need to be focusing on is sales and marketing.

How do I generate leads? How do I engage those leads? And ideally, we have some benchmarks in our context where you want to get hired by at least 80% of the people that you sit down with for an initial meeting. In our reality, we do estate planning. And ideally, in our reality, an average fee of 4,500 to $8,500, right? So if we look at like, okay, I know that every time I sit down with a client, I'm going to collect $5,000.

Now, and I know that that's gonna happen at least 80% of the time. Many of our lawyers, 100% of the time because they use a structured system for that. So now I can say, okay, my first level goal, $20,000 a month, four clients a month, and that's gonna be my max capacity to serve if I'm just me. Okay, so now what do I need to be able to do? Who do I need to hire in order to be able to double that so that I can serve eight clients a month?

Okay, I'm gonna need to hire the first hire that we recommend in our context as a client services director. Now, that's generally something that's really scary for lawyers is to hire their first person because, oh, now I'm responsible for somebody else. Okay, well, if I set my goal very clearly and I say, okay, well, that somebody else is going to generate an additional 20 ,000 a month of revenue by increasing my capacity, but they're only going to cost me six or seven or $8,000 a month to get a really good person, that delta of $12,000, $13,000 a month is now money that I can take some of it out, I could put some of it.