Evaluating attorney services can be a slippery task. Factors to consider are speed and efficiency, quality of the work, whether needs and goals have been met and whether the attorney has created value through cost savings, reduced risk or other intangibles.

One area of asset management and planning which exemplifies need evaluation, goal setting and the transaction attorney's ability to effect risk and cost is the area of estate planning. By changing estate plans and structures, the attorney can directly change tax costs and probate administration costs.

Planning family-owned business or professional practice succession is another area where the risk of doing nothing is great when compared to the cost of a little planning. Squabbling partners or heirs and nervous creditors can destroy a company or professional practice that does not have some clear structure for succession and the passing of ownership. Done right, succession planning, including the use of a buy-sell agreement, can work to ensure that the company survives because ownership interests are well-defined and someone is clearly in charge.

While it is evident that the attorney has created value for the client in the estate planning scenario because goals are met and cost savings can be shown, how does one evaluate the value of succession planning.

To illustrate how an attorney creates value in this context, we can compare:

(1) the expected growth rate and risk of no succession planning; to

(2) the expected growth rate and lowered risk of succession planning.

If no planning is done, let's assume that over the five years following the Owner's death, the company has a 20% probability of a $12,000,000 return, a 50% probability of a $10,000,000 return and a 30% probability of a $2,000,000 return. (This last return and probability results from succession difficulties).

First, multiply each probability times the expected return and then add the totals.

[(.2 x 12,000,000) + (.5 x 10,000,000) + (.3 x 2,000,000)] OR (2,400,000 + 5,000,000 + 600,000) = 8,000,000.

Next, subtract the total return (8,000,000) from each of the expected returns:

12,000,000 - 8,000,000 = 4,000,000

10,000,000 - 8,000,000 = 2,000,000

2,000,000 - 8,000,000 = -6,000,000

This number is the "Differential."

In the next step, square the Differentials:

(4 x 4 =16) x .2 = 3.2

(2 x 2 = 4) x .5 = 2

(-6 x -6 = 36) x .3 = 10.8

and multiply them by the probability of each outcome.

Add these totals (3.2 + 2 + 10.8 = 16 ) and take the square root. This is your Standard Deviation or Risk.

The Square Root of 16 = 4.

4 is the Standard Deviation or Risk.

The next step is to do the same calculation showing the result of succession planning.

Here, let's assume that over the five years following the Owner's death, the company has a 20% probability of a $12,000,000 return, a 50% probability of a $10,000,000 return and a 30% probability of a $8,000,000 return.

[(.2 x 12,000,000) + (.5 x 10,000,000) + (.3 x 8,000,000)] OR (2,400,000 + 5,000,000 + 2,400,000) = 9,800,000.

Next, subtract the total return (9,800,000) from each of the expected returns:

12,000,000 - 9,800,000 = 2,200,000

10,000,000 - 9,800,000 = 200,000

8,000,000 - 9,800,000 = -1,800,000

This number is the "Differential."

In the next step, square the Differentials:

(2.2 x 2.2 = 4.84) x .2 = .968

(.2 x .2 = .04) x .5 = .02

(-1.8 x -1.8 = 3.24) x .3 = .972

and multiply them by the probability of each outcome.

Add these totals (.968 + .02 + .972 = 1.96 ) and take the square root. This is your Standard Deviation or Risk.

The Square Root of 1.96 = 1.4.

1.4 is the Standard Deviation or Risk.

In this second scenario, the risk is drastically reduced and is less than half the risk of the first scenario.

In addition, the expected values of the scenarios change. The expected value from the first scenario is $8,000,000 (The Total of probabilities x expected returns), while the expected value from the second scenario is $9,800,000. By effecting the particular down side risk and increasing the probability of success to one (1), the attorney has changed the expected value of the outcome by $1,800,000 or roughly 18% of the targeted $10,000,000 return.

This same analysis applies to the evaluation of different and distinct transaction choices and the effect the attorney can have on each outcome. Compare, for instance, the risks associated with an acquisition versus investing in the development of a new product line.

By calculating the value added to the transactions from reduced risk and cost savings, the original investment choice could change.

Conclusion

An Attorney can be and should be an integral part of personal asset management and planning and part of an organization's cost management, growth, stability and prosperity.

The transaction attorney can help the client evaluate and prioritize goals and structure transactions which will create value by bringing various parties together, by achieving specified goals or by reducing costs and risks. Using the above analysis, the attorney and client can also evaluate the value of the attorney's services. Working together in this way, the attorney and client can be a more effective team and increase the client's probability of success.

In many instances, however, the attorney is called in only after the flood and asked to clean up the mess. While attorneys relish a good challenge, this in not always the most effective utilization of counsel. Don't wait for the Flood . . .