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The Lost Measure: Cost of Capital - Stress Test Your Firm

When I started working with law firms in 1999, I used to have heated (and futile) debates about the importance of the time value of money in assessing firm (or practice, billing lawyer, etc.) performance. My argument was simple. Take the law firm business model to any venture capitalist and pitch them: "I have a great business for you. An illiquid minority position in a talent-based, service business with few tangible assets, subject to capital calls. What do you think?" The scenario provoked a lot of chuckles. When I then suggested that the minimum necessary return for that scenario was probably north of 50%, outrage ensued. Cash, after all, was cheap (multiple people suggested Libor as a cost of capital) and easy to get. Collections were predictable. I think it's time to revisit the argument. Please click the post title to continue reading at MorePartnerIncome.net.

Full post as published by More Partner Income on April 24, 2009 (boomark / email).