Financial Questions You Need To Answer Before Leaving Your Law Practice
You have spent your entire career building a great law practice. It’s now time for you to start thinking about the next stage in your career. What do things look like after the practice of law? Before you take the leap and decide whether it is really the right time to transition away from your practice you need to make sure it’s the right decision for you, personally and financially.
Here are 7 things you should consider before deciding to take steps to sell or transition out of your law practice:
- How much is your practice really worth? – The real answer is how much will you be left with after you sell it considering taxes, debt payoffs and any other terms of the deal. Consider the costs of the transaction and look to make sure you know how the net amount will hit your personal bank account. Bringing in a practice broker to provide a value is the first step, but making sure other advisors, particularly your CPA look at your situation and give you an estimate of final results.
- What are your personal expenses? – Do you really know how much you spend each year? Do you have a personal budget? Charge everything on credit cards for the next 3 months and see how all the expenses stack up and where the money is going. Can you sustain these cash outflows after your transition?
- How much is the practice providing? – This is a big question. One of the most forgotten business ownership benefits is having control over what expenses that business or your practice may pay that would be personal expenses if not for your practice. Health insurance, vehicles, travel, etc. are all things that sometimes are paid for by the practice, but post-transition would be your sole responsibility. Add them up and consider how they fit into your personal budget.
- How much have you saved outside of your practice? – If you are solely dependent on your practice cash flows or the value from selling your practice you may have a rude awakening upon exit. Make sure you are working with quality advisors on saving and diversifying outside of your law practice investment. Know your personal number and where those funds are going to come from to live the way you desire.
- How much risk am I willing to take? – Most law practices are not sold for 100% cash at closing. Instead, they’re sold for a percentage of cash and the rest as a seller earn out or seller financing note. There is risk involved in these deals. Make sure you have a choice of buyers and terms so you can minimize the risk by making sure you have chosen the right buyer as a transition partner.
- Do you have a true financial plan? – A napkin with your projected expenses scribbled on it doesn’t count. You need to go through a comprehensive financial planning exercise. The total you may get from the sale of your practice will be added to your outside investments and then all those personal expenses will be considered (as well as some you didn’t consider) to make sure you feel comfortable in the next stage in your life.
The Law Practice Exchange aims to curb the lack of knowledge in the profession on law practice transitions by educating and advising attorneys on the number of different options available in the legal marketplace and also serving as a confidential broker and advisor to seek and provide connections for those right opportunities between an exiting attorney and a growth-focused attorney or firm. Find out more at www.TheLawPracticeExchange.com. © 2015 The Law Practice Exchange, LLC. Reproduction in whole or in part is strictly prohibited.
The information and advice provided in this publication is general guidance and is not necessarily specific to your individual situation, objectives or other needs. Make sure you seek a qualified expert opinion before proceeding with your transition objectives.