Where to start? If you are considering buying an existing law practice or buying out a retiring partner in your own practice, here are some key items to consider:
1. Make sure the practice is the right fit for you – Not just the practice areas, geographic location and financial needs, but review and consider:
-Are the clients going to be comfortable with you and are you comfortable with the clients?
-Are the revenues sustainable for how you would run the practice?
-Are you going to be happy coming into the office each day?
-What changes are required of the practice model, facility, and staff? Are you up for making those changes?
2. Do the financials work? – Have you had the practice valued by a qualified individual to make sure the cash flows and practice characteristics justify the purchase price?
3. Are you being objective? – Keep focused on getting the deal that you want on the right practice for you. Maintain your professionalism and be ready if one or more of the potential purchases do not work out at first. Competing purchasers or due diligence items may work to terminate a deal and keeping emotion out of it will help you regroup and move onto the next practice that’s right for you.
4. Get help! – You are an expert in your field. Now it is time to swallow your pride and get experts in the practice acquisition field. A law practice broker, a law focused CPA and yes, even an attorney, are all needed to advise you and make sure things proceed as needed.
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.
The Law Practice Exchange, LLC is pleased to announce that we have been approaved as a BBP Industry Expert for the industry of Law Practices/Legal! We will be included in the 2016 Business Reference Guide. This book is the “essential guide to pricing businesses with up-to-date rules of thumb and pricing information for almost 700 types of businesses.” We will also be added to the Industry Expert directory website.
Time to Plan!
Estate Planning for the Small Firm Partner or Solo Practitioner
The fundamental principal of estate planning is to anticipate and prepare for the major life events, particularly, what will happen to one’s property upon disability or death. The same train of thought can and should be applied to your law practice. Preparing and implementing a concrete backup plan should be a major priority for any practice owner.
The reality of the situation is that so very often professionals spend most or all of their waking hours working on or in their practice. The seemingly endless needs of one’s clients tend to get in the way of this sort of planning. But it is too important to ignore. What were to happen, say, if the sole owner of a practice passed away without a succession plan in place? Trouble, definitely. Chaos, most likely. Missed opportunities, certainly.Every practice owner should take the time to adopt a plan for his or her practice that will properly provide for ongoing client management and representation upon his or her passing. Call it an emergency plan, a disaster plan, or otherwise, it should be well thought out and hands-on in the event of the practitioner’s passing. Here are some key elements to consider as part of that planning:
Prepare. Prepare a law practice knowledge base with key disaster info and checklist for what steps should be taken in such an event.
Ethics. Consider your ethical requirements for each event and how they may impact your plan.
Personal Needs. What are your personal needs regarding exit value for you, your family or otherwise?
Plan for Each Event. Review and implement a transition plan for:
Retirement
Are you going to sell your practice, close it down or transition it to a new associate?
Is time on your side to accomplish this planning?
Will the law practice purchase price meet your retirement planning needs?
Disability or Death
Do you have an Assumption Agreement with an outside trusted peer attorney or a Buy-Sell/Partnership Agreement with other partners of the firm?
How has the purchase price in these events been calculated and is it properly funded to ensure payment?
How can you prepare clients to ease transition in such an event?
Relocation or Other Transition
How would an accelerated timeline impact your plan?
Would your potential transitioning attorney be able to manage the increased client demand?
Ask For Assistance. Seek out those who focus on practice transitions or these types of events and ask for advice in putting together your plan. There is an abundance of resources out there with your insurance providers, state bar associations. In addition, key individuals such as CPAs, financial advisors and law practice consultants and brokers can help you make quick work of your practice’s estate plan.
Just like the saying in estate planning goes; it is not a matter of ‘if’, but ‘when’ this same mindset should be used to motivate your planning. Whether you control the decision or not when retirement, disability or your passing occurs make sure you have a plan that takes care of your practice, your clients and preserves the value built for your loved ones.
One works tirelessly to build a successful practice and a plan should be in place regarding what would happen if the founder were to become disabled or pass away. One’s law practice succession plan and estate plan should work hand in hand to ensure that there is a smooth transition from leadership to leadership and your responsibilities and goals are met.
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.
Have you ever thought about your exit plan from your practice? Retirement, family demands, a new career, or some other career pursuit may be calling. But the typical question that holds many lawyers back from entering the next phase is, “how can I afford to live without the income and resources from my practice?” For many, there are retirement savings, alternative opportunities from a second career or other options available to replace practice income. However, few attorneys actually consider the option of selling their practice as the precursor to that next step or even know that doing so is an option. Selling a practice through a law practice transition can be a great way to benefit from the value built up over years of work. In addition, there are probably even fewer growth-focused attorneys who consider the potential of purchasing a practice as a way to grow client base, income and revenue streams, and overall firm health and sustainability.
The Reality Is That Every Lawyer At Some Point In Time Needs A Plan.
Thanks to life’s multitude of unexpected events, that time may be sooner than you think. And when you throw in the current state of evolution of the legal profession, it becomes more and more apparent just how important it is for each practicing professional to understand the challenges and opportunities that accompany this type of transition. For instance, do you have a succession plan? A practice continuation plan? If so, have you implemented such plan, put the tools in place or sought the counsel needed for implementation? If not, you’re not alone. Few lawyers, particularly, solos and small firm members, have a signed succession or practice continuation plan in place and many don’t think about it until too late to fully recoup the practice value.
With this state of flux in the legal world and the potential impact of major life events, the rules of law practice succession are still being rewritten. Gone are the days of whipping together a succession strategy, transitioning the clients to the next generation of lawyers, and sailing off into a retirement funded by the new partners at the firm. From big-firm shakeups to increasing client competition among small firms, lawyers today must contend with unprecedented financial, cultural, and marketplace changes and, as a result, each attorney must be open to transition strategies with a longer reach than those employed in the past. These broader and more modern strategies include realizing the value of a law practice through a sale or acquisition.
So, How Does One Go About Buying A Selling A Practice?
The knowledge of the process is somewhat complicated by the fact that law practice sales are nearly invisible to the public market. Look down the street and around town and you see house-for-sale signs everywhere. A quick web search yields any number of results detailing homes values and prices and identities of the parties involved. Established markets, like the residential real estate market, give the general public an excellent idea of how and for how much to buy and sell all sorts of items, including real estate, stock, and cars. Buying or selling a business (especially a law firm) is a different story; potential buyers and sellers need to work a bit harder to find and utilize the resources and opportunities available in the law practice marketplace.
Self-education is a good place to start. A potential buyer or seller typically doesn’t know whether any given attorney wants to exit his practice or buy someone else’s, what his practice looks like, what the process or the price to purchase or sell may be. Therefore it becomes important for any lawyer to put in some time, do some research, and learn the basics about the law practice marketplace, how it works, the resources available and how it may help a lawyer looking to transition or grow. Putting the right team of advisors in place is also an important step. The buying or selling of law practices isn’t new, but the approach and need to maximize the practice’s value through an active marketplace search and proper transition structure are setting new benchmarks for lawyer transition success stories.
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.
5 Things to Consider Before Buying a Law Practice
If you have been considering the benefits of buying a law practice in order to expand or grow your client base, be sure to ask yourself the following questions at the beginning of the process before going too far. Buying a law practice could be one of the biggest decisions an attorney makes in his or her career.
As a result, it is crucial to prepare and make sure this potential purchase is right for you.
IS NOW THE RIGHT TIME TO BUY? The first step should always be conducting an assessment of yourself and your firm when determining if you are ready to buy. A certain amount of confidence is needed in your strengths and the ability that you and your team can handle the transition and increased workload that will accompany the increased revenue stream. If you, the lawyer, and your law practice are ready, give some considerations to the personal aspects as well. Is this time right for you to take on more work, responsibility and risk? Or are there things in your personal life that should require such time?
IS THE PRICE RIGHT? All law practices have value, but determining the exact amount of value is the real challenge. An analysis should be completed on the sale price and practice cash flows should be reviewed during the due diligence period to ensure the selling price is justified. Make sure someone who is knowledgeable in this area is providing this opinion and taking into account the key value-drivers of law practices.
WILL THE SELLING FIRM’S CULTURE BE A GOOD FIT? If you don’t already know the attorney or practice, you will have the opportunity to get a glimpse of the firm’s culture throughout the due diligence period. Are there tenured employees or is there constant changeover? How much of the firm’s focus is on marketing for the future and getting clients as repeat customers? These and many other factors can help determine if it will be a good fit for you and your practice.
IS THERE A DOCUMENTED TRANSITION PLAN? Whether the purchase you are considering is an internal transaction between attorneys of the same firm or an outside purchase, a documented and well thought out transition plan should be agreed on and a timeline should be specified. What transition goals should the exiting attorney focus on in the first few weeks? Next two years? Ultimately, you will want to know that you and the selling attorney agree on the goals of the transition, the time which will be required and the benchmarks of a successful plan as it is implemented.
DO YOU HAVE ALL THE ANSWERS? You don’t. We promise you. Even though you are an attorney, this isn’t something you personally go through everyday. It is a process and having the right advisors from step one can ensure the transition is successful and missteps are avoided. Assemble your advisory team and connect with a qualified Law Practice Broker, your CPA and your Financial Advisor to help guide you through the process. Make sure these questions are asked and answered!
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.
My law practice has value? Seriously? Seriously. Like any other business, each law practice has a separate and marketable value of its own. You have built and managed a proven business model. The tasks that were difficult years ago when you started your practice are no longer obstacles, but instead they have been solved with the employees, processes, checklists, documented knowledge, software, solid client base and numerous other elements, that make up your daily operations. All of those resources have value to someone who doesn’t have to repeat those ‘fun’ exercises of experimenting with software, training employees and the like. However, the biggest impact on value that you and your law practice can offer is the ongoing and future access to contacts, referral sources and clients along with the trust and comfort they have with you, your team and your overall practice. In a nutshell, that business platform along with the expectation that the clients will keep coming and the referral sources will keep referring (with a little transition help from you) will produce your law practice’s value.
So, you have come to the understanding that your law practice has value, but next in line is the real question: How much? This number is the one that can make you feel good, feel proud and maybe even a little boastful or on the other hand this number may make you reconsider how things are structured and what you are really trying to build within your practice. Practice income now is great (and needed), but having an exit option that can fund your next career, your move to another state or your retirement is ultimately the decision of whether to sell or buy a practice.
Valuing Your Practice: What’s Your Magic Number?
A number of methods can be used to determine a law practice’s value. Each method may be right depending on needs or purpose of the valuation. Let’s start with some of the core methods and aspects used:
1. Rule of Thumb Methods. The basic premise of these varying methods is to look at past cash flows in order to estimate future value. They are based on the belief that what has happened in the past should continue in the future (hopefully). Traditionally, the cash flow numbers that are examined are either Revenues or Net Income with the latter being applied in most professional and market valuations.
– Revenues – Law practices will typically sell for a multiple of anywhere from .5 to 1.5 of average annual revenues. A practice with average annual revenues of $500,000 may, therefore, sell for anywhere from $250,000 to $600,000 (not a bad number if you previously hadn’t considered your practice had value, eh?). The big missing element on the revenues approach is that it doesn’t consider how well the firm is run or how much profit/net cash flow it leaves an owner.
– Multiple of Net Income – Law practices will typically sell for a multiple of between 2 to 3 times net earnings. Using our example from above, if that same firm has net income of $200,000 then the value may be anywhere between $400,00 to $600,000. The concern with the net income approach alone is that it leaves out core adjustments and considerations unique to that practice that can have a tremendous impact on what a buyer would actually pay for the practice.
2. Market Comparison. In a marketplace of buying and selling law practices where most negotiations and actual deals are confidential, the public’s knowledge or some database of closed transaction prices are limited to say the least. While confidentiality adds a layer of difficulty to the overall public valuation process, those with knowledge of the marketplace and what actual numbers law practices are transferring at can be phenomenal resources. CPAs, practice brokers, other lawyers, lenders and others who focus on the legal marketplace have unique knowledge based on their involvement in these types of transactions over the years.
The market approach simply compares your law practice characteristics (financials, practice area, geographic area, etc.) to other law practice sales that have recently closed to give an opinion of value. The belief is similar to the real estate market approach in that what one sold for down the street yesterday is approximately what yours would sell for today, provided they are similar enough in core features and financials.
3. Key Value Drivers. Your law practice is unique and its individual characteristics need to be considered as part of your valuation. Some of them will help increase the value but some will also lower it. Determining where your practice stands on that spectrum can play a big part in value calculation. Some of the main factors that can create a large swing in value:
– Financial Performance
– Growth Potential
– Brand Identity
– Size of Practice
– Repetitive Client Revenues and Fee Structures
– Practice Structure and Owner Involvement
– Client Satisfaction
– Practice Area
– Client Diversity
– Geographic Location
– Quality of Employees/Staff
4. Adjustments. With any of the methods used for valuation there will always be adjustments that need to be made in addition to those from the key value drivers noted. These adjustments are typically ones that have made a financial impact on the practice, but for one reason or another would be added back or subtracted to come up with true earnings. That said, every valuation should include some adjustments.
The ‘It Depends’ Disclaimer
Hey, we are attorneys and thus understand that variables can change the rules and the end result. You and your practice are unique and those specific aspects can throw any of the methods above out the window or vary them quite a bit. However, you know your practice and if you truly want to know the value of what you have built, start with the above as a first step and then gather the right information and take the time to go through the valuation process with an expert who is fit to meet your valuation needs.
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.
