Considering a Transition or Exit from Your Law Practice? Prepare and Proceed With the Right Team in Place
A law practice is a complex business with many differing and dissimilar components combined to work as one. It makes sense, to seek the assistance of a resource for each necessary area of knowledge. There are several different areas of expertise that should be consulted when the time comes to buy or sell a practice.
The same holds for the sale or purchase of law practice. It is useful, and often necessary, to seek the assistance of several different types of professionals to get the most out of the deal. There is the transactional attorney to help you through the legal side; the CPA for tax considerations; the financial advisor to help you plan for the next step; the valuation expert to help you determine the right purchase/sale price and how to get there; the insurance advisor for malpractice and other insurance needs; and the law practice broker to help you navigate items such as valuation, confidential communications with buyers and the best exit option for your practice.
Choosing the right advisors though who understand and have law practice-specific knowledge can greatly increase the efficiency of the team. For these reasons, consider starting with the law practice broker as your first step. Often, the broker has the right connections to put you in touch with the people you need to see and can suggest cost-effective solutions. Additionally, you can reach out to your state’s bar for this.
It is equally important to make sure you seek the necessary assistance. To keep your health, you’ll (presumably) consult the necessary medical specialties. Do the same for your practice. Don’t forget the benefits that advisors can bring to you on this very important decision.
7 Factors That Affect Your Law Firm Value. If you have read up or experienced the valuation process you already know that there are factors that affect your law firm valuesuch as the owner’s cash flow from the practice which is typically the single biggest factor in determining a practice’s value. However, here are 7 others that also play a part in value determination:
1. Practice Area Type(s)
Certain practice areas have a bright future, high demand, and look ready for growth in today’s crystal ball while others are struggling for profitability or forced to change due to competition or regulation. Your specific practice area can have dictated a swing up or down in value determination.
2. Geographical Location
Is your practice area a great fit for where you practice? Is there a lack of competing firms in the area and does your area have the opportunities a buyer would be looking for?
3. Office Setup and Overall Appearance
There is a reason why people stage a home for sale, remove pictures, put in new carpets, and get everything in ‘new’ condition – they want a prospective buyer to be blown away when they walk in the door. Consider the same for your practice. Appearance counts to more than just clients and putting a little effort into the office never hurts.
If you can’t explain why the clients come to your firm or what you are doing to make sure they keep coming that won’t sit well with a prospective buyer. However, a clean and followed marketing plan that leads to results is a big plus to sell the buyer that they can repeat what you have done.
Every practice today has some sort of required software whether that is something you created for yourself to merge drafting documents or that you invested heavily with a developer or other third-party provider. Having software in place that works to improve your legal process is always a value-add. The more proprietary and impactful on that efficiency or benefit the more value.
6. Employees, Roles & Structure
If you have those key paralegals, legal assistants, office managers, associates, and they not only do their jobs well, but help you succeed in yours (and would do the same for a buyer) you have something more to transfer and greater value.
Ones that work and are used daily are key value drivers. The less that a buyer has to create, repeat your efforts, or worry about how to get a matter from A to Z the better they feel and the more comfortable they will be in paying a higher price.
What does buying a law practice really mean? The marketplace for selling and buying a law practice is still young as compared to some of the other professional business marketplaces (dentists, CPAs, etc.). So, it’s not surprising that we often get questions from those attorneys looking to transfer their practice and wind down (the “sellers”) and those attorneys who are looking to grow or expand through purchase or acquisition (the “buyers”) on how the structure really works when buying, acquiring or purchasing a law practice.
As with anything which involves lawyers and our ability to be creative in structuring new ways to approach a common problem the answer is, of course, it depends on the situation and the parties involved. However, there are some common elements to know and consider depending on what type of seller and buyer is involved that you may want to know and consider.
To a Seller…
Who is a solo practitioner or sole owner? It is typical that the marketplace will provide two types of potential successors or buyers for a solo practitioner or owner – individual attorneys and other law firms.
The Individual Attorney Buyer- The individual attorney is looking for firm ownership and the opportunity to take over established systems, clients, and the revenues and profits that come with them which you have built over the years in your practice.
Focus – The individual attorney is typically focused on the earnings of your firm as they would be considering what they would make if they took over and put themselves in your shoes to do the work (salary) and own the firm (profits).
Typical Structure – It would be typical that the individual buyer would look to purchase all the assets or all the equity of your firm under agreed-upon terms and the structure would be seen more as a new partner joining the firm which you would begin introducing and working with to transition clients, referrals and other areas to over an agreed-upon timeline. To the outside, the firm name may change by the addition of this new partner, and clients and others see it as a continuation of the firm with this next generation.
The Law Firm Buyer – With solo practitioner or owner sellers it is common that other small law firms would also be interested in purchasing or acquiring in order to increase their client base, overall revenues, and/or expand their geographic reach and practice areas.
Focus – The small law firm purchasers in this situation are typically focused on overall revenues that would be gained as well as how to provide for the transition of management and clients from the seller to the attorneys within their own firm. Typically, they are less worried about your systems as they have most of those in place within their own law firm.
Typical Structure – Structures seem to vary quite a bit, but the most typical would be internally structured as an asset purchase upon agreed-upon terms with it publicized and structured as a merger of the firms or a joining of the seller to the buying firm. It would be typical that the firm name would change or the buying firm’s name would be the sole to continue with the seller attorney being added as a non-equity partner or of counsel.
… Who is a small partnership. Typical partners for sellers who are small partnerships are other small to medium law firms who are seeking growth through acquisition and larger law firms who are looking for lateral groups to join their existing firm and overall structure.
Small Partnership Buyer – Other smaller to medium law firms are always looking for opportunities for growth in existing practice areas and for ways to expand their reach or maximize revenue per client relationship by expanding into new geographic and practice area markets.
Focus – These firms are usually focused on revenues generation as compared to the earnings of the firm. Key questions will usually revolve around clients, ability to transition to a new firm, and overall costs and desired financials from the transaction.
Typical Structure – Most of these will be done as a merger with the potential to have some purchase or acquisition price paid for the transfer of goodwill value and/or joinder of the firms. However, it would be typical that compensation after a merger would play a material part in how clients and overall goodwill is paid for overtime to the seller. The seller would want to focus on a transition plan during due diligence to make sure clients can and will transition to the new firm as desired to ensure compensation after closing.
Medium/Large Firm Buyer – Established law firms with multiple offices and existing practice areas to what sellers may offer are also looking for good opportunities to increase their client base in those areas. This allows them to maximize their existing attorney and other firm resources by acquiring more client relationships.
Focus – Typical focus for this type of firm would be the types of clients or practice areas, overall billing, and revenues and what a transition plan for the seller would look like and would it be successful.
Typical Structure – Some may be promoted as acquisitions, but it would be common for most of these purchases to really be a lateral move with negotiated and agreed-upon compensation structure. That structure may have a bonus or ‘goodwill’ component for security to the seller, but most of the value to the seller will come from the compensation and bonus structure agreed to after closing.
… Who is a larger partnership or established firm – In the scenarios where because of lack of successor options or other motivators a larger or more established partnership or firm is seeking to transfer the value they have built the most common element would be a merger with another firm of comparable or larger size.
Focus– Similar to the notes above when a larger firm would acquire a smaller partnership the focus will truly be on overall clients, revenues per client, and ability to maintain those relationships under a transfer. The transition plan of a senior attorney and how it would help ensure client retention would also be of key importance.
Typical Structure – Most all of these would be in the form of a merger with some forms of value (bonus, down payment, purchase consideration) given at the time of the merger, but with most payments and consideration to seller attorneys being provided in the form of profits through equity (if the sellers become partners in buyer) or in salary with bonus structures based on billable production of the seller attorneys and overall client performance after the merger.
Attorneys today are looking at more options for practice growth and expansion than ever before. Due to continually increasing challenges in the legal profession and an abundance of the attorney workforce for hire, the competition in certain practice areas or specific geographic markets is sometimes too burdensome to consider starting a new law firm location or a law practice from scratch.
A history of proven financials, ongoing client matters, phones that continuously ring, and systems and knowledge built to serve those clients successfully all lead to the appeal of buying a law practice compared to stepping into the unknown of the startup world.
Is now the right time for you to take on more work and responsibility? Are there things in your personal life or your current firm’s structure that could benefit from such additional time instead?
2. Get Help.
Even though you are an attorney, this isn’t something you go through every day. It is a unique 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 (we know a good one) to help you get started and understand the platform.
3. Consider Opportunities.
The law practice marketplace is mainly hidden due to confidentiality concerns. It’s happening all around you, but most transactions go unnoticed. To look for the opportunities that are out there, contact a law practice broker sign a confidentiality agreement, and get preliminary information on potential firms that may be a fit, including their financials and overall characteristics—still interested? The practice broker will then coordinate an initial conversation with seller(s) to discuss how transition may work, get questions answered, and get an overall initial comfort level that could be a success.
4. Get Engaged.
After some discussions and review, if you and the owner of the practice think it may be a good fit, then it is time to agree on the financials of the transaction and how they will be paid, transition plan details, and other vital aspects of the purchase transaction. Once these are agreed to, then due diligence continues as you work towards closing. This is also typically when you and the seller will work out the details on transition plan specifics, and you complete any due diligence review of the selling firm with your advisors.
5. Closing & After.
Just like in other business sales and acquisitions, a day will be chosen for the ownership to change, and the purchase and ancillary agreements are executed along with the financial exchange. At this point, you should feel confident about what post-closing looks like and your plans for transition success.
1. What’s The Key to Success?
If you think buying a law practice is an option for you, then understand that the buying process and transaction are vastly different from other types of non-law firm business purchases. The key to success lies in a well-prepared transition plan for the selling attorney(s) in the law practice world. A law practice (and its value) is so closely tied with the individual owner(s) or partner(s) that the success post-closing of a transaction will be achieved in the details and structure of that transition by the seller(s). Ultimately, you will want to know that you and the selling attorney agree on the goals of the transition efforts, the time required, and the benchmarks of a successful plan as it is implemented. Overall, the goal in any practice acquisition is that the selling attorney remains or becomes part of the buyer’s practice post-closing.
2. How to Value?
The value of a law practice is typically calculated based on historical cash flows and adjusting for several factors personal to the seller or that practice and deal terms that impact value (shorter transition timeline, etc.). The sale price and practice cash flows should be reviewed during the due diligence period to ensure the selling price is justified and the payments are sustainable with your projected future cash flows. Make sure a law practice broker or CPA knowledgeable in this area is providing this opinion and taking into account the critical value-drivers of law practices and the expected post-transition retention. Net income may be a great line item to use in determining the purchase price, but the cash flows post-closing are the real determining factor of whether it makes financial sense for your acquisition plans. A law practice broker or CPA can show you how those two can match and make it a win for both sides.
3. How Does Payment Structure Work?
Payment structures for law practices vary almost as much as the prices themselves. Overall, the most typical is for you as the buyer to finance or pay a certain amount at closing and for the seller to invest some or structure the remaining portion as a percentage of revenues earned over time. This allows buyers and sellers to share the risk, focus on making the transition plan a success, and enable buyers to have immediate income from the practice. An abundance of cash on hand is not typically the norm for younger attorneys, so considering all financing options with lenders and payment structures is vital. For more established firms or attorneys, cash may be more readily available, but some form of a seller earnout is typically still desirable.
The law practice succession marketplace is still young. Still, current opportunities are present (and more are being added every day) for those attorneys ready to take advantage of the benefits of purchasing a practice. While success and growth are certainly not guaranteed to follow, a well-thought-out and implemented purchase can go a long way toward achieving these critical goals. Careful planning, thorough due diligence, and some hard self-evaluation, should always be performed before you make the commitment required in buying a law practice. It is a unique process, and having the right advisors from step one can ensure the transition is successful and missteps are avoided.
Written by: Tom Lenfestey, Attorney, CPA, ABI with The Law Practice Exchange, LLC. Tom Lenfestey is the Managing Member of The Law Practice Exchange, LLC, and a North Carolina attorney and CPA. The Law Practice Exchange aims to curb the lack of knowledge in the profession by educating and advising attorneys on the number of different options available in the legal marketplace for a succession of law practice and also serving as a confidential advisor to seek and provide connections for those right opportunities between an exiting attorney and a growth-focused attorney or firm. Contact The Law Practice Exchange today at (919) 789-1931 or info @ TheLawPracticeExchange.com for a confidential conversation.
Please find out more at www.TheLawPracticeExchange.comBy making the connection between attorneys looking to exit their practice and attorneys looking to expand their practice, The Law Practice Exchange provides brokerage and transition services that preserve the client and professional goodwill of the procedure, allowing a value-based exchange between the selling and buying attorneys.
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 situation, objectives, or other needs. Make sure you seek a qualified expert opinion before proceeding with your transition objectives.