Eight Key Considerations in a Law Practice Transition Agreement

Eight Key Considerations in a Law Practice Sale Agreement.

While many different considerations are leading up, during, and after the sale process, here are a few to which you should pay particular attention.

1.Valuation.  

It is common to highly value our work. This is particularly true for business owners, and lawyers are no different. As such, we may be prone to overvaluing the business. Unrealistic or unsupported sales prices can hamper or outright quash a deal. So it is typically a good idea to bring in a valuation professional to accurately value the practice.  

2.Increasing Purchase Price. 

It is beneficial in preparing for sale to review some of the key factors of valuing a practice as they pertain to your own. These include historical financial performance and growth, reasonable expectations of future revenue, likelihood, and extent of repeat clients, geographic location of the practice, saturation of practice areas in the local and regional marketplace, and others. Focusing on strengths and weaknesses may point to where you can do more to improve the value of your practice leading up to the sale. 

3.Consider Taxes and Net Number.

If there is a certain purchase price you need to hit for retirement or any other next stage in your life, knowing what you need to do to get the value of your practice to that price, and then making sure the purchase price and structure support that goal is imperative. Also, consider the personal benefits you are receiving as an employee of the practice (health insurance, vehicle, CLE, etc.) as well as those liabilities that you would have to satisfy at closing and how those impact your number.

4.Transition Timeline.

Knowing what is needed and if you can provide the time and effort to transition the clients and their associated goodwill to any purchaser is vital to any transaction being successful. Each practice is unique and specifics should be worked out not only on the total time but how the day-to-day roles will work and the financials post-closing.

5.Insurance Considerations. 

Due to the nature of legal malpractice insurance coverage, maintaining proper coverage through and beyond the sale of your practice is vital. Coverage details will likely be a key point in the sale transaction deal, with the seller’s responsibility likely taking the form of “tail” coverage, which provides a certain period of extension of coverage for claims made during the original life of the policy.

6.Ethical Considerations.

As an attorney, you are subject to a myriad of legal and ethical duties on an ongoing basis. That doesn’t change just because you sell your practice. ABA 1.17 of the Rules of Professional Conduct provides some guidance depending on structure of your sale and several other ethical responsibilities apply depending on the transaction (i.e. merger v. sale).

7.Post-Closing Items.

Give strong consideration and planning to how things will work after the sale is closed. Items such as non-compete, access to files, firm name use, how selling attorney will be involved, fees, and billing structures are just a few key areas that should be discussed and included.

8.Make Sure You Are Ready.

 Selling your practice can be very draining: mentally, emotionally, physically, and financially. It is important, therefore, to make sure you are ready, on all of these levels. Take the time to talk it through with your loved ones. What are their expectations? What are yours? Are they reasonable? Does it matter? Make sure you are fully prepared for these and other transition consequences.

5 Ways You Can Exit Your Law Practice

5 Ways You Can Sell Your Law Practice.

So you’ve decided to plan for exit and sale of your law practice? Congratulations! Great first step. Now what? Now, you must go forward and choose the best exit strategy for you and your practice.

Consider these options noted below as a starting place.

Then get your key advisors, do some goal setting and choose the best path for you.

  1. Selling to an internal candidate. Even if you don’t have someone within the firm at present the idea of hiring or recruiting your successor should always be considered. Internal sales tend to be smoother and can be on a more controlled timeline for your plans and client needs.
  1. Transferring to a trusted attorney or firm. You may know some good attorneys or firms out there that would be interested. If you are worried about confidentiality, then consider hiring a law practice broker to maintain confidentiality and guide the parties through the process.
  1. Selling to a marketplace buyer. The number of buyers looking for quality law firms in all sorts of practice areas and locations continues to grow. This is a great option to maintain confidentiality and bring in a successor for value when internal options don’t exist.
  1. Partnership, join a firm, or merge. You have built a good practice. You are a good attorney. Most firms would be happy to have you join them in a partnership, merger, or lateral move structure. Financials and your ultimate exit plan should be agreed upon, but this is a great option when others don’t fit.
  1. Do nothing. It will happen. One day you will no longer be running your practice. The question is what that even will look like if you have not taken action and seen it through. Did you get the financial needs required upon exit? Are your clients going to be taken care of? Employees?

Taxes and Fees When Selling a Law Firm

What You Need to Know About Taxes and Fees When Selling A Law Practice.

Not every lawyer lives in the world of business sales and transitions and even fewer have ever had the opportunity to advise and work on a law practice sale. The unique blend of law practice transaction specifics with the ever-changing landscape of structure options, how the government taxes proceeds and associated fees with a sale create potentials for some unknown and unwanted surprises. 

You don’t need to be a tax or law practice expert, but it does help to put a CPA on your team early. Beyond that,  having an early idea of how things may work always helps in laying out structure and paths to achieve.

Consider these quick items on structure and taxation before going too far in your plans:

  • Transaction Structure Options. From stock purchase to asset purchase to mergers and beyond there are many potential purchase structures to consider. Each of those has its impact on taxes and your financials. 
  • Taxation on Sale Proceeds. Depending on the structure of your law practice entity and the structure of the purchase your tax hit can often be anywhere from 20% to 50% or more of the sale proceeds. Making sure you understand how the net amount would be calculated under certain structures and terms to negotiate to lessen that tax hit to the lower range is key.
  • Fees. Yes, you are an attorney but expect to pay other advisors such as practice brokers/consultants, accountants, and even an attorney to help you through the process. Knowing and calculating these as part of your expected after taxes and fees benefit is key.

Knowledge of deal terms and having an idea of where key points of the deal may impact your net number is key to get your transition plans moving without surprises later. Look for the right people to add to your team, as it is near impossible to go it alone and plan for the best outcome while minimizing those surprises and hits to the bottom line. 

Succession Planning For A Law Firm

Law Practice Succession Planning – Set Your Goals and Take The First Step.

The reality is that every lawyer at some point in time needs a plan for when he or she steps away from the legal field and the options for buying or selling a law practice should be considered. 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.

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. If those options are being considered in your exit or growth planning, then know your personal and practice goals and get ready to take that first step.

Set Your Objectives

The most important question: “What are my exit or transition objectives?” In looking to sell, transition, merge, groom the associate or even in buying a practice for growth, there are right reasons and there are wrong reasons. Any attorney must first reflect on his or her practice and determine if it is ready for such a transition or acquisition. Is now the right time, or is it better to put the plan in place for a transition or acquisition down the line?

Openly, you must first establish your objectives, weigh the costs and potential benefits, and then strive to determine the best path for your sale or purchase that has given those goals. And while personal aims may differ, in preparing a transition plan, it can be helpful to consider the following goals and rewards of practice transition planning:

– Better Prepare Practices for Change – Promote Lawyer Focus on Client Value

– Preserve Client and Practice Goodwill – Provide Alternative Growth Options

– Provide Exit Strategies – Continuous Service to Client

– Promote Mentorship – Increase or Expedite Retirement Options

Where to Start?

  1. Look Around. Regardless of whether you are looking to sell your practice or acquire another’s, the first step in any transition is to look at your practice and determine if it is in good order and capable of sustaining a transition. Focusing on how one will perceive your practice’s value or considering the potential of doubling your client matters overnight is great motivation to help you tackle those lingering items you have wanted to address for years. 
  2. Put Your Team Together. Next, continue your education on getting ready to sell or buy by seeking assistance. This includes putting together your transition advisors, which typically include your CPA, financial advisor, insurance advisor, valuation expert and law practice broker. Yes, a law practice broker. This type of advisor focuses on the buying and selling of law practices, bringing guided expertise to navigate and exploit the marketplace even when you can’t see the for-sale signs. Confidentiality is key, so contacting and engaging someone to act on your behalf, but properly, helps make sure the transition is successful for all involved.
  3. Set Specific Goals. Once you have your team in place it is time to start developing your strategy for selling, buying, merging, or other transition. Set and review your goals and define your desired transaction terms; and, then your practice broker will confidentially seek out and search potentials as well as sort through the non-opportunities. 

When to Start?

Now. Time has a way of working against us, especially in the legal profession where time is our typical exchange for compensation. Don’t be the lawyer who forgets to focus on his legal contingency plans when advising clients of the need of their own. Take the time today to jot down some of your objectives for a potential transition, whether selling or buying, and some tasks to do tomorrow to see what options are out there for you. Seek a resource to help you with your best next step.

A Law practice has transferable value and that value can provide options to an attorney looking to exit his or her practice or to gain the goodwill of another. Knowing your options and the likely financial outcome can greatly impact your professional and personal finances and can also provide tremendous opportunities for those firms or lawyers looking to see continued client service through a transition. Recognize that these options exist and begin exploring which may be best for you today.