When you have worked at your law practice for many years, weariness often starts to creep in and manifest itself in many ways. For some attorneys, this is a sign that it may be time to consider selling their firm. While most professionals begin exploring succession avenues at some stage of their career, many lawyers don’t realize that selling their firm is an option.
Whether you’re a solo or a larger firm, it’s worth researching your firm’s value if you’re considering moving to another venture or starting to plan for retirement or succession.
Should You Sell Your Law Firm?
If you’re considering selling your law firm, odds are it is worth more than you think. Many lawyers don’t totally appreciate the value of what they’ve created throughout their professional lives. A lot of time, work, and money go into building a law practice, and that all combines to give your firm a transferable value of its own.
Even if you’ve built your practice on your own name and reputation, you should realize that your practice will carry value for someone else, even long after you’ve retired or moved on to something else. In addition to tangible assets such as your office and technology, you likely have a solid track record and goodwill in the community that another firm or lawyer may be willing to pay for.
Key Elements You Need To Consider As You Prepare To Sell Your Practice
A key consideration is the law governing the sale of practice within your state. California was the first state to develop and implement rules governing the sale of law practice back in 1989. Today, the American Bar Association (ABA) Model Rules of Professional Conduct Rule 1.17 (enacted in 1990) guides the sale of a law practice.
This has been absorbed into the state laws in most of the jurisdictions in the United States. Part b of the rule establishes that the practice or practice area must be sold in its entirety. Regarding its pricing, one of two prices is attached; either a fixed price calculable from an analysis of the firm’s past performance or an earn-out (based on future revenue).
The sale of the practice essentially translates to the selling lawyer losing practice rights in the firm. Nevertheless, the law remains rather vague on the window of time leading to when you, as the seller, need to cease practicing. Likewise, no such requirement prompts such a transition to be immediate.
As a matter of good faith between parties to a contract, the selling lawyer must give notice of sale via certified email to all its clients. This letter can be used as the announcement of merger, joinder with a firm or other positive announcements as well.
When a lawyer comes to buy a practice from you, they are looking to grow their revenue by adding your clients to their client base. Even though the property, office furniture, and technology are of some value, they do not offer the financial security equivalent to regular client traffic and the network that the firm has been able to build over its lifetime. This is why it is very important to gain clients’ consent, agree on the proper message with the buyer and develop the right transition plan before making a sale – the value of the firm strongly depends on them.
How A Law Firm Valuation Works
The valuation of a law firm typically takes three forms; asset, market, or income valuation. Asset valuation is done on the tangible assets of the company. Most law firm assets owned depreciate over time so the values are low. So, the calculation for the cost valuation is done by deducting the depreciation accumulated from the original price of the items. This figure is known as the book value. Asset value can also include case inventory, receivables, billings in progress and other assets in law firms which can drive the value up.
A market valuation is conducted to arrive at a fair market value. In essence, this is the estimated value of the firm based on its comparison to peers in the industry. The ideal scenario would be to find a firm of similar profile and financial standing to compare with and ultimately settle on a figure, similar to a real estate comparison.
However, it is rare to find another firm along these lines to compare to since business operations vary, affecting the overall value of individual firms. This is one of the reasons it’s important to hire a M&A firm experienced in your vertical like our team here at The Law Practice Exchange – our experience helping lawyers buy and sell firms gives us data that is peerless in the industry.
The third method of valuation is cash flow valuation which looks at revenues or income of the firm. A cash flow valuation example would be if you take your gross income (averaged over the past 3 to 5 years) and use a multiplier to come up with a value. The appropriate multiplier is often determined by a number of different variables, including:
- The client base – do you have one big client that’s 50% of your revenue, or a good distribution of client income across many clients?
- The stability of the revenue of the practice – is it growing, shrinking or staying the same?
- How long has the practice been in business?
How Can You Get Prospective Buyers For Your Firm?
Marketing a law firm for sale is an arduous process, mainly because of the difficulty to package your product well enough to attract the best buyers. While some lawyers choose to advertise on their own, the best choice is to find a broker to guide you through the transaction as they will often already be connected with potential qualified buyers.
An experienced law firm broker like The Law Practice Exchange can help find and vet qualified buyers for the firm, and in many cases can get a higher valuation for your practice than if you had elected to go it alone or work with a general business broker.
What Paperwork Do You Need to Sell Your Law Firm?
You’ll first need to appraise and package the structure of your legal practice when selling it. You’ll also need any legal documentation pertaining to the sale of a business in your jurisdiction. While the specific paperwork you’ll need may depend on your circumstance and location, you’ll almost certainly require the following:
- An offer-to-purchase agreement
- Cash flow statements
- A note of seller financing (if offered)
- Past and current financial statements (about 2 to 3 years)
- A statement of the seller’s discretionary income
Some Tips To Keep In Mind During The Transition
While you may be burned out and ready to sell your practice or retire, it’s critical to keep some things in mind throughout the process to make sure everything goes smoothly.
First, is that you must continue conducting business normally during the process. This means servicing clients, supporting your team, and continuing to grow revenue if possible. This continuity will help put your buyer’s mind at ease, and anything unexpected during the sales process could either derail the sale or lower your valuation.
Second is that there is almost always a period (can be as long as several years) where you will be required to stay at the firm to help with the transition. This period is often tied to compensation in some form or fashion (an earnout).
Make Your Plan
While the specifics of your strategy may vary depending on your circumstance and the ethical regulations in your location, you should consider the following:
- A timeline for transitions: How long do you plan on staying following the sale? Plan the stages in detail and estimate the time it will take to transfer ownership to the buyer.
- Transfer of essential information: You should have a strategy to appropriately pass on crucial knowledge about your law firm. This could include passwords, account details, insurance information, and vendor contacts.
- Training: Will you have to train the new owner or employees? Factor all this into your strategy to ensure a smooth changeover.
Contact The Law Firm M&A Experts
Having a deliberate transition strategy when selling a law practice is just as important as having a business plan when beginning one. A transition strategy guarantees that everyone involved, including you, your clients, and your buyer have a smooth and seamless transition.
The successful sale of a law firm requires experience and preparation. From valuation and preparation to finding your buyer and executing the sale, you will need expertise on your side. The Law Firm Exchange has the experience and expertise to help you navigate the complexities of selling your law firm. Contact us today for a free confidential consultation and find out your options!