August 2022 - Law Practice Exchange

What’s My Law Firm Worth?

Posted on August 30, 2022 by Tom Lenfestey

The law is one of our most important industries. According to data from IBISWorld, there are nearly 450,000 law firms in the United States. Similar to any other business, professionals buy and sell law firms. Though, the process can be more complicated. One central challenge is that valuing a law firm is notoriously difficult. Still, every legal practice has a fair market value. You may be wondering: What is my law firm worth? In this article, you will find a comprehensive guide to the key things to know about determining the value of a law firm.

Starting Point: A Law Firm is a Business With a Marketable Value

To start, it is important to emphasize that all law firms have a marketable value. No matter how small a law firm is and how modest its annual earnings are, any firm that has clients will have a market value. If you are considering selling your law firm—retiring, transitioning to a new practice, etc—it is imperative that you understand exactly what your law firm is worth.

Revenue Often Serves as a Baseline for the Value of a Law Firm

In a broad sense, the market value of a business is what buyers are willing to pay. It is fairly easy to determine the value of something for which there are many comparators available. For example, if you want to know the value of a used car, you can get a pretty good idea by looking for similar sales. The challenge for valuing (and selling) a law firm is that very limited public information is available about sales. There is no general database where you can look up all finalized law firm transactions.

For this and other reasons, a law firm’s annual revenue often serves as a baseline for its value. True valuation depends on overall firm structure, earnings, profitability metrics and types of practice assets, but revenue is the easiest place to start. In most cases, the value of a law firm from the revenue approach will be calculated as a ‘multiple’ of its average gross revenue. The multiple for valuing a law firm on the revenue approach is typically between .5x and 1x annual revenue. For example, imagine that a small immigration law firm has had an average of $800,000 in revenue over the past three years. A rough range for the value of the firm would be between $400,000 and $800,000.

Your Law Practice is Unique: The Specifics Always Matter

The revenue method—sometimes called the “rule of thumb” method—can only give a broad range of the potential value of a law firm. The reality is that every law practice is unique. The specific circumstances always matter when determining the fair market value. Not all law firms with $1 million in an annual have the same market value. Some notable factors that impact the value of a law firm include:

The practice area
The geographic location
Consistency of revenue year-over-year
Client satisfaction
Growth potential
Future financial projections
Quality of employees/staff
The amount of debt

How Our Law Firm Brokerage Will Determine Your Firm’s True Value

Valuing a legal practice is a complicated process. The specifics always matter. At The Law Practice Exchange, LLC, our law firm brokerage team will always put in the time, resources, and attention to detail to help you determine the proper of your law firm. Among other things, we are prepared to:

Know Your Law Firm: We will gather and review all of the relevant financial documents and records. From there, our law firm valuation team will take the time to understand the unique value propositions that your law firm brings to the table.
Work Closely With You: In valuing a law firm, we work closely with law firm owners every step of the way. Putting an emphasis on open communication, we are always ready to answer your questions and make sure you understand our analysis.
Prepare a Comprehensive Valuation Report: For obvious reasons, law firm buyers are interested in getting the lowest possible purchase price. To help support our clients in negotiations, we will put together a comprehensive law firm valuation report, ensuring that you have all of the supporting materials that you need to justify the sales price.

Find Out the Value of Your Law Firm With The Law Practice Exchange

At The Law Practice Exchange, LLC, we were created by lawyers for lawyers. Our entire law firm brokerage company is devoted to helping our clients buy and sell legal practices. If you have any questions about what a law firm is worth, we are here to help. Contact us today to learn more about our law firm valuation service. We are a nationwide leader in law firm brokerage services.

Questions a Potential Law Firm Acquirer May Ask

Posted on August 10, 2022 by Tom Lenfestey

According to data from Statista, the world of law is a $350 billion dollar per year industry in the United States. The American legal market is by far the largest in the world. Law firms large and small are bought and sold every year. Whether you are buying a law firm or selling a law firm, there are a lot of complicated issues that need to be addressed and resolved.

All buyers should be prepared to perform comprehensive due diligence to ensure that they are entering into the right transaction. All sellers should be prepared to answer the questions from a prospective buyer to put themselves in the best position to get a favorable deal.. In this article, you will find an overview of five key questions that a potential law firm acquirer may ask.

Why are You Selling the Law Firm?

One of the first questions that prospective acquirers typically ask is why the law firm is being sold in the first place. The reality is that no one wants to feel like they are acquiring a law firm that is a potentially bad business asset that another person is simply trying to get out of. Of course, there are many different reasons to sell a law firm. The owner may be retiring or transitioning to a new stage in their career. Regardless, as a law firm is inherently difficult to value as a business, it is common for buyers to inquire about why the seller is doing so.

How Did You Determine the Value of the Law Firm?

Price matters. The primary reason why law firm purchase agreements fall apart before a deal is finalized is a disagreement on the price. You should expect a question—more likely many questions—about how you determined the value for your law firm. Valuing a law firm is a complex process. It requires an in-depth discovery process and a detailed analysis of the business, including the brand value and other intangible assets held by the law firm. For sellers, it is best to work with a reliable consultant who can help you determine the value of the law firm and support that number with detailed supporting documentation.

Can You Produce Comprehensive Financial Statements?

In many transactions, such as the sale of a law firm, the seller will be asked to produce comprehensive financial documents and records. Verification of financial statements is an important part of the process. Financials may include:

Five years of financial statements
Five years of tax returns
W-2s and K-1s
Schedules of future employee compensation
Client fee guidelines and/or case inventory summaries
Representation agreements
Leases and other core expenses

As a seller of a law firm, it is crucial that you properly prepare all of your financial information. Incomplete, inconsistent, or otherwise flawed financial statements could stop a transaction from going forward.

What is the Projected Cash Flow for the Next Several Years?

The value of a law firm is based not just on what has happened but on what likely will happen in the future. The seller of a law firm should expect a number of different questions about cash flow projections for the coming years. Indeed, projected future cash flow is key to valuing any type of business entity. An acquirer is likely to ask questions about the projected future cash flow and how the seller came to the number that they did. Putting together strong, comprehensive, and well-supported documents and records pertaining to future cash flow is a must.

Is There a Plan for the Transition?

Finally, the acquirer of a law firm is likely to ask questions centered around the transition. In many cases, the agreement for the sale of a law firm will include some form of transition provisions. These provisions are designed to help ensure that the law firm is able to transfer smoothly from the ownership of the seller to the acquirer. A legal practice is a complex business. Significant problems can arise if proper planning is not done to support the transition of the firm to new ownership.

Interested in Buying or Selling a Law Firm? The Law Practice Exchange Can Help

At The Law Practice Exchange, LLC, we are a brokerage firm that was created by lawyers for lawyers. Our entire practice is devoted to helping clients value, buy, and sell law firms. If you have any questions about the common issues raised when acquiring a law firm, we are here to help. Contact us today to get help buying or selling a law firm. We are a nationwide law firm brokerage specializing in the valuing, buying, and selling of legal practices.