Have You Saved Enough To Exit Your Law Practice?

Have You Saved Enough To Exit Your Law Practice?

Most attorneys made their law practices their largest source of income for them and their families. The dependency on that income may become less over the years, but there is always the question of what things would look like if the law practice salary, profits and benefits ceased upon retirement.

For attorneys who find themselves asking the question of whether they still need the practice, there are a few ways to reduce this dependency and ensure your long-term financial security.

  • The first step is to get a clear picture of your total personal financial situation. What do spending and savings look like post-law firm ownership? Is there a gap in needs with what you have saved?
  • Get help from your financial advisor or retirement planner to make sure if there is a gap that you can fill with income or from the sale of your law practice.
  • Look at life after given your spending, giving, and other financial expenditures to determine how many are provided by the business and which you will be responsible for personally. It may make sense to stay on with the new practice owner or firm for longer after closing to receive health insurance or other benefits for of-counsel work.
  • Remember that your law firm can provide financial benefit to you even after your ownership or retirement through a sale, merger or other sale type transaction, but you need to take the steps early to plan to do so. We can help!

Overall, this analysis can be done fairly quickly with the right help and should be done regardless of your desire to sell or exit in the immediate future. Knowing your number and any gap in funding your goals will help you have confidence in preparing the timeline for transition and those financial goals needed for the value of the practice upon sale or otherwise.

What Does ‘Selling’ A Law Practice Really Mean?

What Does ‘Selling’ A Law Practice Really Mean?

Different ideas come to the minds of attorneys when they hear ‘selling a law practice’. Some think of just the sale of their fixed assets to an up-and-coming attorney or new firm in town and shutting down their actual law practice. Others think maybe they could sell the phone number and that may have some value.

In today’s marketplace selling a law practice takes many forms which are from the basic and lowest value to the more strategic with a higher value to both seller and buyer. Typical sale transactions take various structures, but are usually one of the following:

  • Outright Sale. An outright sale of assets (including your personal and firm brands) to another attorney or law firm as a buyer to continue your firm under their ownership.
  • Merger/Joinder. A merger or joinder by your firm or you with another firm to continue your firm’s services and provide a financial incentive for allowing them to be your firm’s successor as you slow down.
  • Affiliation With Succession. An Of Counsel or other affiliation with a law firm where you personally join the successor firm to continue your practice with the support of their resources until you decide you want to retire.

Each of these are done with your financial and overall succession goals in mind to allow you to transfer what you have built for value, but allow us to work with a buyer or successor to take different structures depending on your goals, the practice transition needs and the potential buyer or successor who may be interested. 

Selling a law firm or selling a law practice can take on several shapes and forms, but the key to remember is it involves your transition and that takes time. If you are pondering “should I sell my law practice?” then contact us today to discuss your options and which structure may work best for you.

Thinking of Selling Your Law Practice? Should You Consider an Internal Sale First?

Thinking of Exiting Your Law Practice? Should You Consider an Internal Sale First?

If you are one of the law practice owners who is looking at setting plans for retiring from your law firm or selling your law practice you have more options than you think for exiting for value. Over the last several years the external purchaser marketplace has continued to gain popularity, but many times owners of law firms should look to the internal candidates, but should do so while also exploring the marketplace at the same time in case the internal path doesn’t work out.

There are several things to consider in deciding between an internal and external sale for succession and exit from ownership of your law practice:

  1. Financial Considerations – Your practice may be positioned and strong enough to seek some outside prospective buyers who are willing to pay a higher price than internal candidates, but this is not always the case. For many practices, the internal associate or junior partner candidate understands the practice, the people, the clients and is more comfortable taking an additional financial risk in a purchase. Additionally, they are ensuring their compensation so many are more motivated than an external.
  2. Practice Considerations – Each option will impact your team, your clients, and the community you serve differently. An external option may be more knowledgeable, stronger financially, or have more experience, but may not understand ‘how things work’ in the practice or community. As well, some employees may resist change and rather see a known person take control than the uncertainty that comes with an external.
  3. Personal Considerations – Paint the picture in your head of what a perfect exit and transition looks like for you. Do the financial needs outweigh the practice aspects or do you like the idea of being able to have a tested successor who you have worked with for years before making the decision. These personal goals and objectives are the key drivers in making sure you see the exit as a success after the implementation.
  4. Timeline Considerations – Sometimes timeline is not just about you or your path to retirement. The timeline that may be important is for your internal successor. Where are they in their career timeline? How long have they been with your firm?

Overall, the key is that you can’t be sure whether an internal sale or succession will work. It may look like it would or that it should and you may even have had conversations about it which seem promising, but don’t put all your eggs in one basket. Instead, make movement on your plans and keep the internal and the outside/marketplace options open to find success for you and your firm.

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. 

The Benefits of Using a Broker in Selling a Law Practice

The Benefits of Using a Broker in Selling a Law Practice

Regarding the sale of a law practice, it is reasonable to say that there is a distinct lack of communication,  opportunities, and knowledge in the professional marketplace. While you may know that you want to buy or sell a practice, you may not know where or how to start. Speaking with a law practice broker may provide you with the right tools to accomplish this goal and overcome knowledge deficiencies.

What is a law practice broker? The goal and purpose of the law practice broker are to help organize, prepare, value, promote, negotiate and package a deal for the sale of the practice. What does this entail? Generally speaking, a broker will use his or her skills, expertise, connections, and other tools to promote and develop your knowledge, awareness of market opportunities, and overall ability to get the deal done. More specifically, this includes:

  • Listing the practice, finding the right practice to buy, and otherwise exploring the marketplace;
  • Connecting you with key advisors;
  • Developing marketing and listing strategies;
  • Assisting in practice valuation and valuation improvement strategies;
  • Assisting with preserving and transferring goodwill;
  • Negotiating, and facilitating the negotiation of, key deal terms and otherwise bringing the parties to the table;
  • Reviewing and discussing exit strategies and opportunities;
  • Providing alternative growth options;
  • Ensuring confidentiality in the sale process;
  • Expediting the process and keeping it moving;
  • Allowing you to focus on your business;
  • Assisting in practice transition;
  • Facilitating closing and accomplishing checklist items; and
  • Developing an overall plan for transferring the practice.

The broker is motivated and incentivized to help you make the sale, so you may question the motives of or need for the broker. But the simple truth is that the broker can often be the difference between closing the deal and it falling through. Buyers and sellers often have substantially differing opinions on what constitutes a “fair” deal. From price amount, structure, and allocation, to limitations and qualifications of representations and warranties, to post-closing transition requirements, there are many opportunities for discord among the parties. And while it is typically the job of the attorney to hammer out these terms and prepare and revise the purchase agreements, it is the broker that often can get past the recalcitrance and get the parties talking.

The benefits of having the right law practice broker to guide and assist you through the purchase and sale process often more than justify the commission. How do I find a buyer? Is the seller asking too high a price? Does the buyer have the right qualifications? Is the market share and growth outlook of the seller the right fit for your practice goals? These are complicated questions that often take a qualified and experienced broker to help you fully understand. And while you may feel comfortable or qualified to or sell a practice based on your experience as an attorney, you can still benefit from speaking with a broker.

As you begin considering purchasing or selling a practice, take the time to speak to a law practice broker. Whether you move forward with his or her services, you will almost certainly benefit and learn from the experience.

 

 

Six Steps to Prepare Your Practice for Sale

Six Steps to Prepare Your Practice for Sale

So you’re ready to sell your law practice. That’s great! Selling your law practice can be an excellent way to realize the value built up over years of practice and to generate income as you transition into the next phase of your career or life. But where do you start? Listed below are a few steps to review and help you prepare for the transition and sale process.

1.Set a Time frame.  When do you want to sell? Knowing this (flexible) date in mind, and factoring in a post-transition assistance period, is important in readying the practice for sale and maximizing sale value.

2.Self-Education.  Spend some time researching the process, the applicable laws and rules (including NCRPC 1.17), and the practical concerns of putting practice for sale on the marketplace.

3.Get Your Team in Place. You can’t go it alone, although it may be tempting: as a lawyer, you may have helped sell many businesses, but that does not mean you are necessarily qualified to best conduct the sale of your own. Having the right people to help you through the process will not only make it easier but can also have a dramatic effect on the bottom line. Additionally, you are trying to run a practice, so your time and focus are limited. Find yourself a law practice broker and CPA, and consider consulting or retaining a financial advisor, an insurance advisor, and a valuation expert.

4.Value your Practice. It is a good idea to have a verifiable idea of your practice’s value before placing it for sale. And while we are all likely to place a high premium on the work that we do, a potential buyer may see things differently. Consult with your practice valuation expert on current value and ways to increase value.

5.Analyze and Initiate Steps to Make Your Practice More Valuable.  Get your practice in the best shape possible. Client management, practice areas, intended timeframe for sale, billing and realization rates and procedures, and employee management and transition are some of the factors that go into valuing a practice. There may be ways to improve efficiency and results in any or all of these areas. If you give yourself enough time, these improvements may make the practice more appealing to potential buyers and may lead to increased sale price and take-home profits.

6.Develop Your Strategy. Consider the type of intended buyer, your financial needs for retirement or next phase (consult your financial planner and CPA), necessary sale price to provide for those needs, tax strategies, internal communication, and transition needs, and other desired terms of sale. Prepare your strategy. It may and likely will change, but don’t adlib the sale process.

Selling your practice does not happen overnight. It takes months of prep as well as months, if not years, of post-transition assistance. You have to start somewhere, however. Just as you may advise a client preparing to sell his or her business, start by getting your house in order. These steps should help.

Tom Lenfestey is the Managing Member of The Law Practice Exchange, LLC, as well as a practicing North Carolina attorney The Law Practice Exchange, aims to curb the lack of knowledge in the profession on law practice transitions by educating and advising attorneys on the number of different options available in the legal marketplace and also serving as a confidential broker and advisor to seek and provide connections for those right opportunities between an exiting attorney and a growth-focused attorney or firm. Find out more at www.TheLawPracticeExchange.com. © 2021 The Law Practice Exchange, LLC. Reproduction in whole or in part is strictly prohibited.

Law Practice Sale Tips

Law Practice Sale Tips: Check the Checklist off the Checklist. As most (probably all) legal practitioners know, a good checklist is a lifesaver when it comes to completing legal matters. That principle holds whether the matter involves suing on a faulty construction defect claim, administering an estate, or selling a business: especially when it comes to selling a law practice.

Your transaction checklist can mean the difference between a smooth, effective, and efficient closing and a deal that falls through due to an issue you didn’t think to check. There is any number of other factors that affect the deal, of course, but the checklist is a must.

Appear when searching for law practice sale tips

The law practice sale tips will likely look substantially similar to checklists you may use in other M&A deals: it will involve many of the same general categories, including the following:

1. Putting the team together (CPA, Banker, Law Practice Broker, etc.)

2. Addressing financing requirements before closing.

3. Seller inspection matters, such as entity and financial review; asset inspection and review; due diligence for liens, judgments, and encumbrances; IP review; employee matters; licensing and permits; contracts, assignments, and third party consents; taxes; client information review; litigation and insurance issues; and other disclosure needs.

4. Definitive transaction agreement and ancillary document preparation and review.

5. Pre-closing actions.

6. Closing actions, including payoffs and verification of funds transfer, license and title transfer, utilities and service connections, and others.

7. Post-closing actions, including outstanding payroll and employee issues, retention of employees, verification of vendor transfers, and others.

The nuances and subtle differences between the sale of law practice and the sale of another entity, particularly involving your ethical responsibilities to your clients, will have an enormous impact on the transaction. Furthermore, with a law practice transfer, the selling attorney is most likely going to be engaged by the buyer for an extended period for goodwill and client maintenance, the association of a competent attorney in the practice area, and other ongoing practice needs.

Yes, in many ways the practice sale list is similar to the checklist you would see in other types of transactions, but on a much more detailed and intricate level that is directly impacted by the structure of exit chosen and the professional requirements. It is incredibly important, therefore, to use a law-practice-specific checklist for the sale of your practice.