Jenny Magallen, Author at Law Practice Exchange

Things to Remember When Selling

Posted on January 18, 2022 by Jenny Magallen

Specific Things to Remember When Selling Your Law Practice. While many different considerations are leading up, during, and after the sale process, here are a few to which you should pay particular attention.

Valuation and Increasing Purchase Price. It is common to value our work. It 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.

However, it would be beneficial to review some of the critical factors of valuing a practice. These include historical financial performance and growth, reasonable expectations of future revenue, likelihood and extent of repeat clients, geographic location of the firm, a saturation of practice areas in the local and regional marketplace, and others.

Many factors come into play, so getting a formal opinion from a valuation consultant will almost certainly benefit you in the long run. But make sure you know about your practice’s valuation prospects.

Insurance Considerations. Coverage details will likely be a pivotal point in the sale transaction deal. Maintaining proper coverage is vital due to the nature of legal malpractice insurance coverage.

Coverage details will likely be a critical point in the sale transaction deal, with the seller’s responsibility probably 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.

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!

Rule 1.17 of the North Carolina Rules of Professional Conduct is the seminal authority on your responsibilities during and after this process, laying out certain conditions precedent the ability to sell and providing guidelines on the post-closing transition.

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.

Four (4) Law Practice Deal Roadblocks to Avoid

Posted on November 14, 2021 by Jenny Magallen

During a law practice deal, there are four deal roadblocks to avoid.

1. Financials –If you are a practice owner and don’t have financials that are in good form and up-to-date with the ability to generate reports for accounts receivables, employee costs, historical comparisons of profits and losses, then the time is now to get things in order. Get those items answered first before you acquire a practice.

2. Where the work comes from –A practice owner’s most significant deliverable to a potential buyer is to explain what works for marketing, where clients come from as a result of the firm’s marketing or brand awareness, and the mix of revenues from specific revenues clients or practice areas. If you haven’t been tracking this, it’s time to put some software to accomplish it.

3. Ethics and licensing –If you don’t understand how a law practice acquisition works under ethics rules or other business structures and proceed forward without that knowledge, several bad things can happen, including killing the deal. Licensing for new or out-of-state attorneys takes time, so make sure to reach out and connect with the right knowledgeable resources who can make those items become understood.

4. Transition plan –Sometimes the biggest hurdle in making a deal work, but it is imperative to get it done right. We work with clients to discuss their practices. By doing so, we make sure the buyer and seller can work through transition details that make sense, work for both parties, and preserve the value and lessen disruptions.

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 provide connections for those right opportunities between an exiting attorney and a growth-focused attorney or firm.

3 Questions to Ask Employees

Posted on November 8, 2021 by Jenny Magallen

The 3 Questions to Ask Employees During a Law Practice Ownership Transition.

The foundation of a good transition plan is open communication. Start by meeting with each of the employees and asking them these three questions during the transition.

1. What worked in the former practice, and what should we make sure we continue?

2. What were some of the obstacles to performance in the old structure to change them?

3. What was missing, not being done before, that we should address and focus on adding?

We work with clients to discuss those 3 questions to ask employees during the ownership transition. Also, it is important to know their practices to make sure the buyer and seller can work through transition details that make sense, work for both parties, and actually work to preserve the value and lessen disruptions.

Use the responses received to drive those subsequent changes. Notice that the questions focus on the practice structure and not the previous attorney. You are looking to take something working and improve on it with the team that helped get it to the level of success you just purchased. It would be best if you had them to help you get to the next level as well, so be mindful and move forward with change involving each of them as possible. Get the team to embrace them as their ideas for improvement.

Tom Lenfestey is the Managing Member of The Law Practice Exchange, LLC, and a practicing North Carolina attorney. The Law Practice Exchange aims to curb the lack of knowledge in the professional 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. © 2015The Law Practice Exchange, LLC. Reproduction in whole or in part is strictly prohibited.

Your Law Practice Has Value Upon Exit

Posted on November 1, 2021 by Jenny Magallen

Every Law Practice Has A Quantifiable And Marketable Value. Like any other business, each law practice has a different and marketable value of its own. You have built and managed a proven business model. So, you have come to the understanding that your law practice has value, but next in line is the real question: How much? This number is the one that can make you feel good, feel proud, and maybe even a little boastful or on the other hand. This number may make you reconsider what you are trying to build within your practice, but having an exit option for your retirement is ultimately deciding whether to sell or buy.

Valuing Your Practice: What’s Your Magic Number? Several methods can be used to determine a law practice’s value. Each technique may be right depending on the needs or purpose of the valuation.

Rule of Thumb Methods. The basic premise of these varying methods is to look at past cash flows to estimate future value. They are based on the belief that what has happened in the past should continue in the future.

Revenues. Therefore, practice with average annual revenues of $500,000 may sell for anywhere from $250,000 to $600,000. It is not an alarming number if you previously hadn’t considered your practice had value.

Multiple of Net Income. Law practices will typically sell for a multiple of between 2 to 3 times net earnings. Using our example from above, if that same firm has a net income of $200,000, the value may be anywhere between $400,00 to $600,000.

Market Comparison. In a marketplace of buying and selling law practices where most negotiations and real deals are confidential. While confidentiality adds a layer of difficulty to the overall public valuation process, those with knowledge of the marketplace and what real numbers law practices are transferring can be phenomenal resources.

Key-Value Drivers. Some factors can create a significant swing in value. Some of them will help increase the weight, but some will also lower it like Financial Performance, Growth Potential, Brand Identity, Practice Area, Geographic Location, etc.

Adjustments. There will always be adjustments that need to be made, and those from the critical value drivers noted. These adjustments are typically ones that have made a financial impact on the practice. That said, every valuation should include some adjustments.

The ‘It Depends’ Disclaimer.

Hey, we are attorneys and thus understand that variables can change the rules and the result. You and your practice are unique, and those specific aspects can throw any of the methods above out the window or vary them quite a bit. However, if you genuinely want to know the value of what you have built, start with the above as a first step. Then, go through the valuation process with an expert who is fit to meet your valuation needs.

How to determine your law firm value is a crucial step to any sale or exit planning you may be considering. The above are ways to estimate, but always consider getting an accurate valuation from a law firm broker, valuation consultant, or similar.

Transition or Exit from Your Law Practice?

Posted on October 25, 2021 by Jenny Magallen

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.

What Does Buying a Law Firm Mean?

Posted on October 11, 2021 by Jenny Magallen

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.

http://www.lpexchange.local