As a law firm owner or partner, you may eventually find yourself in a position where you want to sell your firm. This can be for a variety of reasons, including retirement, a desire to move on to a new opportunity, or simply a change in personal circumstances. Whatever the reason, selling a law firm is a significant decision that requires careful consideration and planning.
One key factor to consider when selling a law firm is its readiness for sale. A law firm that is well-prepared and organized is much more attractive to potential buyers, and will likely command a higher price.
So, how can you ensure that your law firm is ready for sale? Here are a few key steps to take:
Get your finances in order. Potential buyers will want to see accurate and up-to-date financial records, including financial statements and tax returns. Make sure that your records are organized and easy to access.
Review and update your contracts. It’s important to review all of your contracts, including client contracts, vendor contracts, and employee contracts, to ensure that they are in order and up-to-date. This will help to minimize potential issues that could arise during the sale process.
Review your business processes and systems. Potential buyers will want to see that your law firm has efficient and effective systems in place. Take a look at your business processes and see if there are any areas that could be improved or streamlined.
Assess the value of your law firm. It’s important to have a realistic idea of the value of your law firm before you start the sale process. This will help you to set an appropriate asking price and also give you a benchmark to measure offers against.
Prepare a sales pitch. Once you’ve got your law firm in good shape, it’s time to start thinking about how to sell it. Prepare a sales pitch that highlights the key strengths and selling points of your law firm. Be sure to include information about your client base, your team, and your track record of success.
Selling a law firm is a complex process, but with careful preparation and attention to detail, you can increase the chances of a successful sale. By getting your law firm ready for sale, you can increase its value and make it more attractive to potential buyers.
In today’s post, we’ll be discussing the process of valuing a law firm.
There are several factors that can impact the value of a law firm, including the size of the firm, its reputation, the quality of its attorneys, the types of cases it handles, and its financial performance.
One common method for valuing a law firm is the “multiples approach,” which involves using financial ratios to determine the value of the firm. For example, the price-to-earnings ratio (P/E ratio) compares the firm’s net income to its value, while the price-to-sales ratio (P/S ratio) compares the firm’s sales to its value. By comparing these ratios to industry averages, it is possible to get a sense of how the firm’s value compares to other firms in the same sector.
Another approach to valuing a law firm is the “asset-based approach,” which involves looking at the value of the firm’s physical assets (such as office equipment and real estate) and intangible assets (such as its intellectual property and customer relationships). This approach can be useful for firms that have a significant amount of tangible assets, such as real estate law firms.
It’s important to note that there is no one “correct” way to value a law firm, and different methods may be more appropriate depending on the specific circumstances of the firm. In addition, the value of a law firm can change over time due to changes in the legal market, shifts in the firm’s business strategy, and other factors.
If you are considering buying or selling a law firm, it’s important to work with a qualified professional (such as a business appraiser or a financial advisor) to ensure that you are getting an accurate valuation.
Stay tuned for more updates and insights on a variety of topics.
Are you preparing to buy or sell a law firm? If so, it is imperative that you have an accurate valuation of a legal practice. This raises an important question: How do you appraise a law firm? The short answer is that you must take a comprehensive approach that properly accounts for the practice’s hard assets, intangible value (goodwill), and liabilities.
At The Law Practice Exchange, LLC, we are leaders in the appraisal of legal practices. Our team of skilled professionals strongly believes in taking an individualized approach to law firm valuation. We want to make sure lawyers have the tools and knowledge that they need to protect their financial interests. In this article, you will find a comprehensive guide to appraising a legal practice.
An Appraisal is an Expert Valuation of a Law Firm
Every Business has a marketable value. A legal practice is no exception. The challenge with a business—especially a law firm—is that assigning a precise value is difficult. Law firms as business models vary by practice area, location, and ownership structure, and two firms that look similar on the outside can be very different once a valuation is done and all internal factors are considered. Professional support is a must. As defined by the Corporate Finance Institute (CFI), an appraisal is simply “an expert’s estimate of the value” of a particular asset. Anything can be appraised—from antiques to real estate to a legal practice. When a complex asset, such as a law firm, is being sold or otherwise transferred, a comprehensive and reliable appraisal is a must.
Owner’s Earnings are Often a Baseline in the Law Firm Valuation Process
There is not one specific method to value a law firm. Instead, the appraisal of a law firm is highly fact specific. All of the assets—including things like goodwill, brand value, and other intangible assets (client matters or cases, website, phone, etc)—must be considered. In addition, the liabilities of the legal practice should always be evaluated.
Most often, the net income or owner’s earnings of the law firm is used as the fundamental baseline to conduct the appraisal. A law firm’s value is often considered somewhere between two (2x) and three times (3x) of the average annual net income after some adjustments. That’s a wide range and some even go higher while some are lower, but it depends on many factors in the appraisal to determine where on that scale a law firm may land.
However, it is important to emphasize that there are exceptions as well which can break out of that range. As well, it is important to note that other valuation methods are utilized in addition to the net income. A legal practice that is being appraised must be carefully evaluated. In some cases, a practice may be worth more than net income would suggest. In other cases, a law firm’s net income may overstate its value.
Three Key Steps in the Legal Practice Appraisal Process
An appraisal of a law firm is a key component of any type of transition. You need a reliable and accurate valuation of a legal practice if you are preparing to buy a firm, sell a firm, or develop a succession plan. An appraisal should be comprehensive. Careful attention should always be paid to any unique value propositions offered by or drawbacks associated with a legal practice. The steps in the process may include the following:
Discovery: The law firm appraisal process generally begins with discovery. Among other things, this aspect of the process typically entails an assessment of purpose, gathering of all relevant financial documents and records, and gathering all non-financial information about the history and operations of the firm. Only when an appraiser has comprehensive information will they be in a position to accurately value a legal practice.
Analysis: An appraiser will conduct an in-depth, detail-driven analysis of all of the documents, records, and other business information that they collected. The analysis will provide a valuation for a legal practice based on several different factors, including revenues, net income, recent sales of comparable law firms, unique strengths and weaknesses of the legal practice, and other material issues.
Appraisal: As a general matter, an appraisal is sought for a purpose; it could be a sale, a purchase, or a transition/succession plan. Regardless of that purpose, the appraisal of the law firm needs to be well-supported. That an expert assigned a particular legal practice is not going to do much unless you can support their assessment in negotiation or business planning. This is why you should always work with a professional who can provide a comprehensive law firm appraisal report.
The Law Practice Exchange is the Leader in the Valuation of Legal Practices
At The Law Practice Exchange, LLC, we are the experts in law firm brokerage services. Our team is built by lawyers for lawyers. The importance of an accurate law firm appraisal cannot be overstated. If you have any specific questions or concerns about the appraisal of legal practice, we are more than ready to help. Call us now or connect with us online to set up a fully confidential appointment. Our brokerage firm provides nationwide law firm appraisal services.
The legal industry is competitive. The American Bar Association (ABA) reports that there are approximately 1.3 million licensed attorneys in the United States. Those attorneys work across more than 400,000 law firms—with the overwhelming majority being small law firms having nine or fewer attorneys on staff. Given the numbers of these law firms, it begs the question of how these law businesses are continued as ownership changes over time. In many ways, a law firm is similar to other businesses. One of these is that it can be bought or sold.
The first step in buying or selling is always to look at what’s the value of the business. However, there is an inherent challenge that comes with valuing a law firm for when considering an exit planning, sale, or purchase. Whether you are considering selling your law firm, buying a more significant stake in your current practice, or buying a separate law firm, it is imperative that you know how much it is worth as a benchmark to set other details in place. In this article, you will find a comprehensive overview of the key things to know about how to value a law firm.
Every Firm has a Marketable Value—But It Can Be Difficult to Determine a Precise Number
Every law firm in the United States has a marketable value. It is worth something to somebody. The core challenge of buying, transferring, or selling a law firm is that it can be challenging to put a precise dollar figure on the value. A law firm’s “goodwill”—an intangible asset that encompasses its reputational value—plays a big role in the valuation of a law firm.
An Overview of Methods to Value a Law Firm
There is no “one” correct way to value a law firm. There are several different common methods that are used to determine how much a law firm is worth. What makes the most sense for your situation depends on the specific factors. Some methods that are used to value a law firm include:
Rule of Thumb Approach (Revenue): Known by the short-hand “rule of thumb” method, this law firm valuation approach looks at revenue. The law firm’s value is presumed a multiple—usually one or less—of a single year’s total revenue.
Asset-Based Approach: With the asset-based approach, value is assigned to the tangible and intangible assets held by the firm. The approach can be useful for law firms that own significant tangible assets, such as receivables, cases in progress, or other non-goodwill assets.
Market Comparison Approach: The market comparison approach looks at similar sales that have occurred in recent months or years. A comparator law firm can help to provide a baseline.
It should be noted that law firm valuation methods are not “either/or.” In most cases, it makes sense to consider multiple different valuation approaches to determine the proper valuation for a law firm and when a true valuation analysis is done more approaches are utilized and typically weighted by how applicable they may be to the subject law firm.
Many Factors Affect the Valuation of a Law Firm
A law firm should always be valued on a fact-specific basis that considers all methods, but also the non-financial aspects of the firm that may make it unique and push the value up (or down). A careful assessment is needed of the law firm’s prior, current, and future financial position along with these other factors. There is a wide range of different things that will impact the core value of a law firm. Specific factors that can impact the valuation of a law firm include:
Revenue (both historical and year-to-date)
Size of practice (number of attorneys and staff)
The value of hard assets
Ongoing financial liabilities, including debts
Historical and current-year profitability
Type of practice area
Location of the practice
Involvement of the owner-attorney in legal work
Marketing and brand
Demand for practice area
And many more.
Law Firm Valuation Tip: Documentation is key. Whether you are buying or selling a law firm, it is crucial that you thoroughly review all of the firm’s financial documents and records. This includes everything from annual financial statements to business tax returns to appraisals of hard assets. To determine the true financial picture of a law firm a comparison and new model of the financials are usually built to show the true normalized financials.
Both Buyers and Sellers Need to Get the Valuation Right
Price matters. A seller of a law firm that undervalues their business is getting less than they deserve. An enormous amount of time and effort goes into building a successful law firm. Along the same lines, a buyer that pays more for a law firm than it is actually worth will be in a challenging financial position. It may be difficult to make out well on the investment.
The Bottom Line: A law firm is inherently difficult to value, but market value metrics and experts are available to help more now than ever before. A wide range of different unique factors must be considered to determine how much it is actually worth and a skilled professional who has experience with law firm valuation can help you determine the value.
The Law Practice Exchange is a Leader in the Valuation, Buying, and Selling of Law Firms
At The Law Practice Exchange, LLC, we were built by lawyers for lawyers. If you have any specific questions or concerns about how to value a law firm, we are here as a professional resource. Contact us today to set up your fully confidential initial appointment. We are also proud to be the nationwide leader in law firm brokerage services.
You’ve decided that it’s finally time to take the step and move forward in exploring a purchase of a law firm. You have located one or a few potential law firm listings that you think may be the right choice for you or your law firm’s needs and you are ready to get things moving. However, there is one thing you should do before diving into a review of the law firms, financials, calls, and meetings to see if one is the right opportunity for you – you should get pre-qualified for the purchase of a law firm.
What Is Pre-Qualification?
If you’ve ever gotten a home mortgage before, you may already be familiar with the process of pre-qualification. Pre-qualification is a preliminary commitment from a lender to give you a set amount of money that you can use to fund the purchase. The lender will supply you with a pre-qualification letter or document that you can present to brokers or to sellers when you reach out expressing interest in the law firm(s).
Why Get Pre-Qualified?
If you are going to require financing for any portion of the purchase of the law firm, it is crucial to get pre-qualified before you take any further steps. Even if your needs are only for working capital and not related to the acquisition price of a firm you would still want to make sure that key piece to the equation can be fulfilled. Doing so at the beginning of your search will provide a number of benefits:
Saving Time – By applying for pre-qualification, you’ll know up front whether or not you’ll even be able to obtain a loan of the type, the amount or for the purpose needed. In the event that you can’t obtain pre-qualification with your current lender due to that lender’s industry focus, you’ll have time to connect with a lender which is focused on law firms and move things forward for you as needed.
More Focused Search – Your pre-qualification will let you know precisely how much you can spend on the purchase of a law firm and what works for your goals, needs and overall financial risks. As a result, you’ll be able to focus on the law firm that you can afford. The improved focus will make for a more streamlined search process and help you find the perfect law firm to buy much faster.
Expanded Options – Some prospective law firm buyers are pleasantly surprised by their pre-qualifications and find out they will be able to afford a different scale of law firm than they anticipated. Once you know how much you will be able to borrow, you may be able to expand your search to more profitable or larger law firms that may be better fits for you or your firm in the long run.
Credibility – Having a pre-qualification letter from a lender will show sellers that you’re the real thing. By establishing financial credibility from the start, you’ll be in a better position to negotiate. When sellers take you seriously, they’ll be more cooperative and eager to work with you.
How to Get Pre-Qualified?
To get pre-qualified, you’ll need to approach lenders and complete an application. Lenders may want to see proof of income, bank statements or tax returns, so it’s helpful to have those documents together.
If you’re looking for assistance with pre-qualification or want to line up your next steps so that you can begin searching as soon as you have your qualification paperwork, The Law Practice Exchange can help! Contact us today and we can provide law firm marketplace lenders and other resources to help you expedite this process.
The legal industry is aging and replacement law firm owners and leaders are needed. According to data from the American Bar Association (ABA), a record high percentage of active attorneys are senior citizens. While more and more lawyers are working later in their life, a significant share of the lawyer population is expected to retire in the coming years.
This raises an important question: What options do law firm owners have when they are ready to retire? The answer is that you have several different choices, including selling your firm which can take many different structures depending on your specific goals.
Be Proactive: Ensure a Strategic Exit from Your Law Firm
For lawyers, preparing for retirement can be challenging. Owning and operating a law firm is complicated and the client demands take priority. You do not want to simply wake up one day and leave the business without warning. Many unique issues need to be considered and addressed when transitioning a legal practice—from client notification – to file and case transfers – to insurance coverage.
By ensuring a strategic exit from your firm, you can do right by yourself, your family, your associates, and your clients to keep what you have built going even after you are done running the firm. A proactive approach can make a big difference. Give yourself time to develop the right strategy. The sooner you start preparing for retirement from your firm, the better position you will be in for a smooth transition.
Know the Three Main Options If You are Ready to Retire from Your Law Practice
For the owners of law firms, there are many different ways to retire from legal practice. Every situation is unique. Some attorneys may want a clean break from the law. They may be ready to sell their law firm and move on to the next stage of life. Other attorneys may be interested in keeping some part-time role with the firm, perhaps as an of-counsel lawyer or a consultant. The options for lawyers who are ready to retire from their firm typically fit into the following three broad categories:
Transfer the Law Practice to a Successor (Family Member, Junior Partner Associate, etc): Upon the retirement of the primary owner, many law firms are transferred to an internal successor. It could be a child, a long-time associate, or someone who joined the law firm relatively recently. Transferring a law firm to a successor requires a well-considered succession plan. The plan should ensure that the successor—or multiple successors—has the funding, resources, and knowledge that they need to take over the firm.
Sell the Law Firm on the Open Market to a Third Party: A law firm is a marketable asset. It can be sold on the open market to a third party. Indeed, many law firms are sold to outside parties each year. You do not have to have any pre-existing relationship with the buyer. Selling a law firm on the open market to a third party is often the best approach for retiring attorneys who are looking to get the most out of the business that they built. That third party may be another law firm or an individual attorney. The sale may be structured as a merger, joinder, of counsel relationship, or others, but the financial and exit strategy goals remain the same.
Close Down the Law Firm: A final option that is always available is to simply close down the law firm. While it may be a sensible option in some limited cases, closing a law firm is less advantageous than selling the firm or, at the very least, selling its assets. Building and developing a law firm takes a tremendous amount of work and sometimes closing it down requires a significant amount more. Retiring lawyers should consider the value of their firm before closing it down and see if instead of taking on the burden of shutting it down themselves, they may be able to sell or affiliate with another firm to save some of that time and expense in closing it down. Even a solo practitioner’s small law firm has a market value.
For retiring lawyers who own small or mid-sized practices, transitioning to the next stage of life can be complicated. You do not have to figure everything out on your own. The Law Practice Exchange, LLC is a brokerage firm dedicated to helping attorneys value, sell, and buy law firms. We are available to help you understand and evaluate all of your available options and help you decide which is right for you.
Ready to Retire from Your Law Firm? The Law Practice Exchange Can Help
At The Law Practice Exchange, LLC, we were created by attorneys for attorneys. With an exclusive focus on helping clients buy and sell legal practices, our team has the knowledge, experience, and professional expertise that you can trust. If you have any questions about your options when you are ready to retire from legal practice, we are here to help. Give our resourceful law practice brokers a call now or connect with us online to find out more about how we can help. We provide nationwide law firm brokerage services.
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.
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.
Though long and satisfying, a career in law also has its sunset years. You will have to think about what to do with the law firm you have built for years through blood and sweat at some point. You will want the best for your law firm as you’ve done for many years. One decision that most law firm owners consider is selling the law firm. It’s not an easy decision, but it’s a rewarding one that ensures you get some compensation for the years of work put into the firm.
Like a case, you should have a plan, follow jurisdiction rules and ask for assistance when necessary to ensure you get the valuation and sale of the firm right. You will also need several documents, as highlighted below.
A Written Notice
Most law firm sale structures require a written notice to your active clients. Depending on your state rules and the sale structure you choose this notice may contain information about the proposed sale and the client’s right to retain other counsel or take possession of the file is one of the initial documents you will need as per the ABA Model Rule 1.17, adopted in 1990. However, if you are merging your practice, joining another practice or selling with a plan to continue for some time this notice requirement may be a bit different than under 1.17 and should be used to inform clients, referral sources, community and others of your continuation plan and introduction of the successor.
Before selling your practice, you should check your state’s rules. Some states have adopted Rule 1.17, and others have variants of this rule. And remember, your sale structure matters when looking at the ethical requirements.
Valuation
Pricing is a vital factor in the process of selling a law firm. Like other businesses, there’s more to the firm’s value than meets the eye. Start by hiring a CPA or consultant to help set the firm’s price.
Although physical assets like furniture are a part of the sale price, they are not the initial focus of evaluating the cost of the law practice. Buyers are more interested in the firm’s goodwill or adding practice areas.
The CPA or consultant you select will value the fixed assets and goodwill of the firm. While assets are much easier to value, goodwill is slightly different. For goodwill, the consult will evaluate:
The firm’s net tangible assets on an accrual basis
Add back benefits and compensation to reconstruct the net income and subtract a reasonable compensation package
Calculate the average of the reconstructed net income for three to five years
Multiply the net tangible assets from the reconstructed net income average by a reasonable return date
Subtract the reasonable return from average reconstructed net income (Excess net income)
Capitalize on the excess net income to arrive at goodwill.
The goodwill and firm asset valuation determine the price tag to attach to the sale of the law firm. It’s crucial to remember that according to the ABA Rule 1.17, the fees may not be raised because of the firm’s sale.
An Offer-to-purchase Agreement
After the valuation process, you will set out to find a buyer. Considering this is your lifelong work, you want to find a buyer with a good reputation, ample experience and education to run the firm profitable. Potential buyers can include attorneys looking to expand, lawyers, coming out of Biglaw or even a lawyer currently working in your practice.
Once you identify the right buyer and there’s serious interest in the firm, you will need an offer-to-purchase document. This is a legally binding contract containing the details of the sale. Some of these details include:
Purchase price – This is the price you have agreed with the buyer to purchase the law firm. Some OTPs will also include additional terms like an expiry date for you to accept the offer on the purchase price or make a counteroffer.
Conditions of sale – This is possibly the most essential aspect of the sale agreement. It details the conditions of the sale, usually agreed upon by both parties.
Occupation date – It’s prudent for the Offer-to-Purchase to have an occupation date for a smooth transition. By the occupation date, you should have removed all personal effects and other items not part of the sale from the premises and have it ready for occupation by the new owners. You can also have a transition period set out so the new owners can come in and learn the ropes of how things run at your law firm.
The terms of the sale contract can be extensive depending on your wishes and desires and the running conditions of the firm.
A Note on Seller Financing
The buyer has multiple financing options when purchasing the law firm. Seller financing is one of the fastest and most convenient methods, especially in a shrinking credit market.
In this case, you take on the role of the lender. You and the buyer will sign a promissory note containing the financing terms and record a deed of trust (in some states) with the local public records authority.
This approach applies if the buyer cannot afford to purchase the firm outright and would rather pay installments.
Current and Past Financial Statements
Any shrewd buyer will want to understand the law firm’s financial health. The easiest and most practical way to do this is by requesting that you provide current and past financial statements of the business, usually up to three years. This allows them to verify that the firm is profitable and has been growing.
A Statement of Seller’s Discretionary Earnings
A statement of the Seller’s Discretionary Earnings (SDE) calculates the financial benefits that you have derived from a business on an annual basis. Some buyers may also present this as an adjusted cash flow request.
This statement gives the buyer insight into how clean the business’s financial details are. The leaner or more practical your SDE statement is, the more likely you will sell the firm at the best price and terms.
Cash Flow Statement
As the buyer shows more interest in the firm, they will request a cash flow statement. The statement has detailed information about the business’s cash flow, indicating how much money the business is making and spending. The cash flow is vital in several ways:
It gives the buyer insight into the spending activities of the firm
It gives the buyer ideas on how to increase cash flow in the firm, potentially
Provides a basis for a working capital analysis
Improved knowledge of cash balance
Insight into potential crisis management planning for firms in financial constraints
Contact The Law Firm Brokerage Experts
Although this is meant to be a baseline of what you may need to sell your law firm, buyers can and often do request additional documentation depending on the details and complexity of the firm’s sale. It’s highly recommended to engage experts at every corner to get the most value out of the sale and the firm’s best terms with the new owners.
Selling your law firm is a complex process and with the right team on your side, you can maximize your firm’s value and reduce your stress throughout the process. Contact our team here at The Law Practice Exchange today for a confidential, no-obligation consultation and find out more about selling your firm.
According to a recent American Bar Association report, over 65% of law firm partners will retire in the next eight years. Baby boomers, who have dominated law firm management for decades, are retiring, and millennials are taking their place. Is your firm ready for this change?
The legal sector is undergoing significant upheaval, and the greatest protection you can have is a robust succession plan.
Regardless of where you are in your legal career, law firm succession planning is critical to your company’s survival. According to a 2018 Thomson Reuters study, just 37% of legal firms had (or were developing) a detailed succession plan.
It isn’t always easy to imagine a circumstance in which your law firm exit plan would be required. The unexpected can, however, occur at any time. If something happens to you, a succession plan provides you peace of mind and assures that your clients and partners are in a great spot to succeed. You can ensure that your clients won’t be caught off guard regarding their legal needs by planning ahead of time.
However, law succession planning is often not an easy task, and many law firms make mistakes when developing one. When planning for succession at your law firm, don’t leave it to chance – the team here at The Law Practice Exchange are succession planning and law firm M&A experts and can help you make sure your firm is set up for success if or when an attorney exits the practice.
Common Pitfalls to Avoid When Developing a Law Firm Succession Planning
The following are some of the common mistakes we’ve seen law firms make when coming up with a succession plan:
Not Mentoring Upcoming Partners
If you employ young talent, but don’t coach them well to become partners, you’ll be in a predicament. You should be grooming younger partners toward management long before your older partners announce their retirement.
Place them on panels to watch how they behave and respond in different scenarios. Make them a part of the firm’s management, client proposals, client relations, and vision.
This aids junior partners in assuming leadership roles and aids other firm members in seeing them as leaders and feeling more at ease when their leadership status is established.
Not Giving Plenty of Time for Transition
Giving yourself enough time is probably the most crucial thing you could do to ensure a smooth leadership transition. Law firm succession planning should be a continual component of the company culture for large and mid-sized firms, where there may be numerous departing senior partners.
Even in a small firm where just one lawyer is transferring, succession planning should begin at least five years ahead of time. It’s not a procedure that can be started when a senior partner wants to retire in a year. There’s always a need to hunt for lawyer “stars” to strengthen your roster and safeguard your firm’s long-term viability.
Not Valuing A Retiring Senior Partner’s Contribution to the Firm
Senior partners are encouraged to hang onto their rank for as long as feasible by the existing compensation system, which rewards attorneys for billable hours and origination for a legitimate reason. Seeing that your years of hard work have resulted in huge amounts of money for the firm fills you with pride, so it’s no surprise that when it comes to succession planning, the most common concern from senior partners is, “What about my compensation?”
Compensation is a sensitive and frequently contentious discussion. However, one tried-and-true technique to make it go more seamlessly is to compensate older partners for their immense contribution and for their continued teaching of rising partners. There’s no use in creating a succession plan if your firm is not prepared to compensate transitioning senior partners for their contributions.
Not Involving Business Development Teams and Marketers
Whether working in-house or as consultants, legal marketers and business development experts play a critical role in attracting the best candidates. Law talents with leadership capabilities are in demand, so having a recruitment staff that can uncover them and sell them on your firm is priceless.
Once these talents have been employed, they must be trained and coached to become rainmakers, another job for the business development team. Business development is a firm’s lifeline; if lawyers can’t generate business, everything crashes. That’s why your firm’s succession plan should include a vital company growth component and input from experts in the field.
Not Monitoring Your Law Firm’s Progress Enough
A succession plan’s schedule is self-evident: the senior partner will depart their role on a specific date. However, how you prepare for the change in the meanwhile is critical. To ensure that objectives are reached, essential team members should meet regularly.
Stakeholders in your firm should meet every three months, as doing it less often raises the chances of the transfer failing. These panel discussions allow everyone to track their progress and enable top partners to receive public acclaim for their achievements.
Regular meetings keep individuals responsible, as succession planning is about altering people’s behavior, which can be a challenge.
Contact Our Law Firm Succession Planning Team
Planning for the succession of your law firm can be a daunting undertaking that requires a significant amount of time. Setting aside time to organize your firm’s succession plan might be challenging, from ensuring you’re following your state’s requirements to drafting the proper documentation and choosing what to do after retirement.
If you’re having trouble keeping up with your succession planning checklist, start small and continue expanding your strategy. Succession plans are systematic, and failing to have one puts you, your business, and your clients at peril. Because you can never know when a catastrophe may occur, the best policy is to be prepared.
The Law Practice Exchange has the experience and the expertise to help with succession planning for your law firm, whether that’s bringing in a junior attorney and training them to manage the firm, or whether it’s exploring options to sell your law firm in the future. Call us today or fill out our online intake form to take the next step in securing your future.
