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: 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:  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:  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.