The Importance of Law Firm Succession Planning

Every business needs to be prepared for the future. Law firms are no exception to the rule. A crucial part of planning for the future of your legal practice is putting a comprehensive business succession plan in place. Law firms without a well-crafted succession plan are vulnerable. At The Law Practice Exchange, LLC, we are committed to helping lawyers and law firms plan for practice transitions. In this article, you will find an overview of the importance of law firm succession planning.  What is Law Firm Succession Planning? Investopedia defines business succession planning simply as a strategy that “ensures that businesses continue to run smoothly and without interruption after important people move on to new opportunities.” In other words, a succession plan for a law firm is a strategy designed to transition the legal practice—as a business—from one group of leaders, partners, and decision-makers to another. Exactly what a business succession plan for a law firm will entail always depends on the specific needs of the legal practice.   Why Succession Planning is Essential for Law Firms  Every law firm needs a comprehensive, customized business succession plan. Whether you are a partner at a mid-sized law firm or a solo practitioner, it is imperative that you have a plan in place that adequately protects your rights, interests, and your business. Some of the most notable benefits of law firm succession planning include the following:  Every law firm succession plan is different. Whether the ultimate goal is for the law firm to be sold to another party, ownership interests to be transferred to existing partners, or near partners are to be brought into the practice, a law firm succession plan can help make the transition as easy as possible on everyone involved in the process.  Three All-Too-Common Mistakes to Avoid With Law Firm Succession Planning Succession planning is crucial. At the same time, a law firm succession plan will only be truly effective in protecting your financial interests and the future of your business if it is well-designed. In too many cases, law firm partners make avoidable errors in business succession planning. Here are three common law firm succession planning mistakes that you need to avoid:  We are a Leader in Law Firm Succession Planning  At The Law Practice Exchange, LLC, we are a trusted national leader in the buying, selling, and transitioning of law firms. If you are preparing to purchase a law firm, we are here to offer support and guidance. Contact us today to set up an initial confidential consultation. We can help you meet your objectives. Our experienced law firm brokerage team works with clients nationwide.

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Selling Your Personal Injury Practice: What You Need to Know

Personal injury law is a highly competitive field, and as a personal injury attorney, you may find yourself at a point where you’re ready to move on and sell your practice. Whether you’re looking to retire, take on a different type of legal work, or simply move on to a new chapter in your life, selling your personal injury practice can be a great option for exit and monetizing the value you have built. However, having the right approach is key to ensure a smooth transition and secure the future of your practice. Before you begin the process of selling your practice, it’s important to understand the value of your business. Personal injury practices are typically valued based on a multiple of their adjusted net income along with a strong focus on case inventory and projected future intake from brand assets. However, there are other factors that can affect the value of your practice, such as the size of your client base, the types of cases you handle, and the strength of your reputation. It’s also important to consider the terms of the sale. Will the buyer be purchasing the entire practice, or just a portion of it? Will you be able to remain involved with the practice in some capacity, such as a consultant? It’s important to have a clear understanding of these terms before entering into any agreements. Once you’ve found a buyer, it’s important to ensure that the transition is smooth. This includes transferring client files, transferring any retainers, and ensuring that all legal and ethical obligations are met. It’s also important to inform your clients of the sale and ensure that they are comfortable with the new attorney handling their case. Selling your personal injury practice is a significant decision that requires careful consideration. By understanding the value of your practice, finding the right buyer, and ensuring a smooth transition, you can secure the future of your practice and move on to your next chapter with confidence. It’s also important to seek professional advice from a law firm valuation and brokerage expert (we know some…hint, hint), as it will help you to navigate the process and ensure that your rights and interests are protected.

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Is Your Law Firm Ready For Sale?

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: 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.

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What’s My Law Firm Worth?

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:  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:  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. 

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Preparing For A Law Firm Sale – What Documentation Do You Need?

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

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How To Sell Your Law Firm: An Overview

When you have worked at your law practice for many years, weariness often starts to creep in and manifest itself in many ways. For some attorneys, this is a sign that it may be time to consider selling their firm. While most professionals begin exploring succession avenues at some stage of their career, many lawyers don’t realize that selling their firm is an option. Whether you’re a solo or a larger firm, it’s worth researching your firm’s value if you’re considering moving to another venture or starting to plan for retirement or succession. Should You Sell Your Law Firm? If you’re considering selling your law firm, odds are it is worth more than you think. Many lawyers don’t totally appreciate the value of what they’ve created throughout their professional lives. A lot of time, work, and money go into building a law practice, and that all combines to give your firm a transferable value of its own. Even if you’ve built your practice on your own name and reputation, you should realize that your practice will carry value for someone else, even long after you’ve retired or moved on to something else. In addition to tangible assets such as your office and technology, you likely have a solid track record and goodwill in the community that another firm or lawyer may be willing to pay for. Key Elements You Need To Consider As You Prepare To Sell Your Practice A key consideration is the law governing the sale of practice within your state. California was the first state to develop and implement rules governing the sale of law practice back in 1989. Today, the American Bar Association (ABA) Model Rules of Professional Conduct Rule 1.17 (enacted in 1990) guides the sale of a law practice.  This has been absorbed into the state laws in most of the jurisdictions in the United States. Part b of the rule establishes that the practice or practice area must be sold in its entirety. Regarding its pricing, one of two prices is attached; either a fixed price calculable from an analysis of the firm’s past performance or an earn-out (based on future revenue). The sale of the practice essentially translates to the selling lawyer losing practice rights in the firm. Nevertheless, the law remains rather vague on the window of time leading to when you, as the seller, need to cease practicing. Likewise, no such requirement prompts such a transition to be immediate.  As a matter of good faith between parties to a contract, the selling lawyer must give notice of sale via certified email to all its clients. This letter can be used as the announcement of merger, joinder with a firm or other positive announcements as well.  When a lawyer comes to buy a practice from you, they are looking to grow their revenue by adding your clients to their client base. Even though the property, office furniture, and technology are of some value, they do not offer the financial security equivalent to regular client traffic and the network that the firm has been able to build over its lifetime. This is why it is very important to gain clients’ consent, agree on the proper message with the buyer and develop the right transition plan before making a sale – the value of the firm strongly depends on them. How A Law Firm Valuation Works The valuation of a law firm typically takes three forms; asset, market, or income valuation. Asset valuation is done on the tangible assets of the company. Most law firm assets owned depreciate over time so the values are low. So, the calculation for the cost valuation is done by deducting the depreciation accumulated from the original price of the items. This figure is known as the book value. Asset value can also include case inventory, receivables, billings in progress and other assets in law firms which can drive the value up. A market valuation is conducted to arrive at a fair market value. In essence, this is the estimated value of the firm based on its comparison to peers in the industry. The ideal scenario would be to find a firm of similar profile and financial standing to compare with and ultimately settle on a figure, similar to a real estate comparison.  However, it is rare to find another firm along these lines to compare to since business operations vary, affecting the overall value of individual firms. This is one of the reasons it’s important to hire a M&A firm experienced in your vertical like our team here at The Law Practice Exchange – our experience helping lawyers buy and sell firms gives us data that is peerless in the industry.  The third method of valuation is cash flow valuation which looks at revenues or income of the firm. A cash flow valuation example would be if you take your gross income (averaged over the past 3 to 5 years) and use a multiplier to come up with a value. The appropriate multiplier is often determined by a number of different variables, including: How Can You Get Prospective Buyers For Your Firm? Marketing a law firm for sale is an arduous process, mainly because of the difficulty to package your product well enough to attract the best buyers. While some lawyers choose to advertise on their own, the best choice is to find a broker to guide you through the transaction as they will often already be connected with potential qualified buyers.  An experienced law firm broker like The Law Practice Exchange can help find and vet qualified buyers for the firm, and in many cases can get a higher valuation for your practice than if you had elected to go it alone or work with a general business broker. What Paperwork Do You Need to Sell Your Law Firm? You’ll first need to appraise and package the structure of your legal practice when selling it. You’ll also need any legal documentation pertaining to the sale

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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 themselves 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 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 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.

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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.

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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: 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. 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. 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. 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.

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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. 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. 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. 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. 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. 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?

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