Taxes and Fees When Selling a Law Firm

What You Need to Know About Taxes and Fees When Selling A Law Practice. Not every lawyer lives in the world of business sales and transitions and even fewer have ever had the opportunity to advise and work on a law practice sale. The unique blend of law practice transaction specifics with the ever-changing landscape of structure options, how the government taxes proceeds and associated fees with a sale create potentials for some unknown and unwanted surprises.  You don’t need to be a tax or law practice expert, but it does help to put a CPA on your team early. Beyond that,  having an early idea of how things may work always helps in laying out structure and paths to achieve. Consider these quick items on structure and taxation before going too far in your plans: Transaction Structure Options. From stock purchase to asset purchase to mergers and beyond there are many potential purchase structures to consider. Each of those has its impact on taxes and your financials.  Taxation on Sale Proceeds. Depending on the structure of your law practice entity and the structure of the purchase your tax hit can often be anywhere from 20% to 50% or more of the sale proceeds. Making sure you understand how the net amount would be calculated under certain structures and terms to negotiate to lessen that tax hit to the lower range is key. Fees. Yes, you are an attorney but expect to pay other advisors such as practice brokers/consultants, accountants, and even an attorney to help you through the process. Knowing and calculating these as part of your expected after taxes and fees benefit is key. Knowledge of deal terms and having an idea of where key points of the deal may impact your net number is key to get your transition plans moving without surprises later. Look for the right people to add to your team, as it is near impossible to go it alone and plan for the best outcome while minimizing those surprises and hits to the bottom line. 

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The Benefits of Using a Broker in Selling a Law Practice

The Benefits of Using a Broker in Selling a Law Practice Regarding the sale of a law practice, it is reasonable to say that there is a distinct lack of communication,  opportunities, and knowledge in the professional marketplace. While you may know that you want to buy or sell a practice, you may not know where or how to start. Speaking with a law practice broker may provide you with the right tools to accomplish this goal and overcome knowledge deficiencies. What is a law practice broker? The goal and purpose of the law practice broker are to help organize, prepare, value, promote, negotiate and package a deal for the sale of the practice. What does this entail? Generally speaking, a broker will use his or her skills, expertise, connections, and other tools to promote and develop your knowledge, awareness of market opportunities, and overall ability to get the deal done. More specifically, this includes: Listing the practice, finding the right practice to buy, and otherwise exploring the marketplace; Connecting you with key advisors; Developing marketing and listing strategies; Assisting in practice valuation and valuation improvement strategies; Assisting with preserving and transferring goodwill; Negotiating, and facilitating the negotiation of, key deal terms and otherwise bringing the parties to the table; Reviewing and discussing exit strategies and opportunities; Providing alternative growth options; Ensuring confidentiality in the sale process; Expediting the process and keeping it moving; Allowing you to focus on your business; Assisting in practice transition; Facilitating closing and accomplishing checklist items; and Developing an overall plan for transferring the practice. The broker is motivated and incentivized to help you make the sale, so you may question the motives of or need for the broker. But the simple truth is that the broker can often be the difference between closing the deal and it falling through. Buyers and sellers often have substantially differing opinions on what constitutes a “fair” deal. From price amount, structure, and allocation, to limitations and qualifications of representations and warranties, to post-closing transition requirements, there are many opportunities for discord among the parties. And while it is typically the job of the attorney to hammer out these terms and prepare and revise the purchase agreements, it is the broker that often can get past the recalcitrance and get the parties talking. The benefits of having the right law practice broker to guide and assist you through the purchase and sale process often more than justify the commission. How do I find a buyer? Is the seller asking too high a price? Does the buyer have the right qualifications? Is the market share and growth outlook of the seller the right fit for your practice goals? These are complicated questions that often take a qualified and experienced broker to help you fully understand. And while you may feel comfortable or qualified to or sell a practice based on your experience as an attorney, you can still benefit from speaking with a broker. As you begin considering purchasing or selling a practice, take the time to speak to a law practice broker. Whether you move forward with his or her services, you will almost certainly benefit and learn from the experience.    

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Six Steps to Prepare Your Practice for Sale

Six Steps to Prepare Your Practice for Sale So you’re ready to sell your law practice. That’s great! Selling your law practice can be an excellent way to realize the value built up over years of practice and to generate income as you transition into the next phase of your career or life. But where do you start? Listed below are a few steps to review and help you prepare for the transition and sale process. 1.Set a Time frame.  When do you want to sell? Knowing this (flexible) date in mind, and factoring in a post-transition assistance period, is important in readying the practice for sale and maximizing sale value. 2.Self-Education.  Spend some time researching the process, the applicable laws and rules (including NCRPC 1.17), and the practical concerns of putting practice for sale on the marketplace. 3.Get Your Team in Place. You can’t go it alone, although it may be tempting: as a lawyer, you may have helped sell many businesses, but that does not mean you are necessarily qualified to best conduct the sale of your own. Having the right people to help you through the process will not only make it easier but can also have a dramatic effect on the bottom line. Additionally, you are trying to run a practice, so your time and focus are limited. Find yourself a law practice broker and CPA, and consider consulting or retaining a financial advisor, an insurance advisor, and a valuation expert. 4.Value your Practice. It is a good idea to have a verifiable idea of your practice’s value before placing it for sale. And while we are all likely to place a high premium on the work that we do, a potential buyer may see things differently. Consult with your practice valuation expert on current value and ways to increase value. 5.Analyze and Initiate Steps to Make Your Practice More Valuable.  Get your practice in the best shape possible. Client management, practice areas, intended timeframe for sale, billing and realization rates and procedures, and employee management and transition are some of the factors that go into valuing a practice. There may be ways to improve efficiency and results in any or all of these areas. If you give yourself enough time, these improvements may make the practice more appealing to potential buyers and may lead to increased sale price and take-home profits. 6.Develop Your Strategy. Consider the type of intended buyer, your financial needs for retirement or next phase (consult your financial planner and CPA), necessary sale price to provide for those needs, tax strategies, internal communication, and transition needs, and other desired terms of sale. Prepare your strategy. It may and likely will change, but don’t adlib the sale process. Selling your practice does not happen overnight. It takes months of prep as well as months, if not years, of post-transition assistance. You have to start somewhere, however. Just as you may advise a client preparing to sell his or her business, start by getting your house in order. These steps should help. Tom Lenfestey is the Managing Member of The Law Practice Exchange, LLC, as well as a practicing North Carolina attorney The Law Practice Exchange, aims to curb the lack of knowledge in the profession on law practice transitions by educating and advising attorneys on the number of different options available in the legal marketplace and also serving as a confidential broker and advisor to seek and provide connections for those right opportunities between an exiting attorney and a growth-focused attorney or firm. Find out more at © 2021 The Law Practice Exchange, LLC. Reproduction in whole or in part is strictly prohibited.

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Law Practice Sale Tips

Law Practice Sale Tips: Check the Checklist off the Checklist. As most (probably all) legal practitioners know, a good checklist is a lifesaver when it comes to completing legal matters. That principle holds whether the matter involves suing on a faulty construction defect claim, administering an estate, or selling a business: especially when it comes to selling a law practice. Your transaction checklist can mean the difference between a smooth, effective, and efficient closing and a deal that falls through due to an issue you didn’t think to check. There is any number of other factors that affect the deal, of course, but the checklist is a must. The law practice sale tips will likely look substantially similar to checklists you may use in other M&A deals: it will involve many of the same general categories, including the following: 1. Putting the team together (CPA, Banker, Law Practice Broker, etc.) 2. Addressing financing requirements before closing. 3. Seller inspection matters, such as entity and financial review; asset inspection and review; due diligence for liens, judgments, and encumbrances; IP review; employee matters; licensing and permits; contracts, assignments, and third party consents; taxes; client information review; litigation and insurance issues; and other disclosure needs. 4. Definitive transaction agreement and ancillary document preparation and review. 5. Pre-closing actions. 6. Closing actions, including payoffs and verification of funds transfer, license and title transfer, utilities and service connections, and others. 7. Post-closing actions, including outstanding payroll and employee issues, retention of employees, verification of vendor transfers, and others. The nuances and subtle differences between the sale of law practice and the sale of another entity, particularly involving your ethical responsibilities to your clients, will have an enormous impact on the transaction. Furthermore, with a law practice transfer, the selling attorney is most likely going to be engaged by the buyer for an extended period for goodwill and client maintenance, the association of a competent attorney in the practice area, and other ongoing practice needs. Yes, in many ways the practice sale list is similar to the checklist you would see in other types of transactions, but on a much more detailed and intricate level that is directly impacted by the structure of exit chosen and the professional requirements. It is incredibly important, therefore, to use a law-practice-specific checklist for the sale of your practice.      

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Things to Remember When Selling

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.

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Handling Client Transition When Selling

Practically speaking, handling client transition when selling includes and means selling and transferring your clients. There are several things to do and considerations to take into account.  Here is a list of things to remember and consider when handling client transition when selling a law practice. Client notice  Written notice regarding the proposed sale Conflicts of Interest rules must be adhered An announcement in a local newspaper  Contact information  Follow all requirements  Introduce the purchasing attorney to the clients Find common ground Client notice. Rule 1.17 in most states mandates client notice as a condition precedent to selling. A written notice regarding the proposed sale. All clients should have a copy of a written statement regarding the proposed deal, the client’s rights regarding ongoing counsel and possession of records, and other details.  Conflicts of Interest Conflicts of Interest rules must be adhered to following the law.  Notice in a local newspaper.  The seller should send a letter or email to your entire current client database and all former clients to keep everyone updated on the upcoming changes.  Contact information.  The seller should provide clients with contact information for both parties involved just in case they need assistance. Follow all requirements.  Follow all requirements regarding retaining and transferring client records, giving the clients notice of the right to retrieve their records. Introduce the purchasing attorney to the clients. It can be an excellent policy to introduce the purchasing attorney to the clients (though practical difficulties will likely prevent introduction to all). It will demonstrate your care for them and encourage them to stay. Find common ground Find common ground and work together to achieve a mutually beneficial transition. Both parties will have an incentive to protect the practice’s goodwill – reputation, referral base, etc.     

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Four (4) Law Practice Deal Roadblocks to Avoid

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.

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Strategies for Successful Law Firm Mergers and Acquisitions

Your Law Practice Has Value Upon Exit

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 $500,000. 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.  

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Transition or Exit from Your Law Practice?

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.    

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As attorneys, we are called on from time to time to advise and advocate for clients’ needs while also anticipating items they may not be thinking about on the road ahead in life or business. Many attorneys will also advise those same clients, businesses and individuals on contingency and succession planning they should consider if certain events should happen. Solid advice and the implementation handled by that attorney and other advisors on behalf of the client can work perfectly. The client gets to walk away knowing they have a great contingency plan in place and things will be alright upon disability, death, retirement and many of the other curve balls life could throw their way. How about your plan? Have you been through the same level of planning with your team of advisors that you recommend to your clients? Have you spent the time, money and effort on your own personal contingency plan? Make sure you aren’t projecting “Do as I say, not as I do” as it applies to the succession plan for your law practice and for you personally. Follow these next steps to get prepared for your future: Stop Procrastinating! – No seriously, stop putting it off! Set aside some time to get out of the office and start considering the ‘what-ifs’ for you as a person and how those situations will impact your practice. Schedule Those Meetings – Not with your clients, you are the client now. Reach out to your financial advisor, your own trusted attorney, your CPA and a law practice consultant or broker (like us!) to start the discussion. No idea who to start with? Anyone. Make a list. The key is to start and the pieces will begin to fall into place. Document Everything– You are an attorney after all!…So make sure you are taking notes and preparing a war chest of information, goals, ideas, disaster planning info and all those other items you or someone else would need to complete your succession plan.  It could be helpful to create an organized list of where all your important documents are stored as well. Get Informed – Talk to your advisors. Open up about what your goals are and what your personal and financial needs are so that you can lay out a plan that truly works for you. Address the Contingencies – Have you heard of a Will? Do you have one? How about one for your law practice? It’s called an assumption, buy-sell or partnership succession agreement. Some form of agreement should be in place so that your practice, your clients, your family and most of all your professional legacy is not lost by just a winding down and shuttering of the client matters. The Law Practice Exchange aims to curb the lack of knowledge in the profession on law practice transitions by educating and advising attorneys on the number of different options available in the legal marketplace and also serving as a confidential broker and advisor to seek and provide connections for those right opportunities between an exiting attorney and a growth-focused attorney or firm.   Find out more at © 2015 The Law Practice Exchange, LLC. Reproduction in whole or in part is strictly prohibited. The information and advice provided in this publication is general guidance and is not necessarily specific to your individual situation, objectives or other needs. Make sure you seek a qualified expert opinion before proceeding with your transition objectives. Posted in Articles,

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