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.