Should I Buy or Start a Law Practice?
Law Practice Startup or Acquisition?
Attorneys today are looking at more options for practice growth and expansion than ever before. Due to continually increasing challenges in the legal profession and an abundance of the attorney workforce for hire, the competition in certain practice areas or specific geographic markets is sometimes too burdensome to consider starting a new law firm location or a law practice from scratch.
A history of proven financials, ongoing client matters, phones that continuously ring, and systems and knowledge built to serve those clients successfully all lead to the appeal of buying a law practice compared to stepping into the unknown of the startup world.
THE PROCESS
1. Self-Assessment.
Is now the right time for you to take on more work and responsibility? Are there things in your personal life or your current firm’s structure that could benefit from such additional time instead?
2. Get Help.
Even though you are an attorney, this isn’t something you go through every day. It is a unique process, and having the right advisors from step one can ensure the transition is successful and missteps are avoided. Assemble your advisory team and connect with a qualified law practice broker (we know a good one) to help you get started and understand the platform.
3. Consider Opportunities.
The law practice marketplace is mainly hidden due to confidentiality concerns. It’s happening all around you, but most transactions go unnoticed. To look for the opportunities that are out there, contact a law practice broker sign a confidentiality agreement, and get preliminary information on potential firms that may be a fit, including their financials and overall characteristics—still interested? The practice broker will then coordinate an initial conversation with seller(s) to discuss how transition may work, get questions answered, and get an overall initial comfort level that could be a success.
4. Get Engaged.
After some discussions and review, if you and the owner of the practice think it may be a good fit, then it is time to agree on the financials of the transaction and how they will be paid, transition plan details, and other vital aspects of the purchase transaction. Once these are agreed to, then due diligence continues as you work towards closing. This is also typically when you and the seller will work out the details on transition plan specifics, and you complete any due diligence review of the selling firm with your advisors.
5. Closing & After.
Just like in other business sales and acquisitions, a day will be chosen for the ownership to change, and the purchase and ancillary agreements are executed along with the financial exchange. At this point, you should feel confident about what post-closing looks like and your plans for transition success.
THE QUESTIONS
1. What’s The Key to Success?
If you think buying a law practice is an option for you, then understand that the buying process and transaction are vastly different from other types of non-law firm business purchases. The key to success lies in a well-prepared transition plan for the selling attorney(s) in the law practice world. A law practice (and its value) is so closely tied with the individual owner(s) or partner(s) that the success post-closing of a transaction will be achieved in the details and structure of that transition by the seller(s). Ultimately, you will want to know that you and the selling attorney agree on the goals of the transition efforts, the time required, and the benchmarks of a successful plan as it is implemented. Overall, the goal in any practice acquisition is that the selling attorney remains or becomes part of the buyer’s practice post-closing.
2. How to Value?
The value of a law practice is typically calculated based on historical cash flows and adjusting for several factors personal to the seller or that practice and deal terms that impact value (shorter transition timeline, etc.). The sale price and practice cash flows should be reviewed during the due diligence period to ensure the selling price is justified and the payments are sustainable with your projected future cash flows. Make sure a law practice broker or CPA knowledgeable in this area is providing this opinion and taking into account the critical value-drivers of law practices and the expected post-transition retention. Net income may be a great line item to use in determining the purchase price, but the cash flows post-closing are the real determining factor of whether it makes financial sense for your acquisition plans. A law practice broker or CPA can show you how those two can match and make it a win for both sides.
3. How Does Payment Structure Work?
Payment structures for law practices vary almost as much as the prices themselves. Overall, the most typical is for you as the buyer to finance or pay a certain amount at closing and for the seller to invest some or structure the remaining portion as a percentage of revenues earned over time. This allows buyers and sellers to share the risk, focus on making the transition plan a success, and enable buyers to have immediate income from the practice. An abundance of cash on hand is not typically the norm for younger attorneys, so considering all financing options with lenders and payment structures is vital. For more established firms or attorneys, cash may be more readily available, but some form of a seller earnout is typically still desirable.
IS IT THE RIGHT CHOICE FOR YOU?
The law practice succession marketplace is still young. Still, current opportunities are present (and more are being added every day) for those attorneys ready to take advantage of the benefits of purchasing a practice. While success and growth are certainly not guaranteed to follow, a well-thought-out and implemented purchase can go a long way toward achieving these critical goals. Careful planning, thorough due diligence, and some hard self-evaluation, should always be performed before you make the commitment required in buying a law practice. It is a unique process, and having the right advisors from step one can ensure the transition is successful and missteps are avoided.