Structuring an Internal Deal vs. an Outside Buyer: Tom Lenfestey’s Answers
Succession planning raises different questions than a straight outside sale. Tom Lenfestey, founder and CEO of The Law Practice Exchange (LPE), tackled many of them during a live “Ask Tom Anything” webinar for his new book, The Exit Blueprint. Owners asked him how to tell their team, how to structure an internal deal, and what actually tips a buyer decision. Here’s what he said. You can also watch the full conversation in the webinar replay on YouTube. Telling Your Team You’re Planning to Sell One attendee asked the question almost every owner eventually faces. How do you tell your team you’re selling without setting off a panic? Tom flipped the premise. In his experience, staff worry far more about an owner retiring with no plan at all than about a succession process getting underway. Silence, not disclosure, tends to create the anxiety owners are trying to avoid. His recommended approach: Loop in key decision makers confidentially, and do it early. Frame the process around continuity: most buyers want the team to stay, and see it as a core asset of the deal. Treat the transition as an ongoing conversation, not a single announcement. New questions will surface for months after closing. How an Internal Sale Is Actually Structured A current LPE client asked about selling his practice to an internal candidate from a C corporation. His main concern was tax treatment. Tom laid out the two most common structures: Structure How It Works Tax Treatment for Seller Equity purchase The internal buyer purchases the seller’s equity directly. Clean and simple, but the buyer inherits the firm’s history and liabilities. Typically capital gains, taxed lower than ordinary income. Asset purchase A new entity acquires the firm’s goodwill, systems, and other assets. The buyer can depreciate the acquired assets over time. Often still capital gains, though C corp sellers need to watch for double taxation. For complex C corp situations, Tom flagged a less common option. A new partnership can form, and the seller can sell personal goodwill separately from corporate assets. He was clear on one point: every seller in this position should bring in their own CPA. The right structure depends heavily on entity type and retained earnings history. General background on capital gains tax treatment is available from the IRS. Internal Multiples vs. External Multiples As a baseline, Tom said healthy law firms of solid scale typically transact between two and three times adjusted net earnings. Many land around two and a half to three times. He was direct on one myth: gross revenue multiples, the “one times gross” figure people quote informally, don’t reflect how law firms actually transact. Internal versus external buyers is a different question, and external offers tend to land a little higher. Internal candidates, especially long-tenured ones, often expect a discount. They feel they helped build the firm’s value themselves. External buyers evaluate the numbers fresh, without that tenure-based expectation, which tends to support a stronger price. Building the Next Generation of Equity Partners Several questions focused on grooming internal successors before a sale is even on the table. Tom recommended starting with two questions among current owners. What does it actually mean to become an equity partner in this firm? And how do you measure and exchange value? Once that criteria is clear, the next step is presenting the opportunity to identified candidates as an incentive, not an obligation. Not everyone wants ownership, and that’s a normal outcome. Some team members meet every criteria but aren’t ready to take on ownership risk. Tom suggested building a defined non-equity or salaried partner track for them. That way, the firm can retain good people without forcing a decision nobody wants. Staying On After the Sale Whether the buyer is internal or external, Tom expects nearly every seller to stay involved for some period after closing. He calls it a baton pass, not a clean break. Much of a law firm’s value lives with the owner personally: referral relationships, community connections, and team trust. His recommended framework: Define the seller’s post-sale role, hours, and duration in the letter of intent itself, not after the fact. Hold a recurring check-in between buyer and seller through due diligence and beyond to manage the transition actively. Keep communication open for unexpected situations, like a legacy referral source calling months after closing. What Actually Makes a Seller Choose One Buyer Over Another Asked what tips a deal, Tom said price has to sit in a reasonable range. But fit consistently wins over the highest offer. Sellers gravitate toward buyers who bring an actual plan: how they’ll preserve the firm’s legacy, retain staff, and handle the post-closing transition. A term sheet with a bigger number rarely beats that. Buyers who show up with a real plan set themselves apart far more than a marginally higher price ever will. Weighing an internal succession plan against an outside sale? LPE’s advisory team has guided hundreds of owners through both paths, from structuring the transaction to preparing the team. Read more about selling your law firm or explore The Exchange podcast for more conversations on succession and true sale transactions. Book a Free 15-Minute Strategy Call Frequently Asked Questions Is an internal sale of a law firm cheaper than selling to an outside buyer? Often, yes. Internal buyers sometimes expect a discount because they feel they helped build the firm’s value during their tenure. External buyers typically pay closer to full market value, since they don’t ask for that same discount. When should I tell my team I’m planning to sell my law firm? Let key decision makers know confidentially and early, well before the full team needs details. An owner with no visible plan causes most staff fear. Learning that a succession process is underway rarely does. What is the typical multiple for selling a law firm? Healthy law firms of solid scale typically sell for two to three times adjusted net earnings. Many land around two and a half to three
