What Does Buying a Law Firm Mean?
What does buying a law practice really mean? The marketplace for selling and buying a law practice is still young as compared to some of the other professional business marketplaces (dentists, CPAs, etc.). So, it’s not surprising that we often get questions from those attorneys looking to transfer their practice and wind down (the “sellers”) and those attorneys who are looking to grow or expand through purchase or acquisition (the “buyers”) on how the structure really works when buying, acquiring or purchasing a law practice.
As with anything which involves lawyers and our ability to be creative in structuring new ways to approach a common problem the answer is, of course, it depends on the situation and the parties involved. However, there are some common elements to know and consider depending on what type of seller and buyer is involved that you may want to know and consider.
To a Seller…
Who is a solo practitioner or sole owner? It is typical that the marketplace will provide two types of potential successors or buyers for a solo practitioner or owner – individual attorneys and other law firms.
- The Individual Attorney Buyer- The individual attorney is looking for firm ownership and the opportunity to take over established systems, clients, and the revenues and profits that come with them which you have built over the years in your practice.
- Focus – The individual attorney is typically focused on the earnings of your firm as they would be considering what they would make if they took over and put themselves in your shoes to do the work (salary) and own the firm (profits).
- Typical Structure – It would be typical that the individual buyer would look to purchase all the assets or all the equity of your firm under agreed-upon terms and the structure would be seen more as a new partner joining the firm which you would begin introducing and working with to transition clients, referrals and other areas to over an agreed-upon timeline. To the outside, the firm name may change by the addition of this new partner, and clients and others see it as a continuation of the firm with this next generation.
- The Law Firm Buyer – With solo practitioner or owner sellers it is common that other small law firms would also be interested in purchasing or acquiring in order to increase their client base, overall revenues, and/or expand their geographic reach and practice areas.
- Focus – The small law firm purchasers in this situation are typically focused on overall revenues that would be gained as well as how to provide for the transition of management and clients from the seller to the attorneys within their own firm. Typically, they are less worried about your systems as they have most of those in place within their own law firm.
- Typical Structure – Structures seem to vary quite a bit, but the most typical would be internally structured as an asset purchase upon agreed-upon terms with it publicized and structured as a merger of the firms or a joining of the seller to the buying firm. It would be typical that the firm name would change or the buying firm’s name would be the sole to continue with the seller attorney being added as a non-equity partner or of counsel.
… Who is a small partnership. Typical partners for sellers who are small partnerships are other small to medium law firms who are seeking growth through acquisition and larger law firms who are looking for lateral groups to join their existing firm and overall structure.
- Small Partnership Buyer – Other smaller to medium law firms are always looking for opportunities for growth in existing practice areas and for ways to expand their reach or maximize revenue per client relationship by expanding into new geographic and practice area markets.
- Focus – These firms are usually focused on revenues generation as compared to the earnings of the firm. Key questions will usually revolve around clients, ability to transition to a new firm, and overall costs and desired financials from the transaction.
- Typical Structure – Most of these will be done as a merger with the potential to have some purchase or acquisition price paid for the transfer of goodwill value and/or joinder of the firms. However, it would be typical that compensation after a merger would play a material part in how clients and overall goodwill is paid for overtime to the seller. The seller would want to focus on a transition plan during due diligence to make sure clients can and will transition to the new firm as desired to ensure compensation after closing.
- Medium/Large Firm Buyer – Established law firms with multiple offices and existing practice areas to what sellers may offer are also looking for good opportunities to increase their client base in those areas. This allows them to maximize their existing attorney and other firm resources by acquiring more client relationships.
- Focus – Typical focus for this type of firm would be the types of clients or practice areas, overall billing, and revenues and what a transition plan for the seller would look like and would it be successful.
- Typical Structure – Some may be promoted as acquisitions, but it would be common for most of these purchases to really be a lateral move with negotiated and agreed-upon compensation structure. That structure may have a bonus or ‘goodwill’ component for security to the seller, but most of the value to the seller will come from the compensation and bonus structure agreed to after closing.
… Who is a larger partnership or established firm – In the scenarios where because of lack of successor options or other motivators a larger or more established partnership or firm is seeking to transfer the value they have built the most common element would be a merger with another firm of comparable or larger size.
- Focus– Similar to the notes above when a larger firm would acquire a smaller partnership the focus will truly be on overall clients, revenues per client, and ability to maintain those relationships under a transfer. The transition plan of a senior attorney and how it would help ensure client retention would also be of key importance.
- Typical Structure – Most all of these would be in the form of a merger with some forms of value (bonus, down payment, purchase consideration) given at the time of the merger, but with most payments and consideration to seller attorneys being provided in the form of profits through equity (if the sellers become partners in buyer) or in salary with bonus structures based on billable production of the seller attorneys and overall client performance after the merger.