The law is one of our most important industries. According to data from IBISWorld, there are nearly 450,000 law firms in the United States. Similar to any other business, professionals buy and sell law firms. Though, the process can be more complicated. One central challenge is that valuing a law firm is notoriously difficult. Still, every legal practice has a fair market value. You may be wondering: What is my law firm worth? In this article, you will find a comprehensive guide to the key things to know about determining the value of a law firm.
Starting Point: A Law Firm is a Business With a Marketable Value
To start, it is important to emphasize that all law firms have a marketable value. No matter how small a law firm is and how modest its annual earnings are, any firm that has clients will have a market value. If you are considering selling your law firm—retiring, transitioning to a new practice, etc—it is imperative that you understand exactly what your law firm is worth.
Revenue Often Serves as a Baseline for the Value of a Law Firm
In a broad sense, the market value of a business is what buyers are willing to pay. It is fairly easy to determine the value of something for which there are many comparators available. For example, if you want to know the value of a used car, you can get a pretty good idea by looking for similar sales. The challenge for valuing (and selling) a law firm is that very limited public information is available about sales. There is no general database where you can look up all finalized law firm transactions.
For this and other reasons, a law firm’s annual revenue often serves as a baseline for its value. True valuation depends on overall firm structure, earnings, profitability metrics and types of practice assets, but revenue is the easiest place to start. In most cases, the value of a law firm from the revenue approach will be calculated as a ‘multiple’ of its average gross revenue. The multiple for valuing a law firm on the revenue approach is typically between .5x and 1x annual revenue. For example, imagine that a small immigration law firm has had an average of $800,000 in revenue over the past three years. A rough range for the value of the firm would be between $400,000 and $800,000.
Your Law Practice is Unique: The Specifics Always Matter
The revenue method—sometimes called the “rule of thumb” method—can only give a broad range of the potential value of a law firm. The reality is that every law practice is unique. The specific circumstances always matter when determining the fair market value. Not all law firms with $1 million in an annual have the same market value. Some notable factors that impact the value of a law firm include:
- The practice area
- The geographic location
- Consistency of revenue year-over-year
- Client satisfaction
- Growth potential
- Future financial projections
- Quality of employees/staff
- The amount of debt
How Our Law Firm Brokerage Will Determine Your Firm’s True Value
Valuing a legal practice is a complicated process. The specifics always matter. At The Law Practice Exchange, LLC, our law firm brokerage team will always put in the time, resources, and attention to detail to help you determine the proper of your law firm. Among other things, we are prepared to:
- Know Your Law Firm: We will gather and review all of the relevant financial documents and records. From there, our law firm valuation team will take the time to understand the unique value propositions that your law firm brings to the table.
- Work Closely With You: In valuing a law firm, we work closely with law firm owners every step of the way. Putting an emphasis on open communication, we are always ready to answer your questions and make sure you understand our analysis.
- Prepare a Comprehensive Valuation Report: For obvious reasons, law firm buyers are interested in getting the lowest possible purchase price. To help support our clients in negotiations, we will put together a comprehensive law firm valuation report, ensuring that you have all of the supporting materials that you need to justify the sales price.
Find Out the Value of Your Law Firm With The Law Practice Exchange
At The Law Practice Exchange, LLC, we were created by lawyers for lawyers. Our entire law firm brokerage company is devoted to helping our clients buy and sell legal practices. If you have any questions about what a law firm is worth, we are here to help. Contact us today to learn more about our law firm valuation service. We are a nationwide leader in law firm brokerage services.