Your Law Practice Has Value Upon Exit
Every Law Practice Has A Quantifiable And Marketable Value. Like any other business, each law practice has a different and marketable value of its own. You have built and managed a proven business model. So, you have come to the understanding that your law practice has value, but next in line is the real question: How much? This number is the one that can make you feel good, feel proud, and maybe even a little boastful or on the other hand. This number may make you reconsider what you are trying to build within your practice, but having an exit option for your retirement is ultimately deciding whether to sell or buy.
Valuing Your Practice: What’s Your Magic Number? Several methods can be used to determine a law practice’s value. Each technique may be right depending on the needs or purpose of the valuation.
Rule of Thumb Methods. The basic premise of these varying methods is to look at past cash flows to estimate future value. They are based on the belief that what has happened in the past should continue in the future.
Revenues. Therefore, practice with average annual revenues of $500,000 may sell for anywhere from $250,000 to $600,000. It is not an alarming number if you previously hadn’t considered your practice had value.
Multiple of Net Income. Law practices will typically sell for a multiple of between 2 to 3 times net earnings. Using our example from above, if that same firm has a net income of $200,000, the value may be anywhere between $400,00 to $600,000.
Market Comparison. In a marketplace of buying and selling law practices where most negotiations and real deals are confidential. While confidentiality adds a layer of difficulty to the overall public valuation process, those with knowledge of the marketplace and what real numbers law practices are transferring can be phenomenal resources.
Key-Value Drivers. Some factors can create a significant swing in value. Some of them will help increase the weight, but some will also lower it like Financial Performance, Growth Potential, Brand Identity, Practice Area, Geographic Location, etc.
Adjustments. There will always be adjustments that need to be made, and those from the critical value drivers noted. These adjustments are typically ones that have made a financial impact on the practice. That said, every valuation should include some adjustments.
The ‘It Depends’ Disclaimer.
Hey, we are attorneys and thus understand that variables can change the rules and the result. You and your practice are unique, and those specific aspects can throw any of the methods above out the window or vary them quite a bit. However, if you genuinely want to know the value of what you have built, start with the above as a first step. Then, go through the valuation process with an expert who is fit to meet your valuation needs.
How to determine your law firm value is a crucial step to any sale or exit planning you may be considering. The above are ways to estimate, but always consider getting an accurate valuation from a law firm broker, valuation consultant, or similar.