Trellis White paper Ad 770 Spot #6
share TWEET PIN IT share share 0
Panic to Profits

What Is My Law Firm Worth?

By Brooke Lively

If you’ve ever asked yourself, “What is my law firm worth?” you’ve probably wondered about ways to boost its value. Here are the two most important factors that determine your asking price.

what is my law firm worth

Fifty years ago, the question of the firm’s worth didn’t cross the minds of many attorneys. They started a practice, milked it for all it was worth, and then shut it down when they retired. The other option was to buy into a partnership, milk it for all it was worth, and then hope to get their original investment out by selling it to a younger attorney when they retired.

Times change. And so do attitudes about law firms.

Attorneys are beginning to see their firms not as practices, but as the businesses they are. Businesses can be bought and sold. Businesses have value — value that can be built over time and then harvested at the end of a career.

And that brings us to the original question: “What is my firm worth?”

Most Law Firms Sell as a ‘Multiple’ of a ‘Number’

Law firms are valued based on two main factors:

  • Seller’s discretionary earnings (SDE)
  • How dependent the firm is on its owner (dependency)

For law firms, the “number” is SDE and the “multiple” is dependency.

The value of a law firm is usually between 2.5X and 4X of the SDE.

The higher the SDE and the lower the dependency, the higher the firm’s value. Do other factors go into the selling price? Of course. But SDE and dependency are the two biggest factors.

The ‘Number’: Seller’s Discretionary Earnings

SDE is the total benefit you, as an owner, derive from your firm. If somebody is buying a company, here’s the most important thing they want to know: How much money does the current owner get out of this business? They do this to make sure they can cover any loan they need to fund the purchase and make sure they still have enough left over to live on for this to be a profitable decision for them.

SDE comes from a few different places — some are obvious and some (probably purposely) less so. Before you sell, you will want to normalize your earnings. This means nothing more than pulling all the components of SDE together in one place where they can easily be seen. Here is where to look:

  • The firm’s net income or profit.
  • Your salary.
  • Monthly benefits, which includes retirement, insurance, etc.
  • Discretionary expenses. These are all the personal expenses you run through the firm, so you get to pay for them with pre-tax dollars. It is none of my business. If you and your tax professional are good with it, go for it. This category includes your cellphone, car, travel (even those family trips), any family members who are “ghost employees,” and your Amazon habit.

Since a law firm sells as a multiple of SDE, it is in your interest to find every personal penny you might have buried in your P&L so you can use it to increase the value of your firm.

The ‘Multiple’: Dependency

If you are house-hunting and fall in love with a fixer-upper, you know it will take a lot of work— and that is reflected in your offer. A law firm that requires a lot of effort from the current owner is like a fixer-upper house. It is going to take a lot of work before it is operating smoothly at maximum capacity, so a buyer will want to see that reflected in the price. This means the multiple will be on the lower end of the scale.

How can you boost the multiple?

The question I can hear you asking right now is, “What do you mean by a lot of work?” Let’s look at six different parts of your firm that may be candidates for improvement.

  1. Marketing. Is the firm’s brand all you? It’s hard to sell yourself and your name. Are you the only one generating new clients? Lower the multiple.
  2. Sales. Are you doing the selling? Or maybe one of your attorneys? If your attorneys are selling, move up the scale slightly. If you have professional salespeople, that really gives you a positive bump, and you can raise the multiple.
  3. Operations. Do your employees understand their role in the firm and own their responsibilities? Are they accountable to themselves, their teammates and boss? Do they have documented procedures for delivering on their responsibilities without the owner’s day-to-day involvement? If your answer is a wholehearted yes, raise that multiple!
  4. People. Do you have a lot of turnover? Are you reinventing the wheel every time you hire someone? On a new employee’s first day, are you scrambling trying to get ready for them and figure out what they need to learn to do their job? Do you think spending time and money on things like core values and building an intentional culture is silly? The more yes responses you have, the lower you need to push that multiple.
  5. Production. This is about understanding capacity, setting and tracking billing goals, holding the team accountable for meeting those goals, and creating efficient working groups. The more you have this dialed in, the higher the multiple.
  6. Technology. Technology doesn’t usually drive the multiple down much, but it can push it up. Why? Because it is how you prove you have all the other things. Your technology — the practice management and knowledge management systems you use, for example — houses the data that confirms your firm can do what you say it does. And proof means more money.

Three Fascinating Facts About Your Law Firm’s Value

Fascinating Fact No. 1: When you fix all the parts of your firm I describe in this list, SDE rises.

Fascinating Fact No. 2: When you fix all the parts I describe in this list, the lower the firm’s dependance on the owner … and the higher the multiple.

Fascinating Fact No. 3: Just because your firm is an attractive acquisition doesn’t mean you have to sell it. That is the firm we all want to own, so you might just hang onto it.


Exit on Top book by Brooke Lively

Calculating How to ‘Exit on Top’

If you want help calculating an approximate value for your law firm, go to www.ExitOnTopBook.com to access the valuation quiz from my book, “Exit On Top: Sell Your Law Firm to the Right Person at the Right Time for the Right Price.”


More Law Firm Financial Tips from Brooke Lively

For more tips on building a more profitable law firm, read:

Image © iStockPhoto.com.

Don’t miss out on our daily practice management tips. Subscribe to Attorney at Work’s free newsletter here >

share TWEET PIN IT share share
Brooke Lively Brooke Lively

Brooke Lively is the CEO and founder of Cathedral Capital, a team of CFOs and profitability strategists who help entrepreneurs turn their businesses into profitable companies. After earning her MBA, Brooke built a seven-figure company in under two years. As a Chartered Financial Analyst, she and her team work with Hall of Famers, Inc. 5000 businesses, CEOs and small business owners. She has been named a Top 25 Women to Watch, 2016 – 2020 Diversity Journal Women Worth Watching, and to Fort Worth’s 2016 CFOs of the Year. She is a highly regarded speaker and author of several books. Follow her on LinkedIn.

More Posts By This Author
MUST READ Articles for Law Firms Click to expand
envelope

Welcome to Attorney at Work!

Sign up for our free newsletter.

x

All fields are required. By signing up, you are opting in to Attorney at Work's free practice tips newsletter and occasional emails with news and offers. By using this service, you indicate that you agree to our Terms and Conditions and have read and understand our Privacy Policy.