The marketplace for buying and selling law firms — especially selling a small law firm — is immature and difficult to navigate. Indeed, says Roy Ginsburg, it’s pretty darn fickle. Here’s why, based on his experience of more than a decade brokering law firms nationwide.
Table of contents
- Private Equity Really Has Its Work Cut Out
- Small Law Firm vs. Big Law Mergers
- Aren’t Young Law Firm Owners Looking to Cash Out?
- What About Finding Buyers?
- What About the Online Marketplace?
- Private Equity: A New Pool of Serious Buyers
- It Is Not All Doom and Gloom for Sellers and Buyers
- More on Selling a Small Law Firm
Private Equity Really Has Its Work Cut Out
I recently wrote about how private equity is in the very early stages of exploring the law firm marketplace to disrupt it and, of course, make money. Here’s what these investors will find when they begin their journey to acquire law firms. Simply put, they have their work cut out for them. The law firm marketplace is immature, underdeveloped, and difficult to navigate.
And yes, that may seem somewhat counterintuitive, with all of the boomer small law firm owners approaching retirement. Nevertheless, the marketplace is still developing. Indeed, it’s pretty darn fickle. Here’s why.
Small Law Firm vs. Big Law Mergers
The post is only about the small law firm space, not the robust M&A activity in Big Law. That’s a whole different animal. In those so-called “mergers,” no one is cashing out as in a traditional business sale. More often than not, these are situations in which one firm is failing (often due to poor succession planning) and seeks a merger with a more successful firm as a lifeline.
Most Firms Owned by Boomers Never Reach the Marketplace
Let’s go back to all of those boomers who are retiring. Where do they look for buyers?
Inside the house. The first place they look for buyers is within their own ranks. Many have a handful of loyal associates willing to take over, and the firm continues with a new owner or owners.
Nextdoor. The second place owners look for buyers are friendly competitors in either their geographic location or practice area. Everyone knows who the good ones are. Owners approach competitors. Smart competitors beat others to the punch and approach the ones they think will be retiring soon. Either way, deals are struck. Sometimes they are labeled as mergers, but they are still a sale and, again, the law firms never hit the marketplace.
No place at all. Then there’s a large subset of boomer attorneys who don’t even consider selling, either because they are misinformed or lazy.
The misinformed assume they have nothing to sell. They believe they are the law firm and that once they retire, there is no value. While true for some practice areas, it is not true for all. Whether the owner’s assumptions are true or not, these firms typically just lock the doors.
And then there are the lazy ones. They do a bit of online research and conclude it is too time-consuming and complicated to find a buyer and do a deal. They also close their doors.
What these lawyers forget to do is Google “What do I need to do to close my law firm?” Then they’d see that closing a firm is usually just as time-consuming and complicated as selling; it is hardly a cakewalk, at least if you do it right.
Aren’t Young Law Firm Owners Looking to Cash Out?
Ask entrepreneurs in other fields why they started their businesses, and many will respond, “I want to build something to sell in five or 10 years.” You will never hear that answer if you ask a lawyer why they hung out their own shingle. Lawyers just don’t think that way; buying and selling are not part of the profession’s everyday conversations.
As a consequence, the thought of selling the firm they built mid-career never ever occurs to younger law firm owners. These firms, too, never hit the market.
So now you may wonder, “Would young owners sell if presented the opportunity to do so?”
Yup. A few probably would. But how do you find those who want to cash out?
Beats the hell out of me. Even those who would take the money and run are usually too busy running their practice to consider selling, let alone to know how to find a buyer.
What About Finding Buyers?
With such a limited pool of sellers, you might think those who do choose to sell have it easy. They don’t. Here’s why.
As noted above, many law firms never hit the market. Even so, there are still plenty of law firm owners with no viable internal or friendly competitor options who try to sell their firms to third parties. But once again, counterintuitively, finding buyers can be just as difficult as finding sellers.
Pass: The Risk-Averse Nature of Growth by Acquisition
Most small law firms grow organically. Growth by acquisition, although common in other industries and professions, is not something aspiring law firm owners instinctively consider. It’s not part of the conversation. They don’t wake up in the morning hoping to find a new law firm listing.
So, even if a seller directly approaches a young, small law firm owner they think should be interested, most are rarely enthusiastic about the opportunity. Acquisitions involve risk, and heaven forbid a lawyer ever take what they perceive to be an unnecessary risk. Take out a loan? Are you kidding? It’s not in their DNA.
Lawyers just don’t think like other business owners when it comes to assessing risk. What is normal and routine for others is not normal for lawyers.
And even if a seller is lucky enough to locate those few law firm owners willing to take a risk and consider acquiring another practice, in the current environment, many law firms can’t staff what they already have in-house.
In other words, while young owners might be eager to pursue the growth opportunity, they don’t have the horsepower to get the work done. And so they pass.
What About the Online Marketplace?
That space is very much a work in progress.
There are a couple of national online marketplaces that list law firms for sale. My few competitor law firm brokers and I list the law firms we represent. Also, many state bar journals publish “want ads” sections and may list one or two firms in their monthly publications. But, overall, the pickings are slim.
Not only are the listings few, but many of the firms are overpriced — especially those listed on purely online marketplaces. Typically, traditional business brokers place those listings and have no clue about the law firm marketplace and how to price them. They think that since they have sold a dental or accounting practice, they can create a similar magic with a law firm. They rarely do.
Law firms are different from other professional services. Each practice area is a distinct business, and all make money in different ways and need to be valued accordingly. No one size fits all. Business brokers don’t understand even that simple nuance.
Private Equity: A New Pool of Serious Buyers
Even if a law firm seller finds some interest, prospective buyers often don’t meet their standards. Hopeful buyers are usually too young, cash-poor, and burdened by law school debt to make a purchase work. Many have little legal experience. Sellers in most practice areas will not want to sell to an inexperienced attorney, so those deals are typically non-starters.
If the private equity interest continues, which it very likely will, and the regulators don’t muck it up (always a possibility, but for now, not likely), there is definitely a new pool of very serious buyers now entering the marketplace. This development bodes well for younger Boomers presently facing retirement.
It Is Not All Doom and Gloom for Sellers and Buyers
I am now approached by PE-type entities far more often than before the pandemic about whether I have any firms for sale that suit their preferences, or simply to better understand the marketplace. With this growing interest, not all attorneys looking to sell will do insider deals or sell to friendly competitors; they will look to third parties as a potential market.
There is an adequate pool of serious sellers and buyers that continues to grow, but there is still no easy way to connect them.
Direct Outreach Is the Best Answer For Now
At least for now, targeted direct outreach by both sellers and buyers is the strategy I recommend most to those who are serious about buying or selling. It may seem like a needle-in-a-haystack approach, and in some ways, it is precisely that. But the persistent will discover plenty of diamonds in the rough, waiting to be picked up and polished.
More on Selling a Small Law Firm
Private Equity Comes Knocking: The New Frontier of Law Firm Ownership
Mea Culpa: What I Got Wrong About Private Equity by Brooke Lively
Building a Valuable Law Firm: Road Map to a $5 Million Business
How To Value a Law Firm: Understanding What Your Firm is Worth
What Do Law Firm Buyers Want? The 3 Things That Matter Most
Mentally Preparing to Sell Your Law Practice
Image © iStockPhoto.com.
Sign up for Attorney at Work’s daily practice tips newsletter here and subscribe to our podcast, Attorney at Work Today.
