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Friday Five

Law Firm for Sale: Boosting the Value of Your Law Practice

By Ryan McPherson

Your law firm for sale? Assuming your state allows for it (most do), you probably want to maximize your firm’s value and ensure you bring on a competent successor.

As a solo or partner in a smaller firm, your law practice might be a substantial component of your retirement plan, making its value even more important.

Before we dive in, note that the items below are presented for educational purposes only. Nothing here is or should be considered specific financial advice for you. As your situation is undoubtedly nuanced, you should seek the advice of financial and tax professionals before using the strategies mentioned.

First, Consider the Seller and Buyer Mindset

Before diving into the value levers, let’s look at a transaction from each party’s perspective:

You, The Seller

Selling your practice will be emotional — acknowledge it, prepare for it. You’re not selling stock in a company thousands of miles away. You want top dollar for your decades of hard work and to ensure that the purchaser will take care of your clients as you would.

Your Buyer

Whether an internal successor or an external purchaser, your buyer wishes to acquire a consistent stream of future profits free of outsize risks and administrative burdens.

The dynamic between buyer and seller is somewhat comparable to that in home sales. Sellers recall each memory created in their home and become hesitant to sell their emotion-laden asset at anything less than a “fair” value. Buyers see $50,000 of bathroom and kitchen upgrades, questionable carpet, and an HVAC system on life support.

Your Clients

Clients want unfaltering service and assurance about your successor’s competence.

Sell a Law Firm: Law Practice Value Levers

While there are many factors that will influence the selling price, these five will get you started in evaluating — and increasing — your practice’s value. Which of these levers will you be pulling?

1. Time

Try selling anything quickly. At best you’ll receive a depressed value; at worst you’ll have a financial disaster on your hands.

Give yourself multiple years to better your firm’s financials, outline a succession strategy, and identify potential purchasers. This holds true even if you’re planning on selling to an internal party.

Think it’s too early to start planning? Owners and partners of many of the best-run, most successful businesses have started business succession planning decades before it was needed. Why? This type of planning pulls the owner/partner out of her functional role and forces her to examine the company from a different, near third-party perspective.

2. Transferability (Remove Yourself)

Step into your buyer’s shoes for a moment. One of her greatest fears is that the value of your business is inseparably tied to you and will vanish as you retire — leaving her with a crumbling firm.

Transitioning out of your functional role as an attorney takes time (see point 1) and is less feasible for certain practice areas.

If clients come to your firm for you, not for your team, and not for the firm’s expertise, you may have an issue. Changing this can involve firm branding, client messaging, and actually building a working team. In other words, take some of the focus off you. Understandably, shifting to more of an executive role with management responsibilities doesn’t suit everyone.

The point is that you want to make your firm transferable and not anchored to your presence.

3. Consistency and Dependability

Buyers love dependable profits and are often willing to pay more (sometimes substantially more) for a steady stream of income. Whether your firm’s growth is powered by local referral sources or online marketing, the result is highly prized.

If you’re referral-centric, define a strategy for introducing prospective buyers to your referral sources. This should be more akin to fostering a relationship than a simple hand-off.

4. Key Clients

Ideally, you want to shift to focusing on clients who have a larger number of continuing matters. This decreases your cost of client acquisition and deepens your relationship with those clients. However, this needs to be balanced against becoming overly dependent on a few massive clients. 

5. Systems and Procedures

No buyer wants to deal with your antiquated operations and technology. Within reason, modernize your software and memorialize your processes into systems and procedures that a prospective purchaser can easily understand and adopt.

A Parting Note on Ethics: Before you proceed with plans to sell or buy, be sure, of course, to review the related ethics rules in your jurisdiction. Also see ABA Model Rule 1.17: Sale of Law Practice.

Illustration ©iStockPhoto.com

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Categories: Personal Finance, Retirement Planning, Small Law Firm
Originally published June 19, 2018
Last updated August 25, 2020
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Ryan McPherson Ryan McPherson

Ryan McPherson is the founder of Intelligent Worth. He helps solo practitioners and partners in smaller firms align their personal and business finances to generate wealth and avoid missteps. Ryan is a Certified Financial Planner and an IRS Enrolled Agent. He is a member of the National Association of Personal Financial Advisors (NAPFA) and the XY Planning Network. Follow him on Twitter @RyanDMcPherson.

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