Let’s talk about one of my favorite subjects: building a law firm that is valuable and sellable.
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Your firm is probably one of the greatest investments of your time and energy. And the result of your labor shouldn’t be just a job that generates a small profit. It should be a valuable asset for which someone, someday, will pay you handsomely.
Now, how do you get there?
Let’s imagine that you set a goal to sell your law firm for a cool $5 million. Let’s play through this scenario and figure out what it would take to get that valuation and then break down what systems your law firm must have and how much profit it should generate for somebody else to want to invest money into it.
Understanding Valuation
The value of your law firm is its ability to produce profit. A buyer invests in a law firm as they would in any other business. They expect the investment to produce a return, commonly referred to as profit or a return on investment (ROI).
To value a professional service company like a law firm, you and the buyer look at your net profit EBIT (earnings before interest and taxes) and multiply the profit by a multiplier of three to five, depending on the level of profitability. Law firms that crank out more than $1 million in net profit may be valued at five times the net profit. Those that generate less than $1 million will be valued at three to four times the net profit.
But how do we get to $1 million in net profit?
The math is simple. To achieve $1 million in net profit, you need to run a well-managed law firm that generates, let’s say, $4 million in gross revenue and produces a 25% net profit ($4 million multiplied by 25% equals $1 million in net profit).
Planning for the Future: Why Sell Your Law Firm?
Now, you may be wondering why you’d want to sell a law firm that produces a million dollars in profit. Well, one day, you will retire, and that retirement will either happen by design or by default.
By default means that life circumstances such as illness will push you into retirement and you will no longer operate your firm. If your firm is not a valuable sellable asset, you walk away with little to nothing.
Alternatively, you can retire by design — mapping out how much you’d like to get for your firm, designing a plan for how to get the valuation, and then implementing the plan and working toward that goal.
Related Reading: “Planning for Retirement” and “Prepare Yourself for a Happy Retirement.”
The Blueprint for Success: Five Systems
Now, what does your law firm need to reach that valuation and make it a desirable business for somebody else to acquire? It has to run like a well-oiled machine. It doesn’t have to be perfect, but it has to operate well. For it to operate well, it needs five systems.
1. Marketing System
Your marketing system attracts prospective clients (qualified leads) that the intake system (next) converts into cases that will pay you $4 to $5 million in gross revenue per year.
What does that look like? Well, let’s imagine that your average case value is $5,000. In order to get to $5 million in revenue, you need to have 1,000 paying clients per year. To get to 1,000 paying clients, you need approximately 83 clients per month. Let’s suppose that your conversion rate on incoming leads is 25%. So, to get 83 clients, your marketing system needs to generate 328 good sales-qualified leads every single month. It’s all incredibly formulaic.
2. Intake System
The Intake is supposed to convert leads into paying clients. A high-converting intake system incorporates the following elements:
- Fast response rate. Answer the phone when it rings. Call back inquiries that came through the Contact Us form with lightning speed. If you don’t but your competitors do, the probability of converting prospects gets diminished dramatically.
- Friendly professional intake specialists who know the right questions to ask, tell good stories, make prospects feel welcome and cared for, and have a high ability to convert into scheduled appointments on the first call.
- An effective follow-up system. Not everyone who calls will convert on the first call. Not everyone who schedules will show up to the call. Your follow-up system must kindly guide each prospect to the next desired action.
A law firm with an excellent intake system is desirable to investors. So, get a specialist(s) who can develop such a well-polished intake system, and not only will you quickly increase the conversion rate, but also the value of your business.
Related reading: “How to Fix Your Intake Process.”
3. Production System
The production system is responsible for delivering the service that marketing promoted, and intake promised. The service must be of referrable quality, which means an experience above and beyond what a typical client expects.
And production processes must be optimized so that the cost of production does not exceed the target. A healthy margin in law firms is 40% or higher, meaning the cost of delivering the service does not exceed 40% of what the client pays for the service.
Because law firms with well-optimized production systems attract more referrals and generate higher profits, investors gravitate toward such firms and may shy away from other less-desirable opportunities.
4. HR System
The HR system is responsible for having the right people in the right places; people who know what to do, how to do it, do it at the right time, and without you telling them to do so.
In other words, they are responsible for recruitment, hiring, training, performance reviews, and firing when warranted.
5. Management System
The management system is comprised of the CEO (you) and the people who are in charge of each of these systems. They are responsible for their respective systems and ensure that the systems do what they are supposed to. (For example: Marketing delivers 328 leads per month, intake converts 25% of the leads into paying clients, and production delivers services at 40% of revenue.
The CEO is responsible for setting reasonable objectives and making sure that the leadership creates and implements plans to accomplish those objectives. You review results and provide course corrections to make sure that your firm works toward accomplishing goals.
And once you get to $5 million in gross revenue and do it at 20 or 25% net profit, you will have yourself a $5 million sellable business.
The Bottom Line: Put in the Work and Reap the Rewards
In summary: Optimize your marketing and intake — and within a year, your business will multiply, helping your income catapult into the seven-figure range.
A side point: Managing a $1 million law firm is infinitely harder than managing a $5 million firm because with more money coming in, you will have more and better resources to take care of more things.
All of this may seem hard and even foreign, but it is infinitely easier to put in the work and get there than to suffer from unrealized potential for the rest of your life.
Image © iStockPhoto.com.
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