Selling a Law Practice: Why You Should Prep Your Law Firm — Even If You Don’t Want to Sell

Most entrepreneurs build businesses with the idea that they will eventually sell them. Whole books have been written about the concept — “Built to Sell” by John Warrillow is a great example. The concept of a built-to-sell law firm, however, is unusual. At least until recently.

Law firm owners in small to midsize practices have historically viewed their practices as something they will build, milk for all the cash possible, and then pass on to another generation for a nominal buy-in. Unless they simply close the doors.

That is changing.

Building to Sell a Law Practice Business

Lawyers are starting to realize that they are not just building law practices; they are building businesses. And businesses have value. And if a business has value, it can be sold. And if you want to sell it someday, you need to build it to sell — starting now. Firm valuation is a key component in determining the worth of your law practice, and hiring experts in firm valuation can help you obtain a fair market value and navigate the the selling process.

I had you until that last sentence, right?

Selling your firm seems so far in the future. Why worry about it now?

But here’s the thing, the same law firm somebody wants to buy is the law firm you have been dreaming about owning.

What Makes a Law Firm Attractive to Buyers?

A well-run firm that is profitable and takes very little effort from the owner to operate is an attractive acquisition target. When you are ready to sell, it will get you top dollar.

Isn’t this exactly the type of firm you want to own? Appraising and packaging your legal practice can enhance its value and make it more attractive to potential buyers.

Are you starting to understand the allure of “build to sell”?

For starters, buyers want at least three years of tax returns. So, you need to have filed taxes for three consecutive profitable years. When we start working with law firm owners, it typically takes two to three years to improve their profitability numbers, and another three years to get them running at peak efficiency. That’s five to six years to prep your law firm to sell. Strategic planning throughout your legal career is important for a smooth transition and successful sale. (I’ll talk about calculating your firm’s value in a future column.)

Then you have to actually put the firm on the market, find a buyer, go through due diligence, and close the sale. All of that takes time.

Somebody waking up on their 64th birthday who wants to be out in 12 months is in for a nasty dose of reality.

Perfectly Positioned: A Timeline for Lawyers Who Build to Sell

Contrast that 64-year-old with a 35-year-old attorney who is looking ahead, positioning themselves to sell when they are ready.

This lawyer knows it will take at least three years to become profitable.

But by the time they are 38, a nice chunk of change starts rolling into their retirement account.

They run the firm for another 10 years at fair margins, saving some cash for retirement, but are really focused on growing their top-line revenue. Growing is expensive, but they are willing to sacrifice a little of the bottom line to grow.

Now they are 48. Retirement is getting closer. So are college tuition and weddings — and given these major expenses, maybe the time for funding growth is over. Retirement is mostly funded, so they throttle back on marketing, and the firm’s growth slows. But that’s OK because they have learned how to operate their firm well, and profits are high. The firm is a cash cow.

The next 10 years pass in a blur.

Then the first grandbaby appears, and all they want to do is spend time with their family, travel and enjoy life. Maybe it’s time to get out. At 58, they are perfectly positioned to do that.

Or …

They are perfectly positioned to keep working for a while longer, play with that grandbaby and travel because they built a profitable law firm that doesn’t take much effort from them to run.

Either way, because they planned ahead and built to sell, they are a winner.

Plan to ‘Exit on Top’ with Succession Planning

The idea that law firms are not merely practices but valuable businesses with market value is gaining traction. My latest book, “Exit on Top,” challenges traditional notions and guides attorneys on the path to building a profitable and effortlessly operable business with the intention of selling.

Calculating Firm Valuation 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.”

Engage a Broker. The selling lawyer must also consider the legal and ethical obligations during the sale process, including notifying clients, creating a comprehensive transition plan, and understanding the legal implications of ceasing practice after the sale.

---

Other Considerations When Selling a Law Practice

Evaluating Your Law Practice

Evaluating your law practice is a key part of determining its value and preparing it for sale. Think of it as a full service health check for your business. Here are the key things to consider:

• Revenue: Start with your financials. What are your revenue streams? What’s the growth potential? Are you seeing year over year growth? Buyers will be looking for an upward trend.
• Client Base: What’s the size, demographics and loyalty of your client base? A diverse and loyal client base is a real plus for your practice. Will your clients stay with the firm after the sale?
• Market Position: What’s your market share, competition and reputation in the industry? A strong market position is a big plus for your practice. How do you compare to your competitors?
• Practice Areas: What are the most profitable and in demand practice areas in your firm? Specializing in high demand areas will increase your practice’s value. Are there opportunities to expand or narrow your practice areas?
• Tangible Assets: Inventory your practice’s tangible assets, equipment, furniture and technology. These assets add to the overall value of your practice. Do you have up to date technology and well maintained equipment?

This will give you a better understanding of your law practice and its value. And help you prepare for the sale and make improvements to sell.

Professional Conduct Rule

Selling a law practice is non negotiable with Professional Conduct Rule. This rule is to ensure the sale is done ethically and client interests are protected. Here are the key points to remember:

• Notice to Clients: You must give written notice to your clients about the proposed sale. This notice must include the name of the buyer and the terms of the sale. Transparency is key here; clients need to know who will be handling their files going forward.
• Client Consent: Getting client consent to transfer their files and representation to the buyer is crucial. This respects client autonomy and makes them comfortable with the new arrangement.
• Confidentiality: Throughout the sale process confidentiality of client information is key. This means only sharing sensitive information with authorized persons and handling with care.
• Fair Market Value: The sale price should be fair market value of your practice. This means the transaction is fair and reasonable based on the practice’s value and current market conditions.

By following the Professional Conduct Rule you will have a smooth and ethical sale and protect all parties involved. This also maintains the reputation of the profession and your clients and buyer. Prepping a Business to Sell Is Not a Fast Task

Get Your Team and Clients Ready

Getting your team and clients ready for the sale of your law practice is key to a seamless transition. Here are some steps to take:

• Communicate with Your Team: First tell your staff about the sale. Give them information about the buyer and the terms of the sale. Open communication will calm their fears and prepare them for what’s to come.
• Client Notifications: Draft client notifications that are clear and concise. Include information about the buyer and the transfer of their files and representation. Transparency will help keep client trust intact.
• Train Your Team: Train your staff on the sale process and their part in the transition. This may include new procedures, client handover protocols and changes to day to day operations.
• Answer Client Questions: Be ready to answer any questions clients may have about the sale and the transfer of their matter. Reassure them their interests will continue to be paramount and the transition will be handled professionally.

By getting your team and clients ready you can reduce disruptions and ensure a successful transition. This proactive approach will keep your practice stable and intact during the sale process.

Managing the Sale Process

Selling your law practice requires planning and execution. Here are some steps to consider:

• Engage a Broker: Consider hiring a law firm broker to sell your practice. A broker will give you insight into the market, pricing and finding the right buyer. They will streamline the process and get you the best result.
• Prepare Marketing Materials: Put together marketing materials to showcase your practice. This might be a practice profile, financials and an overview of your client base and practice areas. These will attract potential buyers and highlight your practice’s strengths.
• Negotiate: Negotiate with the buyer to agree on the terms of the sale. This is price, payment terms and conditions or contingencies. Good negotiation means both parties are happy with the deal.
• Close: Finalize the sale by signing the sale agreement and transferring the practice to the buyer. This involves legal documentation and making sure all terms of the agreement are met.

By following this structured process you will get a good and profitable sale of your law practice.

Tax and Succession Planning

Tax and succession are part of the sale. Here are some to consider:

• Taxes: Talk to a tax pro to understand the tax implications of the sale. Capital gains or losses and how they will impact you. Proper planning can help you minimize liabilities and maximize your profit.
• Succession: Develop a succession plan for the transition of ownership and management of the practice. Who will take over and how will the clients and employees be taken care of?
• Retirement Planning: Consider retirement planning options like a buy-sell agreement or a retirement plan. These will give you financial security and a smooth transition as you step away from the practice.
• Estate Planning: Review your estate plan to make sure it’s current and reflects your wishes for distribution of your assets. This is especially important if the sale of your practice impacts your estate.

By thinking tax and succession you’ll have a successful and profitable sale of your law practice. This broad approach will prepare you for the future and achieve your long term financial and personal goals.

More Law Firm Financial Tips from Brooke Lively

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

• What Should Be on Your Law Firm’s Dashboard
• Are Your Law Firm’s Financial Systems Ready to Scale?
• Law Firm Profits: 5 Ways You May Be Sabotaging Your Firm’s Growth
• The Best Compensation Plans Use the Law of Thirds
• Law Firm Overhead: What It Is — and What It Isn’t
• Building a Law Firm That Pays You First
• Understanding Law Firm Profits — And What to Do With Them
• How Are Law Firm Owners Paid? Total Compensation vs. Salary
• Funding Growth: Are You Starving Your Law Firm?

Image © iStockPhoto.com.