Law Practice Management Asked and Answered Blog

Category: Practice Sale

Jul 11, 2018


Law Firm Goodwill and Valuation

Question: 

I am the owner of a six-attorney litigation firm in San Francisco Bay area. I am sixty and starting to give though to gradually transferring my interest to associates in the firm. I have heard other attorneys mention that I should get some goodwill out of my practice. I would appreciate your thoughts.

Response: 

Many law firm owners prefer to leave a legacy and keep the firm “within the family” and transition the firm to non-equity partners or associates in the firm at a discounted value and buy-in as an incentive to stay on with the firm and a reward for their years of dedication to the firm.

Some law firms – typically second generation or later firms – allow non-equity partners or associates to become equity owners with no buy-in whatsoever. The thought being that the real assets of the firm are its talent – its people and the firm’s priority is to retain and keep the best talent that it can. These firms also do not have hefty buy-outs for partners or shareholders leaving the firm other than possibly the initial founders of the firm. Over the years, such firms fund retirement through 401ks, profit sharing plans, and other mechanisms. When partners or shareholders leave the firm, they get their cash-based capital account, or share of retained earnings and their share of current year earnings.

A “founders benefit” is sometimes put in place for firm founders in which they may be paid a share of the accrual-based capital or retained earnings – WIP and A/R. They may also be paid a goodwill value as well either in the form of a multiple of earnings or a specific sum based upon a multiple of gross revenue.

The problem in many firms is that associates are still paying off student loan debts and they don’t have cash available to purchase the owners interests. As a result, if you don’t start early, the cash often has to come from future cash flows that are available after the owner leaves the firm from the compensation that the owner is no longer receiving.

You need to start early, get people committed and start selling affordable minority shares years before you retire so you can get at least half of your ownership interest paid for before you leave the firm and the other half paid out over a five-year time period.

Wait too long and your associates may feel they can just wait you out and inherit your clients without having to pay you anything.

Click here for our blog on succession

Click here for out articles on various management topics

John W. Olmstead, MBA, Ph.D, CMC

Mar 21, 2018


Law Practice Acquisition Proposal

Question:

I am a partner in a three partner six attorney in Chicago. We have been having discussions with another law firm in the city regarding us acquiring their practice. The owner is seventy years old and wanting to retire and exit his practice. My partners and I have looked over the numbers and believe this would be an excellent opportunity for us to expand our client base. The practice handles the same type of work that we do. We are unsure what our next step should be? Do you have any suggestions?

Response: 

I would start by asking for all the due diligence information that your can get your hands on. For example:

  1. Profit and loss statements and balance sheets for the past five years
  2. Income tax returns for the past five years
  3. Copy of office lease
  4. Copy of all equipment leases
  5. Copy of most recent malpractice application
  6. Equipment and furniture inventory list
  7. Personnel list with current compensation and benefits paid, length of time with the firm, current job duties, etc.
  8. Information pertaining to benefits offered employees.
  9. Copies of marketing and business plans.
  10. Reports showing billable hours, fees collections by timekeeper, etc. for past five years.
  11. Reports showing fees collections by clients and practice areas for past five years.
  12. Current work in process and accounts receivable report.

Insure that you have done a thorough conflict of interest check and insure that you review the Illinois rules of professional conduct concerning sale of law practice. Give consideration to the value of the firm and what you are willing to pay for it and how? What assets do want to purchase – just the goodwill or will fixed assets be included? What about work in process and accounts receivable? Is there a building involved and if so do you want to purchase the building and real estate? Do you want to take on any of the employees? Do the numbers work for you? What terms would be acceptable to you?

The next step is to prepare and present a proposal. Some of the following elements would be included in a proposal:

Once you have prepared the proposal present it to the owner of the firm and go from there.

Click here for our blog on succession

Click here for out articles on various management topics

John W. Olmstead, MBA, Ph.D, CMC

 

 

 

 

 

 

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