Law Practice Management Asked and Answered Blog

Category: Succession/Exit Strategies

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Jul 15, 2010


Valuation of My Law Practice For Merger or Acquisition

Question:

I have been thinking merging or selling my practice. How do I determine what my practice is worth?

Response:

You might want to consider retaining the services of outside advisors to help you with this process. There are a variety of methods used to value law practices including:

  1. Fair Market Value Methods
  2. Rule of Thumb Methods
  3. Price Earnings Ratio
  4. Discounted Cash Flow Models, etc.

CPA practices are often valued using a rule of thumb method employing a multiplier of 1.0 to 1.5 times average gross revenues for the past five years. Thus, a practice with average billings of $400,000.00 per year might sell for $600,000 with 50% of the purchase price paid upon closing and the balance (50%) paid over a five year period based upon subsequent collections.

Law practices are more difficult to value. CPA firms often have more repetitive work from ongoing clients and less risk in the practice – say compared to a personal injury law practice. CPA firms often have enforceable non-compete agreements which are non enforceable and therefore non existent in law firms. Law firms have much more fluctuation in practice valuation and no valuation model dominates. The rule of thumb model – when used – ranges from .5 to 3.0% – and will dependent upon the amount of repeat business, extent of institutional vs indivdiual clients, and the ability to sucessfully transfer clients to the acquiring practice.

Look for ways to institutionalize your practice in a way that your practice is not "uniquely you."

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

Jul 14, 2010


Succession/Exit Planning Questions

Question:

I am sole owner of a 8 attorney firm in the Northwest. Two other attorneys are income partners – no equity – and the other five attorneys are associates. I am just turning 50 and am beginning to think about future retirement. What questions/issues should I be thinking about?

Response:

Fifty seems to be the point at which attorneys being thinking about their retirement and their future. Some even consider and in fact make complete career changes at this point in their lives. Here are a few questions to begin thinking about:

  1. Have you decided when you want to retire and leave your firm? Or do you want to work forever?
  2. What amount of cash or annual cash flow do you need when you exit?
  3. Do you presently have a retirement plan and how much income to you project that it will provide at different exit times?
  4. To whom do you want to transfer your interest? Family members in law school, other attorneys in the firm, another firm, etc?
  5. Based on future cash flow, do you know how much the firm is worth today?
  6. Do you know how to best maximize the income stream generated by the firm – in the years ahead while you are still with the firm and after you leave the firm?
  7. Have you been able to institutionalize the firm – or is it uniquely you?
  8. Is the firm even marketable?
  9. Do you have a succession/exit plan?
  10. Do you have a plan for your business if the unexpected happens to you?
  11. Have you taken steps to protect your family's wealth?

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

Apr 08, 2008


Succession: Obtaining Maximum Value for Your Practice

Question: I am the sole owner of a 12 attorney practice. I am 55 years old and am beginning to think about retirement. The other attorneys are associates in the firm. What do I need to be thinking about in order that I can transition out of my practice and have money for retirement. While I have put some money in a 401k, I am not yet financially secure enough to retire.

Response:

You are not alone. As the baby boom generation ages – more and more attorneys are asking this question. Unless you have an appropriate Exit Planning Strategy and put in place a sound Exit Plan, it is doubtful that you will be able to cash in on the full value of the goodwill that you have created. To exit successfully you need:

You will need to consider whether you should consider merger, sale of the practice to an outside buyer, or sale of the firm to the other lawyers in the firm. You need to find ways to institutionize the firm so that in additional to professional goodwill (your personal reputation and goodwill) you develop practice goodwill (goodwill of the firm that will remain after you have left the firm). Develop your lawyers and create a desire and motivation for them to want to be owners/partners in the firm. Develop your staff and practice systems. Diversify and stabilize your client base.

If you decide to sell to attorneys in the firm – begin the process early so that most of the buy-in is completed before your actually leave the firm. The longer the planning horizon – the easier they buy-in burden will be for others

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

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