I am a partner in a two owner personal injury plaintiff firm in Los Angeles. We have four other attorneys. We do traditional personal injury work with a high volume of medical practice and products liability. One Hundred percent of our fees are contingency fees. My partner has expressed an interest in retiring and selling his interest to me. How do I go about determining a fair price to offer him for his shares? I would appreciate your thoughts.
It would be nice if the two of you could agree on a fair price. However, often it is not possible in a contingency fee practice. Often the primary value of a practice such as yours is the value of the pending cases on the books and those values are unknown until the cases are concluded in the future. It all depends on the extent of fluctuations in the annual revenue stream. I just completed two assignments where a dollar amount was agreed to based upon a gross revenue multiple. However, in both cases the revenue streams were fairly consistent over a five-year period. When there are extreme swings in revenue over a three to five year period there often is no choice but to base the acquisition price upon a payment arrangement as cases are completed. A percentage of completion ratio (how long the case was opened before the acquisition and when the case is concluded) or other method will have to be considered as well as overhead paid.
While cases in progress may be the major asset you also should expect to purchase your partner's cash-based capital account or shares of stock as well.
There are a variety of other approaches. I have never seen the same approach used twice.
John W. Olmstead, MBA, Ph.D, CMC