I am a partner in a small law firm in Northern Virginia. We are a four attorney firm with two equity partners and two associates. We are interested in acquiring a solo practitioner’s practice that is 60 years old and ready to retire. What are the issues that we should be concerned with before we spend a great deal of time on this matter?
I understand your concern and reason for asking for my thoughts. You must immediately determine the nature of the clientele that you would be acquiring and whether the seller is interested in remaining with the firm for a period of at least one year so your firm can become acclimated to the new clients. If the firm’s clientele are older, what would be the reaction if they were represented by younger attorneys? People chemistry is very important. It has often been said that clients hire the lawyer and not the firm. While this is not totally true – there is some truth in this statement. A successful client transition and retention is crucial.
If the sole practitioner is interested in selling out and leaving the area, then you may consider proceeding with the transaction with payments which would be based upon subsequent collections during a period of years after the acquisition. In other words, the more the seller participates during the first year to retain certain clients, the more the set we would receive.
The worst scenario is if the seller dies unexpectedly after signing the agreement. This recently happened one of our clients, and they had to spend a great deal of time and effort trying to retain clients that they had never had contact with.
You must also review the financial records to determine the profitability of the practice. Many sole practitioners do not keep adequate time records, don’t have automated practice management systems, and are not paperless. What is the shape of their client files and how well are they organized? Certain data is stored in their heads. In many cases, the hourly rates are low and could be raised during the first year to make the practice more profitable. However, this increase must be one that will be accepted by the client. The next question would be whether family members are involved in the practice, if they are, there may be problems in the future. The clients know the family, and if there are any remaining family members working in the firm, they may leave the your firm empty-handed. For example, if a paralegal who is a family member leaves the firm after the merger is consummated, several clients could follow the paralegal to their new place of employment. In such situations I have had client law firms that have had such persons execute non-compete agreements. In one situation the deal was aborted by the acquiring firm due to the paralegal not willing to sign a non-compete agreement. This was a situation where the paralegal in the firm actually had the client contact relationship. The owner’s contact with the client was limited. The paralegal had the relationship.
Finally, there should be other safety valves for the purchaser in acquisition of this nature. On a positive note, the situation could present a fine opportunity for growth. Just ensure that the buy sell and other legal agreements provide the appropriate safeguards.
The above issues such as non-compete and practice sale agreements should be addressed with your business attorney.
John W. Olmstead, MBA, Ph.D, CMC