I have a quick question on a recent column of yours that appeared on last week's blog and Illinois State Bar Association (in an ISBA email).
You refer to the following:
“One to one and a half times the owner's average earnings for the past five years is typical. "Does this mean the total firm revenues or the amount the owner attorney received as income? I thought I have seen that multiplier to be on total firm revenue.
I was speaking in terms of net profit or earnings – not gross fee income.
It is true that we often speak in terms of a multiple of gross fee income when trying to value a firm. Typically a best case is a multiple of 1.0 – often less – .60 – .75 or even less. Downward adjustments are made to the multiple based upon practice risk, how high the overhead is, likelihood of clients or referral sources remaining etc.
Law Firm A – has $1,000,000 in gross income and the net earnings of the owner is $600,00
Law Firm B – is a collections practice – very high overhead intensive practice- has $1,000,000 in gross income and the net earnings is $150,000.
Using a multiple x gross has to be discounted substantially for law firm B due to risk, overhead, etc.
It is sometimes simpler to think in terms of net profit – with the typical ranges between 1.5 – 2.0.
John W. Olmstead, MBA, Ph.D, CMC