I am the owner of a small estate planning firm in Kansas City, Missouri. I have two associates and four staff members. I am considering acquiring a small (solo) practice in a nearby community. I have read some of your articles as well as your book on succession planning and valuation, and the multiple of gross revenue used to establish a goodwill value for a law firm. What are some of the factors that can impact whether the multiple is higher or lower – a firm’s potential value?
While multiples of gross revenue is a common approach, a key ingredient should be the profitability picture before distribution to owners. In other words, what is the quality of earnings? A firm that nets fifty percent of gross revenue would generally command a higher price that a firm that nets twenty-five percent. Factors that should be considered in determining a firm’s potential value are:
The average partner or owner earnings figure is the critical component. If the average partner/owner’s income is low, normally the practice is not worth much. A good business person will not pay for a business and pay a premium when it cannot be justified.
Click here for our blog on practice sale
Click here for our blog on succession
Click here for out articles on various management topics
John W. Olmstead, MBA, Ph.D, CMC
Posted at 08:43 AM in Practice Sale, Succession/Exit Strategies
Tags: Effect, Factors, Firm, Law, that, Valuation, Value