Law Practice Management Asked and Answered Blog

Category: Reader

Jul 07, 2015

Law Firm Ownership – Acquiring a Founding Partner’s Interest – Question from a Reader

Question:

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.

Thank you!

Response:

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. 

For example:

Law Firm A – has $1,000,000 in gross income and the net earnings of the owner is $600,00

 vs.

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.

Click here for our blog on succession

Click here for out articles on various management topics

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

Archives

Categories

    Subscribe to our Blog