Law Practice Management Asked and Answered Blog
Category: Selling My Law Practice to My Associate
Feb 28, 2018
I am the owner of a general practice firm in Chicago’s west suburbs. I have three associate attorneys in the firm and three staff members. I am sixty-four and contemplating my retirement and exit from the practice. I would like to start phasing back over the next three years and be out of the practice by December 31, 2021. There is one associate in the firm to whom I would like to sell the practice and he has expressed an interest as well. What are your thoughts as to how I approach this?
Client, referral source, and management transition will be major concerns and will impact the value you can receive for your firm. You will need to use the next couple of years to effect a successful client, referral source, and management transition to your associate. Clients and referral sources will need to have a relationship with your associate and perceive him as a partner.
I have seen law firm owners approach this in the following ways:
- The associate is elevated and given the title of partner (non-equity) with the execution of practice sale agreement for the sale of the practice to occur in the future with a non-refundable deposit. The practice sale agreement outlines the sale price (which includes a goodwill value) and specific terms for the sale of the practice. Upon purchase of the practice the associate would setup a new practice entity. This approach is often taken by firm’s that don’t want to “play partner.”
- A value is determine for the practice and price per share. Often this includes a goodwill value. The associate buys in and initially becomes a minority partner – say twenty to twenty-five percent. Over the next several years the minority partner buys additional shares based upon the valuation formula and the price per share determined at that future time. When the owner retires his or her remaining shares are acquired with the payment for these shares often paid over a period of three to five years.
- An associate becomes a minority partner and makes a capital contribution (usually based on cash-based-capital) that has no relationship to the value that the owner is seeking to receive from the practice. The partnership agreement has a “founder benefit” provision that provides that the founder receives a multiple (1.5 to 2) of the average of his or her last three year’s earnings upon retirement. For example, if the founders average annual earnings for the past three years was $350,000 – $525,000 (multiple 1.5) would be his founder benefit. Typically this would be paid out over three to five years. This would be in addition to a return of the founder’s capital account.
In each of the above scenarios it will be critical that you put in place an action plan with dates, timelines, and activities to ensure that activities that have to occur for a successful client, referral source, and management transition get accomplished. Your biggest challenge will be client and referral source transition. Both of you will need to ensure that clients and referral sources stay with the firm as that will effect the value of the arrangement for both of you.
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John W. Olmstead, MBA, Ph.D, CMC