What is a law practice worth?

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Published on 12/4/06

I have written before in this column that selling a law practice to another qualified lawyer is a positive for everyone concerned. Not only do the buying and selling attorneys benefit, but the clients also benefit when a smooth transition allows them to continue receiving competent representation from a qualified lawyer/buyer.

You shouldn't venture into selling a practice until you are serious about getting out and have thought through what your practice is worth. After investing years of hard work and financial resources in growing the practice and building goodwill, you want to reap the benefits of that investment.

The best way to do so is anticipate questions that can come up, then deal logically and unemotionally with the thorniest issue of all - the selling price.

A business is worth only what someone is willing to pay for it, and time is an important consideration. Valuation and price may not be the same thing.

In the context of buying a business, even a law practice, one must look at the future. When valuing a law practice, one should also look to the expected future earnings of the practice. Many people believe that the price to be paid must be based only on the figure generated by the existing practice. The price the buyer is willing to pay may be increased if he also includes future earnings that may be based on the buyer's talents brought to bear on the purchased practice.

I prefer, and I counsel my clients, to sell (and buy) on a fixed sum. There can be bonuses and payment terms that take into account the buyer's legitimate concerns. I prefer to take advantage of my own efforts to increase the revenue and reap the rewards, usually with an appropriate involvement of the selling attorney during a transition period.

While many lawyers believe there should be a percentage of revenues paid and not a fixed fee, this approach locks both sides into an agreement that allows little or no upside for a buying lawyer. Both parties' concerns can be addressed with a fixed sum. And this also moves away from bar counsel's concerns about selling files, which is illegal.

Some lawyers ask if they can make their practice more attractive to a potential buyer by "enhancing" its name or apparent performance. Although caveat emptor does apply to law firm buyers, ethical rules apply to sellers.

If you are John Doe, solo practitioner, you should not call your firm "John Doe & Associates" to make it inaccurately appear bigger. By contrast, every small law firm involves creative accounting. It is the buyer's obligation to separate real income and expenses from the creative tax accounting normally performed by sellers.

Such issues are why I recommend sellers should retain a professional business consultant or broker for representation when selling a law practice. A professional consultant, involved in selling law practices, knows how to set an appropriate price and identify the lawyers who have the means and motivation to buy the law practice.

For business and ethical reasons, selling a practice is something that must be done right the first time.

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