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LawBiz® TIPS – Week of November 14, 2017

Why Everything you Thought About Selling a Law Practice is Obsolete

"My law practice has no value whatsoever," a common refrain I often hear from lawyers. In fact I heard that very same statement this morning from a client. Why is it that so many lawyers believe this?

Well, we're told this by our law professors, generally people of an older generation where this was the common refrain. We are told that law is a profession, not a business. And professions, or guilds, have no value beyond the intellectual capability of the individual professional. We are also told this by our respective state bar associations, the leaders of which are generlly from the previous generation. And, the rules of professional conduct did not permit the sale of law practice until 1989 in California (the first such rule) and the ABA's Model Rule 1.17 in 1991. In other words, it was generally perceived that law is not a commercial enterprise and therefore has no value that can be transferred from one professional to another.

First, the discussion, nay, debate, at this point in time is moot. We are no longer clustered in small groups of lavers. We see many law firms in excess of 1000 lawyers; in fact, the AmLaw 100 contains law firms whose lawyers number in excess of 500 lawyers per firm; the top 25 law firms in this list employ more than 1000 lawyers each. When you deal with organizations of such large size producing revenues in excess of $1 billion per year, it is difficult to conclude that this is only a profession and not a business. In fact, it is both. And the very rules of business apply equally to the sole and small business (firm) as they do tho the mega-firm. As a business, the business can be valued and transferred. Or, said another way, the business can be sold.

Second, even the rules of professional conduct are changing to reflect the reality of changing economics. In 1991, the American Bar Association at its midyear meeting in Los Angeles, adopted model rule 1.17. This rule said, in effect, that law practices can be sold and that the goodwill of such practices can be transferred without violating the rules of professional conduct. Since that time, one state after another has adopted a similar if not identical rule; today, only four states prohibit the sale of law practice.

I am proud to say that in the year 2002, with me being the catalyst, the American Bar Association amended rule I. 17 to permit the sale of an area of a law practice. Until this time, the entire practice had to be sold. Thus, if a practitioner had two separate practice areas such as estate planning and trust administration, the entire practice had to be sold. Now, however, the estate planning practice area can can be sold while retaining the trust administration practice area, etc. In other words, at this stage, for those states that have adopted the American Bar Association modification, one can monetize goodwill to a degree, while remaining an active practitioner.

The Business of Law@ has a lifecycle just as any living organism does. From the beginning investment and startup phase through the marketing, delivery and collection phases of daily operation, all the way to the "second season," the lawyer is developing goodwill. This goodwill can be monetized. At this stage, there are only four options: (i) Merge, (ii) Sell, (iii) Close or (iv) "Die in your boots." Unfortunately, most lawyers select the latter option. They do not realize that they can sell their practice, monetize their goodwill and move through the "red zone" and begin a "second season" with vim and vigor.

In fact, there are serious ethical considerations and dire financial consequences to the family of the lawyer for failing to address this issue. Dying in one's boots will leave one's clients adrift and subject to potential adverse consequences. When clients' interests are not protected because of the death of a lawyer, some courts have said that this is negligence per se, that the lawyer may not have known when he would die but clearly knew that he would die at some point and failed to take appropriate action to protect his client. If this is the ruling, and damages are awarded to the client, the estate of a lawyer will have to pay, thereby causing significant damages to the heirs of the lawyer. Not a good situation in any event.

As my mother used to say, "you can't have your cake and eat it also." In this case, however, the lawyer can. The lawyer can monetize his law practice, negotiate an appropriate transition and move into a new phase of life benefiting all involved, clients, family and the lawyer himself.

In order, however, to reach this desired position, a lawyer must believe that he has something of value, something that another lawyer would be willing to pay to obtain. What that price may be is a secondary issue at this point. First, the lawyer must believe in himself and that he has created value over decades of helping challenged clients with their issues.

Here's a starting checklist for your consideration:

  1. What is your business worth
  2. Do you have a plan in place to move the sale process forward
  3. Should you involve your staff in the process
  4. Is your time frame for completing a sale realistic
  5. What if the sales process is not completed within this time frame
  6. Do you have a plan B

Here are some common mistakes lawyers make while considering selling their law practice:

  1. Failing to plan - As John Wooden used to say, "is planning to fail."
  2. Not understanding the value of the practice - Price and value are different; but not knowing the value can place the price negotiation at the incorrect plateau.
  3. Trying to sell your own practice - This is your "baby;" emotion should be left at home. Objectivity is required to get the best deal for you.
  4. Being impatient with the sale process - This process takes time, sometimes more than you want. Impatience doesn't serve you.
  5. Slowing down or downsizing the practice before or during the sales process - This will assure a decreased price for you.

Your practice does have value. When you're ready, we'll test the market and monetize your hard work over many years. Call us.



Why Everything you Thought About Selling a Law Practice is Obsolete

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