Selling Your Practice: Getting What It's Worth

Reprinted from:
Published 11/14

It's time: You've put in a lifetime of service to the profession of law, and now it's time to retire. But you can't just finish up your files, lock the office door, and go home to watch reruns of All in the Family. No, you have one more important "case" to wrap up: your own practice. You need to sell your practice to preserve not only your heirs' inheritance, but also your legacy.

Spouses: A Push and a Shove

Most lawyers believe that their practice is worth nothing, so when they call me to help them with the sale of their practice, it's kind of a strike against me to begin with. So, the question is, "Well why did you call me?" And the answer from many lawyers is, "Well, because I was told to." Often, it is the spouse who will tell the lawyer to get on the phone and call me. When I talk to the lawyer without the spouse on the phone, I know I will not get the engagement I need from that lawyer. It's the spouse who will push a lawyer by saying, "You know, this is not the way you would advise your own clients to act. Why are you not taking Ed's advice?"

At Your Service

In a sale, I handle the valuation. I look at earnings, financial statements, etc. Some of it I can do myself. For some of it, I need the client's input.

A big discussion in today's legal world is about unbundling services to provide less-expensive service to the client by giving the client only what he or she needs. I do the same thing: I unbundle the service. If a client wants me to do just the valuation, that's what I'll do. If the client wants me to sell the practice, that's what I'll do, and I include the valuation in that service because there's no point in the seller going off on his own or her own and trying to create the valuation, when he probably understands neither what he wants for the practice nor what it's worth.

A Method to the Madness

Several rules of thumb, methodologies, and formulae can help value a practice. You can take 10 people like 10 CPAs, or me, or some mixture of the two and ask each person to do a valuation, and my guess is that they'll come reasonably close to one another. The way they get there will differ greatly. It's just difficult to do. It's an art. It's not a science.

Many considerations go into a valuation. Even if you have a standardized multiple—which does not exist—the end results won't be the same. The multiples I use by way of a shortcut valuation are .5 to three times the average annual gross revenue. That gives me a starting point. Then many factors come into play, like the geography and history of the practice, the longevity of the earnings cycle, and whether the practice is ascending or descending in gross revenue. The final number will be based on the experience of the evaluator.

Economy: Friend or Foe?

The valuation of many types of practices is governed by the economy to some extent. Personal injury is usually a very healthy practice regardless of the economy. In the personal injury area, people get in accidents, and the victim will be compensated; if the defendant doesn't want to compensate them, the victim must sue. Some practices go up and down with the economy. Estate practice is one example; mergers and acquisitions is another. In the estate planning area, many people will say, "I don't have the money right now, but I'm reasonably healthy. I'm OK. I'll take my chances."

Although most practices experience financial shifts due to the economy, variations are within that parameter. Are we talking about the solo practitioner or small-firm practitioner, or are we talking about a large law firm? One thing I've learned about valuation of a law practice is that so many factors are involved that it's hard to make a general statement that applies to every practice.

Set in Your Ways—And Your Price

My particular bias is that earnout arrangements are inappropriate for a seller. When we sell the client's practice, we sell for a certain number, whatever that number may be. I have my own valuation idea, and it could be up or down from that number, but it will be a set number that the buyer and the seller have agreed on. There might be protection for the buyer down the road, or there might be a bonus for the seller depending on what the buyer does, but the sale price is a set number. Working with a set number permits the seller to plan his future.

Patience Is a Virtue

Sellers should understand that it is not possible to handle a sale immediately. First, there is a 90-day "notice to client" period part of the regulations and the ABA Model Rules. It is challenging to speed things up; even if the seller has, on the day he calls me, a buyer in place and no more negotiating to do, it will still be a minimum of three months for the sale to be finalized.

Some interesting variations to that theme arise, but a true sale requires at least 90 days' notice from the seller to his clients. Those 90 days gives the clients time to think about whether they want to pick up their file or whether they want the buying lawyer to continue with the matter.

Saving You From Yourself

One thing that I provide is coaching for at least three months after the sale to make sure that the selling lawyer doesn't screw it up. I will coach the seller from the moment we get a buyer until we close escrow. From the moment I'm engaged until a minimum of three months after the close of escrow, the seller can screw up a deal—just blow it out of the water.

Once a seller engages me, I will work with him or her on the operations side of the practice to make sure that it is in the best presentable position. It's kind of like a real estate broker coming in and saying, "Well, we have to paint the bathroom because it's terrible. The rest of the house is OK."

The Sale After the Sale

After the deal is made, the buyer must spend a lot of time developing rapport with the clientele. Most deals succeed or fail because of the buyer, not because of the seller. If the buyer is a screw-up, the clients will not stay with him. If the buyer pays attention to the clientele and what they need and want, the clients will, by habit, dial the phone number of the law firm and talk to the new lawyer.

Usually, the buyer will have help from the seller. The seller will introduce the buyer to his clients. With a healthy selling lawyer who merely wants to spend the second season of his life doing something else, he's got time to spend, so another six months or a year can be spent with the buyer, in part to introduce him to the clientele and work out any kinks of personality and so forth.

The time that a selling lawyer stays on is individually negotiated. It depends on geography and the family situation.

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