At FinancialLegal, we don`t like lawyers leaving money on the table, so this week we spoke to Tom Lenfestey, founder of Law Practice Exchange, on the Financial Legal podcast. Tom is an expert in law firm brokerage and has helped dozens of lawyers buy and sell firms. As you might expect, the answer is not simple. Because when a law firm buys another law firm, it buys two different things: the “business” of that law firm and the “practice” of that law firm. It was not a lifestyle practice: the lawyer had bought a building, he had at least one employee and a few assistants and paralegals. In the end, I didn`t accept the generous offer, but I noticed how casually he handled this very valuable asset. There is no “right answer” when evaluating a law practice. There are different types of evaluations carried out by different consultants for different reasons. Reviews can be detailed or general estimates.

If you`re considering transferring your ownership shares now (within a year or two), it`s a good idea to get more than an idea of the value. However, if you are three to five years away from transferring your shares, an estimate should be sufficient for planning purposes. You should update this baseball estimate every year. Is it possible to have at least an idea of what this practice is worth? Yes. Perhaps the simplest way to evaluate a business is through the empirical method. Here, bean counters assign a variable (also called multiples). They then multiply annual net sales by this variable to obtain a value. To help lawyers and law firms take the first step towards understanding this value, we worked with the Law Practice Exchange to create an appraisal calculator for law firms. This tool takes into account obvious elements such as income and net profit, but also tries to preserve intangible value such as that of employees, the reputation of a lawyer, his clientele, etc. Since every law firm is different, the individual characteristics of your practice must be considered as part of the evaluation process. While some of these factors increase the value of your law firm, others can reduce it. Factors such as growth potential, brand identity, firm size, fee structures, and geographic location, to name a few, can cause valuation fluctuation in both directions.

Despite a relatively robust market for dental practices, the market for buying and selling law practices remains very young, and I doubt my mentor was alone, who simply closed or “divested” his practice. All of this means that complications that arise during an assessment process require the expertise of an external source to evaluate your law firm, including analysis of subjective factors. Therefore, it is best to hire an assessment specialist to evaluate your practice. But first, for opponents who don`t believe their business is a) worth something and b) can`t be sold, let`s take a look at two ways your business can be transformed. In states that allow it, it can be sold directly to another attorney who doesn`t want to create the problems associated with a startup, or transferred internally to a successor who becomes your partner for an overlapping transition period until you leave completely. Suppose a hypothetical lawyer wants to sell an estate planning law firm with annual sales of $100,000. Suppose further that the lawyer has drawn up 1,500 wills over the years. We can assume that over the next five years, 50 clients will contact the firm`s buyer to have their will updated (at $1,000 per will) and another 20 will have to leave a discount (at $5,000 per estate). The buyer generated an additional total revenue of $150,000. These are relatively conservative assumptions. There is also personal goodwill (also known as professional goodwill), which is the value that comes from the efforts, expertise, and reputation of an individual lawyer in a law firm. The problem is that while goodwill is transferable, goodwill is not.

In this context, the “practice” of another law firm is what allows the firm`s business to generate revenue. There are several methods for evaluating a practice. For you, the “right” method depends on the purpose of the assessment and your individual needs. Here are the basic methods: Assume a conservative multiple of 0.5 for our hypothesis. Using the empirical method, the value of the practice for sale is 0.5 in $100,000 or $50,000. When a law firm is transferred to someone else, many factors change. You can`t make the same assumption about future revenue. In addition, there is no judicial warrant in a buy/sell situation. Neither party is obliged to enter into an agreement.

Any party can run. In addition, due to the time, energy, and money invested, it can be difficult for many business owners to accurately determine the value of their practice, which can lead to a false sense of increased value. But back to the formula. Ultimately, you have an approximate value, provided you can gather the information you need, perform the calculations correctly, and be careful with your estimates. What you have is the value of the intangible assets associated with your business – separate from any real estate, furniture or appliances that may be part of the whole. This is the most difficult area to evaluate. Design is followed by marketing and practice management advice to increase the value of your business in very specific areas. Dr.

John W. Olmstead, MBA, Ph.D., CMC, is a Certified Management Consultant and President of Olmstead & Associates, Legal Management Consultants based in St. Louis, Missouri. The firm helps law firms and other professional services firms improve the operation and management of their practices and the lives of their practitioners. Founded in 1984, the company serves clients worldwide, helping them implement change and improve operational and financial performance, management, leadership, customer development and marketing. A few years ago, I was trying to figure out what to do with my legal career. I met a friend and mentor for the law firm I had worked for while studying law. Maybe this lawyer who was nearing retirement sensed my concern for the future and said, “I`ll give you my office.” A divorced attitude is very different from a sales attitude. Keep in mind that the key to evaluating a practice is predicting future revenue. In a divorce situation, an expert can usually reasonably assume that the income of a divorce lawyer before divorce should be very similar to the income after divorce. In this environment, evaluation formulas make sense.

The same is not true for the sales situation. For many practice areas, it is not so easy to predict how much revenue a successor can generate. Much depends on the field of practice and many CPAs simply have no idea of these nuances. It evaluates practices by taking a percentage of foreseeable revenue over a period of time. For many companies, Roy`s valuation methodology is an excellent starting point for negotiations. However, depending on the circumstances of the transaction, this may not be the end point. Every law firm has value, including yours. This value is real – as in dollars and cents real – and negotiable.

And it can be much higher than you think. What about working with a CPA who regularly evaluates lawyers` practices when a lawyer divorces? While this answer is not very satisfactory, the valuation of a law firm is different from that of other professional services firms that are bought and sold. When this happens, evaluators regularly apply a variety of formulas. Virtually all other types of professional services, including accounting, medical or dental firms, have fairly predictable future records. If there are a lot of repeat transactions and customer loyalty can be transferred, the multiplier will be higher. When selling a law firm, some of the clients and referral sources will not remain in practice due to the close personal relationships that are usually developed. This factor must be taken into account when determining the multiplier. If the company depends on a few large customers, the multiplier is lower. As baby boomer solo practitioners and small law firm owners approach retirement, many are considering selling their practices. However, they don`t want to explore this trail without having a rough idea of what their practice is worth. It sounds like a cliché, but a law firm is worth exactly what someone else will pay for it. Roy Ginsburg, estate coach and law firm consultant, can give you the valuation information you need to prepare your practice for sale.

Call him today at (612) 524-5837 or contact him by email. As you`ll hear in the podcast, there can be a lot of untapped value in a law firm – the key is to understand where that value is, count it, and then sell it to a potential buyer. Whichever valuation method is used, the key is that your law practice has value. So be sure to proactively and diligently evaluate the law firm you`ve worked tirelessly to build. Practical goodwill is what interests future partners or buyers and what has an impact on value. Unfortunately, many law firms have a lot of personal goodwill and little practical goodwill. These companies need to find ways to institutionalize their operations to improve the goodwill of the practice and integrate these strategies into their succession and exit plans.