The retiring baby boomer generation includes lawyers who were founding partners of their firm. It’s understandable that as they bow out of the profession, they would want to protect the legacy they spent so many years building by ensuring their clients would be well taken care of in the future. It also makes sense that anyone who has spent that many years building a successful business would want to get some compensation for passing it along. Yet many lawyers are struggling to sell their legal practice.
Getting a Realistic Valuation
I have seen practice sales delayed due to an over-valuation of their worth. I’ve seen practices go bankrupt and deals go sideways after the fact due to inaccurate valuations. Setting the right value for a practice is a delicate balancing act between the emotions and pre-conceived notions of value by the seller, and a realistic understanding of what the market will bear.
Let’s start by admitting that traditionally, law firms haven’t been worth much money. Founders would close the firm, sell of what they could, and pretend to write that book they’d always talked about. Today, some law firms can actually fetch a decent sale price…but it’s not as easy as putting it on the market. Not so long ago, business valuators would limit their valuations to any real estate the firm owned. So, if you didn’t own your building, there wasn’t much value in your files, client relationships and furniture.
Today, while it’s understood that a lawyer can’t sell a client relationship, they can certainly assign a value to client introductions on repeatable and non-specialized business (such as corporate records). Depending on the rest of their practice and their ability to successfully make similar introductions to other clients, there might be some value in those other areas as well.
If the buyer wishes to keep the premises, there can certainly be some value in community name recognition and good will – in such cases I usually suggested a phased name-changed to maximize the value of that brand recognition before and during the transfer.
There can also be some value in inheriting a good team of lawyers/staff, provided they stay with the firm after transfer.
Office furniture, technology and a favourable lease have very little monetary value but can offer what we call “street appeal”, making it that much easier to sell the practice.
Finding a fair and marketable price tag is an art and a science. Go too low and you might not attract the right buyer. Get too greedy and you’ll scare a lot of potential buyers off. Take the time to really think this through and land on the right price tag.
Finding the Right Buyer
The key to effective marketing and sales is understanding your target market. Who would buy an existing law practice? It could be another firm wanting to take over assets only (like corporate records, trained associates or good staff). Or, they may be interested in opening a branch office and be willing to take over the premises as well. Alternatively, it could be a younger lawyer or two wanting to branch out and start their own firm.
If you are wooing younger lawyers, be aware that:
- The next generation of lawyer owners doesn’t have the time to wait for a firm to blossom financially. They need to start making profits immediately;
- They probably don’t have the marketing skills the seller has, although hopefully they commit to developing marketing skills over time;
- They probably don’t have the reputation or legal expertise the seller has; and
- They probably don’t have the business skills needed to keep a firm running while it’s still building a client base and marketplace recognition. They’ll need a game plan for this transfer which may include the seller staying on for a time to mentor the new owners, bringing in a business strategist and coach, etc.
It is easier and more quickly profitable for an up-and-coming lawyer to inherit a practice rather than to spend years building one. But for this purchase to be sustainable, there needs to be a more detailed plan than if you were selling to an existing, successful law practice.
Quite apart from the immediate ability of the buyer to run the practice (with or without help), you also want to consider fit. For example:
- Is the buyer younger than the seller? There’s no point in going through the effort of a relationship transfer if the client believes another such transfer will need to occur within five years;
- Does the buyer’s practice mix reflect the seller’s practice mix? There’s little long-term value in a solicitor taking over a litigator’s practice (or vice versa);
- Do the service styles between the buyer and seller match? Clients expect a certain standard of service and will leave – regardless of how personal the transfer was – if those standards are not upheld.
For many lawyers, selling their practice is like adopting out a child. There’s been a tremendous investment of time, money, sweat and passion in that practice. They want to know that whomever takes it over will do so (at least to a degree) in the seller’s own image.
Getting the Right Help
An evaluator in an accountancy will give most law firms a very low valuation because they are primarily looking for sellable assets, not intangibles. A real estate agent can only legitimately cite valuations for the property – useless if you don’t own it. There are business brokers out there but very few with a deep understanding of law firms.
I’m aware of only two individuals in Canada who can do this type of work: one is in Ontario, the other (me) lives here in BC.
If you are interested in selling or buying a law practice or its assets, feel free to contact me. I got into this work at the request of my clients who wanted someone who intimately understood law firms, was closer to home who could give them responsive, personal attention and who better understood the local landscape. I’ve worked with lawyers for over thirty years and truly understand the effort that goes into building a successful practice, and the steps needed to try to find the best fit in a successor.
Heather Gray-Grant is a business strategist, marketing expert and executive coach for law firms and lawyers. She can be reached at email@example.com