We have helped dozens of attorneys buy and sell their law firms. In our experience, these are four factors that must be considered in every transaction.
1. Start with a valuation. Your law firm is not a technology company or another type of passive-income vehicle ripe for a private equity rollup—at least not yet. If and when non-lawyers are allowed to own law firms, this may change, but we’re not there yet in the U.S. Law firm valuations are complex and depend on many factors, so it’s important to consult with experienced professionals to establish a valuation range that is both acceptable (i.e., high enough) and realistic.
2. Your law firm has significant embedded value. Your law firm has you. It also has history and brand recognition in your core markets—both by practice area and geography. It has an existing client base that can generate future repeat business, as well as future referrals in and out (when those clients contact you for other legal matters). In addition, your law firm likely has a range of other referral sources that will continue for several years, even after you transition out.
3. Know your ideal outcome – emotionally, operationally, logistically, and financially. Just like your vision for your law firm many years ago, unless you know your ideal outcome, then you are on the road to nowhere. Understand where you want to end up, cutting across a variety of aspects. What is your timeline to retirement – are you willing to transition, and if so, over how many years? Keeping in mind that you probably will not want to work for someone else, running the law firm you built – for very long. Who is running the law firm during your transition period - you, or the new buyer? Do you have a buyer in mind? For example, would you prefer to transition to your current team? All of these are material to determining your ideal outcome. Also, what is your personal financial situation, preferred lifestyle, and life expectancy? If you are already set up financially to live the rest of your life, then your required outcome may look very different than if you and your family are still relying on the law firm’s cash flow to fund your current living situation.
4. Document the transaction properly. If you are going to be relying on this sale or transition for long-term financial and emotional health, then it is important to have a reliable agreement in place. For example, the agreement terms should be clear with regard to your role as the exiting attorney. Other items that should be documented include, the timeline, respective payment obligations, how to handle future referrals, and how to handle pre-paid case expenses, among other things. Consider contingency planning language in the agreement, for example, life insurance to cover unanticipated health issues.