Law firms, like any other business, can be bought and sold. An analysis of mergers and acquisitions activity and industry trends suggest this is the best time in a long time to sell your law firm, if you’re interested in doing so. After all, starting up a new law firm is expensive and time-consuming. Once you’ve decided that you may want to sell your law firm, the next question is: what should you expect?
Be Realistic in Valuing Your Law Firm
There are several factors that go into determining the value of your law firm. One general measure is four times the seller’s discretionary earnings (SDE), the net income before subtracting the owner’s salary, benefits, operating income and taxes. Another measure is five times the EBIT, the earnings before taxes and interest. It is, in short, revenue minus expenses not including the taxes. Some buyers use five times EBITA, the same equation for EBIT but also excluding amortization. Another metric is using roughly a hundred percent of the annual fee revenues.
If you want to get more for your law firm, you’ll need to start marketing the law firm to boost revenues before you can ask for more from potential buyers.
Consider the Risks the Buyers Are Taking
Law firm buyers see businesses reliant on very few clients as high risk. This is having 30% of your business with a single client whose loyalty is to the law firm’s owner, not the law firm. Clients can be divided between individuals and corporations. If your law firm has a few big clients, individuals or corporations, diversify the customer base. It takes time to change the client concentration, but the diversification will improve the financial outlook of the firm.
Another solution, and you can do this concurrently, is building long term relationships with clients so you can start charging retainer fees. A portfolio of clients that you charge an annual retainer to makes your business much more attractive to buyers.
Steps like increasing your customer base’s size and diversification are good business moves whether you stay, or you go. However, before you pull the trigger and start negotiating a sale, be certain about your decision. If you sell your practice and regret it, you may be violating both contract law and professional rules of conduct if you try to contact prior clients to resume your business. It is quite likely that you’ll be restricted by a non-compete agreement that says you can’t open a new law firm after you’ve sold the old one.
If “who’s going to buy my law firm?” is a constant thought in your mind, don’t try to do everything on your own. Ed Poll’s Lawbiz is a great resource for people trying sell their practice, whether you’re listing your firm on their registry or using their material to aid you with the transition planning process.
You may also need to hire digital marketing experts to create a good website if you don’t already have one. If the main lawyer is leaving, it may be necessary to bring in help to continue handling the case load. Or you may need outside help in accurately determining the value of your firm, handling customer notifications, or closing out trust accounts.
Selling a law firm is a big decision, and now is a great time to do so. There are steps you can take to make the process easier and get more money for the practice.