The global financial crisis and recession have created great apprehension for lawyers in small firms and solo practices, who have seen their savings shrink dramatically and fear they may outlive them if they don’t continue working.
Many of these attorneys worry that retirement is only feasible if they accept a reduced standard of living. However, senior lawyers in small firms may be better able to retire than they realize because they have something of value to sell: their practices.
Not every law practice is salable. Some are so small and personal in nature that the purchaser might not succeed in keeping clients. This, however, is a rarity. Even the smallest and most personal practices are saleable for the right price and under the right terms, especially those with solid clients and little debt.
Valuing your practice
To determine a fair selling price, look at the expected future earnings of the practice. Some people will look at the earnings generated by the existing practice, but you can also include future earnings that may be based on the buyer’s talents. Others look at a multiple of gross earnings at least to arrive at a ballpark figure for valuing the practice.
It’s generally preferable to settle on a fixed sum, rather than a percentage of revenues. This also prevents ethical concerns about selling client files.
One of the thorniest issues in selling a practice involves the issue of goodwill and how to value it. “Goodwill” is the reputation, client base and client loyalty that you have created over the life of the practice. Typically smaller firms understand the value of their client relationships and reputations and, when negotiating for the sale of a practice, discuss compensation for goodwill.
Valuation of practice goodwill is typically based on a “rule-of-thumb” or “multiple” method (mentioned above) after valuing physical or identifiable assets.
Although a standard has not yet been set for law firms, a general multiplier would be in the range of 50 to 300 percent of annual gross receipts, depending on the nature of the practice, the transferability of the clients and how much repeat business is expected, among other factors. Your practice may be insufficient to be your sole source of retirement funding, but it can be a considerable sum depending on its size. Valuation may be different at different points in time, but every practice has some value. After investing years of hard work and financial resources in growing your practice and building goodwill, selling that practice will enable you to reap the benefits of that investment.
One caveat: if a lawyer sells a practice and then soon thereafter decides to start back in practice and solicit previous clients, this likely violates both contract law and the rules of professional conduct. (Check with your jurisdiction for specifics.) Your intent in selling, or in transitioning your practice by any other means, should be to retire from the practice of law, head into the sunset, and begin the next chapter of your life.
However, lawyers often see their personal identities as part of their work. While wanting to convert the practice goodwill into cash, they still may want to practice law in their old setting. Continuing with the new firm (the buyer) as an employee or Of Counsel may be an option and is a subject for negotiation between the parties.
A coach, syndicated columnist and speaker on topics relating to The Business of Law,® Edward Poll, J.D., M.B.A., CMC is a strategic law firm planner whose ideas have helped thousands of lawyers increase their revenue, improve their profitability and enhanced their satisfaction with the practice of law. His honors include being a Fellow of the College of Law Practice Management and a charter member of the Million Dollar ConsultantTM Hall of Fame. Contact Ed at (800) 837-5880 and see more at www.lawbiz.com, www.lawbizblog.com and www.lawbizforum.com .