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Acquiring a Law Firm May Be Smarter Than Starting from Scratch

By Tom Lenfestey

Purchasing an existing law firm may be ideal if you are looking to grow your existing practice or law firm or if you are an in-house or a lateral looking for immediate stability in revenues along with the flexibility and independence that comes with firm ownership. The upward climb from starting from scratch to sustainability may be too great or too financially risky.

Where attorneys once locked the front door when they were ready to retire, today they are instead looking to sell or transition their practices to maintain the value that has been built and demonstrated by the ringing phones, systems, clients, firm reputation and overall practice knowledge base.

THE PROCESS

  1. Self-Assessment. Is now the right time to take on the work and responsibility associated with buying a firm? Is there anything in your personal life or your current firm’s structure that could benefit from additional time instead? As a buyer, what would be a good fit for you or your practice in terms of practice area(s), size, location, culture, etc.?
  2. Get Help. While you are an experienced attorney, this isn’t something you go through every day. It is a unique process and the right advisers can ensure the transition is successful. Assemble your advisory team and connect with a qualified law practice broker (I know a good one) who understands the unique nature of law practice transitions as compared to other business transitions.
  3. Consider Opportunities. The law practice marketplace is mostly hidden due to confidentiality concerns. Most transactions go unnoticed. To discover firms for sale, contact a law practice broker, complete a confidentially agreement, and get preliminary information on potential firms. The broker will coordinate initial conversations with seller(s) to discuss how transition may work, your questions, and to get an overall initial comfort level.
  4. Get Engaged. If you and the current owner believe it’s a good fit, you’ll need to agree on the value of the law firm, the structure of the transaction, transition plan, and other important deal terms while conducting due diligence.
  5. Closing & After. A fixed date will be chosen for the ownership to change and the purchase and ancillary agreements to be executed along with the financial exchange.

At this point you should also feel confident about the post-closing plans for a successful transition plan with the transferring attorney.

THE STEPS

  1. What’s the Key To Your Success? It’s a well-prepared transition plan for the buyer and seller. You both will need to agree on the goals of the transition such as the time which will be required of the seller, and the benchmarks of a successful plan. Your goal in practice acquisition is for the selling attorney to remain or become part of the buyer’s practice post-closing.
  2. How To Value? The value of a law practice is typically calculated based on historical cash flows, adjusting for factors personal to the seller or that practice as well as deal terms that impact value (shorter transition timeline, etc.). The sale price, and practice cash flows should be reviewed during the due diligence period to ensure the selling price is justified and the payments are sustainable with your projected future cash flows.

A law practice broker or CPA who is knowledgeable in the buying and selling of law firms can be vital in assessing the key value-drivers of a law practice along with the expected post-transition retention. Net income may be a great line item to use in determining the purchase price, but cash flows post-closing are a more accurate way to ascertain the firm’s value. As well, consideration of tangible asset value, accounts receivable and post-closing seller compensation should all be considered and calculated.

  1. How Does Payment Structure Work? A typical payment structure is for you as the buyer to finance or pay a certain amount at closing and for seller to finance some or structure the remaining portion as a percentage of revenues earned out over time. This allows buyer and seller to share the risk, focus on making the transition plan a success. For younger attorneys, an abundance of cash on hand is not typically the norm, so considering all financing options with lenders and payment structures is key. For more established firms or attorneys cash may be more readily available, but some form of a seller earn-out is typically still desirable.

IS IT THE RIGHT CHOICE FOR YOU?

Success and growth are not guaranteed if you purchase an existing practice. Careful planning, due diligence, and self-evaluation should be performed before you buy a law practice. It is a unique process and having the right advisers can help ensure the transition is smooth and successful.


Tom Lenfestey is an attorney, CPA, ABI with The Law Practice Exchange LLC. Tom Lenfestey is the managing member of The Law Practice Exchange LLC as well as a North Carolina attorney and CPA. The Law Practice Exchange aims to curb the lack of knowledge in the profession by educating and advising attorneys on the number of different options available in the legal marketplace for succession of a law practice and also serving as a confidential adviser to seek and provide connections for those right opportunities between an existing attorney and a growth-focused attorney or firm. Contact The Law Practice Exchange at (919) 789-1931 or info@TheLawPracticeExchange.com for a confidential conversation