Buying a Law Practice
Even with the best of marketing tactics, the time needed to build a successful law practice is usually measured in years. There is one tactic that—if properly executed—can help you attain an established practice practically overnight. That tactic is buying rather than building a practice.
Does this sound too good to be true? It’s not. While costly, buying someone’s practice can be an effective method to launch a new practice or significantly grow an existing practice. Moreover, as boomer lawyers continue to retire, the supply of available practices should be plentiful.
As an attorney coach who has worked with a variety of lawyers on their exit or retirement strategies, I can tell you that the “sale” option is frequently considered and successfully executed.
Yes, It Is Ethical to Buy a Practice
At one time, it was unethical to buy a law practice, but in almost all states that is no longer the case. We’ve all read about large firms gobbling up smaller ones, groups of partners defecting to another firm or even single rainmakers switching firms. Call this what you want, but for all intents and purposes someone’s practice has been purchased. Even when it was unethical, smart solo practitioners found ways to “sell” their practices. Buyers became partners for a negotiated time frame with a contractual agreement about overhead and revenue. Before you knew it, the retired “seller” had moved to a warmer climate and the “buyer” was running the show.
What are the advantages of buying a practice? First of all, you can hit the ground running. Ideally, one buys a practice that has a transferable book of business and referral base. The phone continues to ring. Staff and systems are operational and costs are predictable.
Only Buy Transferable Books of Business
Buying a practice is successful only if the book and referral base are transferable. Some books have value; others do not. Perhaps the best example of a practice that is transferable and has value is estate planning. Each of the thousands of solo or small-firm estate planning lawyers approaching retirement nationwide has hundreds of wills sitting in a vault. As the clients eventually die, many of those estates will go through probate – most likely with the assistance of the lawyer or law firm that drafted the will.
Let’s do some simple hypothetical arithmetic. A retiring lawyer has 400 wills of older clients. Conservatively assume that eventually 200 of them will be probated at an average fee of $5,000. That’s potential revenue of $1 million, which is not small change in anyone’s book. If someone offered you the chance to make $1 million in revenue over the next 10-15 years, wouldn’t you be willing to pay a price for that opportunity?
But what price? The literature about valuations, written primarily by bean counters, describes a wide range of methods. After reading for a while, you’ll probably walk away with the same feeling that I did—“That’s the reason I became a lawyer and not a CPA.” In short, valuation methods are convoluted and, in my view, ultimately have little bearing on what one actually pays for a practice. There are few reasons for that.
First, unlike other businesses that are frequently bought and sold, the transferability of an attorney’s book of business is more unpredictable than other professional service businesses and doesn’t fit neatly into many of the methods.
Second, although the comparable sales valuation method sounds like it should work, it doesn’t. As a practical matter, the marketplace for law firms is very immature with few comparable sales. Furthermore, unlike the house down the street, there is no way to find out what other practices are selling for.
Finally, practices are valued all the time in divorce proceedings of attorneys. But there is a very big difference between determining a value in that setting and as a going concern in the marketplace. In a divorce, there is far less uncertainty about the amount of business going forward. Furthermore, the parties in a divorce must strike a deal. That is not the case for lawyer sellers and buyers. No one necessarily feels pressure to do a deal. A party can walk.
What is a hypothetical estate planning practice worth? I don’t want to make this sound too simplistic, but the answer is the conventional “whatever someone is willing to pay.” That is determined by two factors: 1) supply and demand and 2) the parties’ next-best alternative to doing the deal. If you are the only interested buyer, a low-ball offer might work. If your offer is too low, however, the seller may simply walk—thinking it’s too much bother to do a deal for so little.
Which practices have little to no value? A good example is a prominent, solo practitioner, criminal defense lawyer. The good will for this type of practice is too personal to have value. There are virtually no relationships that are transferable. That lawyer gets hired only because he or she is that lawyer. Sure, it’s possible the buying lawyer can get a case here and there when the phone rings, but most will call someone else when they realize that the seller is no longer around.
Isn’t It Crazy To Take On Even More Debt?
Not as crazy as you might think. I don’t live in a glass bubble. I realize that some readers still have six-figure debt from law school and college—and no clue how to finance the purchase of an existing practice. While there are plenty of roadmaps on how to market a practice, there is no roadmap on how these deals are done.
Depending upon both parties’ creativity and willingness to assume risk, such deals can be fashioned in myriad ways. It is best to work with consultants such as accountants, lawyer coaches and legal counsel who offer real-world experience in this area.
Even if you have lots of debt, an interested seller might finance the deal, take a payout over an extended period of time, and base the payments on future revenue. If your offer is the only one on the table, something is usually better to the seller than nothing.
While it may seem counter-intuitive, increasing your debt now may be the best way to reduce your in debt in the future—and build a practice quickly today rather than slowly (via traditional marketing) over the next few years.