How To Determine If Your Law Practice Is Worth Anything
Frequently, soon-to-be-retired solo practitioners or small law firm owners want to know if it is worth the effort to sell their practices. By far, the most significant determinant of the answer to this question is whether and for how long the practice can continue to produce revenue once the seller is gone.
Are future revenues predictable?
When purchasing a law practice, the buyer hopes that clients will continue to knock on the door even though the seller is no longer there.
For some kinds of practices, this will not happen. Very prominent criminal defense attorneys and other well-known litigators are good examples of practices where future revenue is very unlikely. These practices are too closely linked to the reputations of the sellers. Buyers will discover that clients want to hire only the particular lawyer who is selling, no one else.
In contrast, some practice areas are extremely likely to generate future revenue. Projected revenue can be based on a variety of different factors.
Old files can keep giving
Estate planning practices often produce future revenue, despite the departure of the lawyer who originally opened the files. When a buying lawyer takes over files that contain wills for living clients, it is reasonable to assume that some of those clients will want to revise or update those wills. In addition, the death of some of those clients can launch probate.
While there should be future revenue, it is virtually impossible – without a crystal ball — to predict how much. You don’t know for sure how many clients will seek to have their estate plans revised or will die and set into motion the probate process. In addition, it is possible that some clients may prefer to work with counsel other than the buyer.
Key client relationships generate revenue
Other practices likely to generate future revenue are those where the retiring lawyer’s book of business is based on relationships with clients and/or referral sources. In theory, when such a practice is transferred, the selling lawyer can make an introduction and vouch for the buying lawyer. Ideally, the relationship will indeed transfer and the flow of business will continue.
A variety of practice areas fall into this category. One example might be an IP lawyer with a patent-prosecution practice whose relationship is with the key GCs of a few companies. Others might be an immigration lawyer who helps employers with foreign-worker issues, whose relationship is with key HR VPs, or a small-business attorney who has productive referral relationships with a handful of CPAs. In these situations, a successful transfer of the relationship should lead to future business.
Just like the situation with the estate planning practice, however, the amount of future revenue is unpredictable. If a retiring lawyer’s book of business is based on eight key relationships, there is no guarantee that there will be eight smooth transitions. It is reasonable to assume that at least some of the relationships will transfer, but precisely how many will do so is anyone’s guess.
Contact information can generate revenue
For certain consumer practice areas, a website domain name and phone number could be valuable. For example, a well-trafficked website for a bankruptcy attorney with an address of www.nodebts.com and a phone number of 1-800-NO-DEBTS should continue to attract business long after the seller is gone. Many clients find such a firm only because of the firm’s unique website and phone number.
Brands can generate revenue
Should Sam and his partners at Lawyerist ever decide to sell, the blog’s name would be a crucial component of the ultimate valuation. Why? Because the blog’s name is well known in the legal blogosphere and the blog’s good reputation will likely continue for some future time. For that reason alone, it would continue to attract readers even if Sam ever leaves.
The same holds true for the names of certain law firms. Let’s go back to our friends at nodebt.com. If the name of the firm is the No Debt Law Firm, and if that name has been heavily advertised on billboards, radio, TV and the web, there will be consumers who seek bankruptcy assistance simply because they remember the name and then contact the law firm. The brand stands on its own. The presence or absence of the owner-seller is negligible in determining the firm’s future revenue.
Know where there’s value
Only practice areas with certain features are likely to yield future revenue when sold. These are the practices that lawyers should consider selling and other lawyers should consider buying.