Listen to the Lawyerist Podcast as Stephanie talks with attorney and business owner, Tom Lenfestey, about succession planning and what it actually looks like to sell your practice in today’s market.
- 7:03 — Where the market is right now when it comes to buying/selling law firms
- 17:22– Selling your law firm to someone internally (someone already on the team)
- 24:44 — What to do when you have ownership interest at a firm you’re currently with
- 29:26 — A thoughtful seller’s transition plan
Tom Lenfestey is the Founder of The Law Practice Exchange, LLC as well as a practicing North Carolina attorney, licensed CPA and Accredited Business Intermediary. Tom’s years in private practice focused on transition and succession planning for other professions including creating, advising and implementing strategic business and estate plans for those clients. As a result, Tom founded The Law Practice Exchange in 2013 to provide education, options and brokerage and consulting services to the legal profession on selling, buying and overall law firm succession strategies. You can connect with him on LinkedIn.
Stephanie Everett is the CEO & Lead Lab Coach here at Lawyerist. She is the co-author of Lawyerist’s popular book The Small Firm Roadmap and is a regular keynote speaker at legal conferences and CLEs. Stephanie’s favorite thing about working in this space is getting to build a forward-thinking community of lawyers. Stephanie can be found on Twitter, or LinkedIn.
Transcript automatically created.
I’m Tom Lenfestey. Attorney, CPA, and founder of the Law Practice Exchange. We help law firms and lawyers build and find their continuation plans. We do this through brokerage in the wild world of the legal marketplace and also through succession and internal transfers.
Hey Tom, welcome back to the show. I’m excited to jump in and pick up from our last conversation where we really talked about buying a law firm. So today we thought we’d go in a little bit deeper to selling, but before we go too deep into that, I just thought, let’s try again. What’s the market like, is there a good market right now for buying and selling a law firm?
Absolutely. Well, it’s great to actually say market for buying and selling of a law firm. Stephanie, as you know, this is something that, you know, has kind of been my passion and others as well of kind of building the educational aspect that, Hey, there really can be a market, you know, for your law firm, meaning somebody else may want to own it. Right. You’ve built value and kind of can transfer that over. So it is great kind of exciting to say, there is a marketplace it’s still young, it’s still a, you know, kind of this niche focus that we have otherwise. But yeah, I would say the market is strong, you know, ever since really COVID, there was a pivot and a change for attorneys during COVID. I think, you know, for firms and attorneys who had traditionally, you know, focused on natural marketing, you know, in their own area, some marketing channels were just closed.
And so then all of a sudden where maybe growth through acquisition had been an idea. It became something that they really wanted to focus on more from that aspect as to, you know, building that, you know, firm and keeping those numbers through growth in maybe a geographic expansion or a practice area or otherwise. But since they couldn’t, you know, go out and have coffee and since most things were being done, remote and lawyers seemed to figure out how to manage remotely, do client interactions, remotely. A lot of other things, you know, that acquisition of another law firm in a new market seemed to be a good opportunity. So overall COVID was a good thing. And then I think from there really over the last couple years, we’ve just seen a strong push and buyer interest and then followed by a little bit of what I’d say as our sellers, our attorneys who are looking at retirement, looking at exit, maybe it was a pandemic that helped him push, you know, push to kind of saying I’m ready to be done, or I need to find a succession plan, more other aspects. But overall from the key element they’ve seen the sellers kind of pick up and come to the table as well. So right now we have strong buyer demand. We need more sellers in the marketplace. Funding has been great SBA loans, equity start, come to play. So everything really has been going strong in the last couple years in building this legal marketplace, opening up more opportunities. If you’re looking to sell and transfer your practice, or if you’re looking to grow and expand through an acquisition purchase.
Yeah. So it’s great to hear that there’s strong buyer demand because it feels like the sellers would follow. It seems like a lot of people might be listening right now and saying, oh, I didn’t know that there were people out there that might wanna buy my practice. I’ve never, I hear so many lawyers tell me that they just assume they’ll, they’ll just close up the doors one day and turn off the lights and they’ll just be done.
Absolutely. And that pains me of course to hear that, you know, based on what we’re trying to do is, you know, really build out the knowledge that all law firms have value. Right? It depends on the degree where you are on that scale. But it is interesting because I do think a lot of attorneys haven’t thought about it and you know, our goal is to have you think about it early, before you slow down, right? And before you start to really, you know, kind of diminish the, the value of your firm is to look at those opportunities and strategies. And I think more are, I think it’s becoming more of that kind of known that a law firm is a business, um, and that business can be, you know, bought, sold and transacted to another person. Another attorney it’s just, you know, developing the structure of the financials to do so. And of course, you know, that’s why we’re here.
Yeah. I wonder how much you hear this too. I feel like one of the things that we struggle from as lawyers is we just don’t know what else the hell to go do with ourselves. Like we can’t even imagine I, someone said this to me recently and it really resonated were so many attorneys, their identity is so tied to being an attorney, to being a lawyer that they really can’t even see themselves beyond that they wonder like what else could I possibly do with my life? And I think maybe part of my message to folks listening might be like, go get some hobbies, go, go, go do something fun with yourself.
Absolutely. You know, Stephanie, it’s interesting when I started, you know, the law practice exchange, of course the CPA side of me and you know, the business law side of me very much focused on the numbers, right? We do valuations for law firms. We’ve gotta focus on that and building out structure the process. There was a lot of the aspect of this emotional aspect for, especially our seller attorneys, those that are looking at retirement, that identity as a lawyer. So in my home state here in North Carolina, you know, a few years ago, they passed that you can now be called a retired attorney. And so it’s not just, you’re an attorney or nothing. You can be a retired attorney and call yourself that, but it is, it is strange. And I was just telling this story earlier today, we’ve gone through this over the last decade with attorneys who are so motivated to find a succession plan, to find a buyer, to, you know, excited to do so really push it along, never show any signs of remorse, emotion, cuz attorneys don’t have emotion.
We have to bury them, right. That’s that’s the goal. And then we’re at the closing table and they’re weeping. They’re, you know, crying and trying to hold back and to them, they see it as, this is the end to maybe a 40 year plus, you know, career. And it’s hard. There is a lot of emotion. There is a lot of that attachment to the identity as an attorney. And really the only kind of advice I can give is selling your law practice or a succession plan does not mean you have to give up that identity. You can decide when you wanna stop practicing law, you don’t have to own a law firm or run the law firm to continue to practice law. The other is which I know you could probably speak even more to than I is. There’s such a need, right? For access to justice for these attorneys who have all this knowledge, it, they want to continue practicing, but they’re not gonna do that through the firm.
They just, you know, sold or anything else. There is such need out there under the, you know, lack of access to justice, lack of attorneys, you know, pro bono needs, but there’s so much other things that attorneys could probably develop as their personal aspects. So yes, I think it’s a real cha we try to help coach our attorneys to have an actionable plan post sale, as much as they would a business plan, you know, during the practice of law or otherwise. But I do think it’s a challenge for most. And we’ve seen that vented in tears, other emotions, anything else which surprises me, who knew attorneys had emotions?
No, I’m sure we do. I think too, some people are starting to realize. And in part maybe because we’re trying to push the conversation here at lawyers that the life after your law firm doesn’t even have to mean retirement. It just could mean you’re putting your energy somewhere else. And I know that’s a conversation that a lot of people that’s intriguing to them that they were like, oh, I didn’t even realize that. Maybe I just wanna put my interest somewhere else or my brain power somewhere else. And I don’t have to own a business to do that. So it really resonated with me when you were saying that, that it’s just, it’s a transition, just like anything else. So maybe they’re not emotionally ready. Maybe they’re ready to think about it. What are some of the steps when someone’s kind of like, okay, when is the right time? I know you always say earlier sooner than they think, but they’ve got that itch now, what do they do next?
If somebody’s considering that that sale or succession, you know, usually I talk about it’s time to start now, right? If you don’t have a potential successor in your firm, you need at least a disaster plan, right? So it’s time to start looking at that structure, everything else, whether that you see that as an ethical responsibility, some states have put that as an ethical and to kind of have a assumption attorney, somebody to take over your practice. But overall, if you’re building value and you are running this law firm and you have clients, you have employees, all these people rely on you. Then the key is to address those. What if situations, right? What if something happens to you, you know, that might be an outside firm relate that may kind of lead you down the path, but if you are ready to start exploring, Hey, what does it look like if I were to sell, we really start everybody with, you know, know your goals, know your objectives, kind of go through a quick discovery call.
We do a lot of those. Some just, it shapes, timelines. It shapes paths otherwise, but really with our process, most of it starts with knowing your value, really? What is the value of your law firm? And that is gonna also help shape your path, your timeline, other things, if your law firm’s more valuable and you can get more, maybe for your law firm now to help fund retirement, or maybe you’re not retiring, you’re just taking you your, you know, career outside of owning a practice and doing something different. That’s a neat part. We were talking about. The marketplace that we’ve seen is our age for our sellers is going down a bit. And that’s a really neat aspect that now we’re starting to see attorneys who have built practices that say, look, I’ve got other interests to kind of pursue as well, but I would, you know, the time to start exploring the key part is, you know, take steps. Now it starts usually with goals, objectives, determining your value. And then really the path that you take will come from that. Right? So it may be an internal sales succession. It may be a marketplace. It may be nothing right now, but we need to create that disaster, a plan for you in the interim and kind of go from there.
Yeah. And at first, when you started talking, you were talk talking about, if you don’t have someone at the firm now who could potentially take over, I guess I would just ask, I think you sort of hit on this at the end of that response. If you do have someone in the firm that you think could possibly buy the firm from you or be the person who takes over, do they still need to go through this process? Cause I think a lot of people would just say, well, I I’ve got it covered. I can handle it just internally.
Yes. They, they still need to go through the process and absolutely start the process. I’ve used the saying as if you think you have the right person on the bus, meaning you’ve got that right. Successor, you, you think you’ve hired ’em, they’re proving themselves. Then the time to start, the succession plan is now even if they’re a two year associate and you think, oh, well they really need another few years of grooming to get to that point. The key is to keep ’em on the bus, right? And so the, in order to do that, you have to show them their future show. ’em the value. The hardest obstacle we have to overcome is when somebody comes to us and says, Hey, I’ve got the perfect associates or associates, really. They’re not even associate. They’ve been with me for 10 plus years. They’re great. They have some, you know, some weaknesses, but overall they’re great.
They’re the clients like ’em the staff likes ’em. They should take over the firm. And then we get to the part of offering purchase, even if it’s at a, still of a price or anything else. And we just find that too much time is passed. The, those associates, non equity, you know, partners, otherwise have either gotten accustomed to being an employee where their life going forward, isn’t ownership, they’re comfortable, you know, with some security that comes with employment versus ownership, or they feel like they’ve earned it. You know, they’ve been there for 10 years. They’ve helped contribute to the value, everything else that comes with it. And you know, there is just that challenge. So timing and delay on time is the biggest challenge that we have when somebody comes and says, Hey, I’ve got the perfect candidate inside the firm. So I would encourage if they’re there with you, even if they’re not ready now it’s the time to start discussing and to build out what that’s going to look like for when they’re ready. Yeah. Even if you jump the gun and bring him in attorneys are great about contingency planning, you can contingency plan to modify or adjust as needed. But the worst case scenario, especially what we’ve seen over the last, you know, several months with a two earnings being poached to move everywhere is we’ve had great potential internal candidates that had left. And that leaves then, you know, these, uh, law firm owners looking now in the marketplace for others because they’ve lost their internal potential.
Yeah. It reminds me, I once taught a class at Emory law. I mean, they had me make up the class. So I don’t know. It was kind of crazy. We called it the economics of law firm or something. Anyway, in this class I had to explain to the students, these were all mostly third, second, and third year students, how the business of a law firm worked. And I remember one day we were talking about equity and I was like, well, you guys realize like if the firm doesn’t make enough money, the owners assume that risk and they’d have to put in money or they’d have to, right. Like, just like everyone thinks about the taking out of the profits. They never think about the buying in. And you could just see light bulbs and eyes getting big throughout the whole room. Like they were just like, what?
This has never occurred. Lots of things never occurred to them in this class. I, I gave ’em the straight talk, but what occurred to me as you were talking is that maybe you do have that second year associate that you think that’s crazy. I’m why would I even talk to them about owning this business yet? They they’re so far away from it. I think you could start even laying that groundwork that this is a business that has value and that there’s a purchase, right? Just this idea of what it means to own a law firm and you might have to pay for it. Or you might have a process where you’re buying in is a new concept for a lot of folks. And so you’re sort of setting that stage early so that you’re not having to explain 13 years later wide. Now they have to come up with money. Yeah, I get it.
Yeah. And I’ll tell you one of the first programs, you know, several years ago that we did on selling a law firm, you know, here in again, North Carolina, we had 50 attorneys come in person, which crazy back then, but you know, the surprising factor was 50 attorneys that were very open to discussing. I’m interested in selling my law firm and the number one complaint and a little, you know, controversial was I have tried succession planning before I have hired numerous associates. I’m a small law firm and they have come and gone. And so a lot, you know, Stephanie, to what you were just saying is change, you know, the message somewhat, maybe you don’t even have that associate in house, or maybe you’re looking at, you know, adding them. But instead of just looking at hiring an associate, really hire them as your future buyer and discussing with them, you know, even during the interview process or maybe they’re a lateral that’s coming over, it’s been working for a few years and they’re gonna fill a need for you, but it’s changing the message to, yes, I’m building something over here.
I want you to be my successor details, you know, to be determined and work on. But overall I want you to be an owner of this firm, or I want you to be the successor of my firm. And that really, I do think gives you an advantage compared to some other offers that they may be considering that don’t paint that picture, whether they’re small law firms or large law firms, a lot of firms are not talking that way and are not offering that opportunity. And you know, once you offer it, then you gotta be ready to back it up, which means probably holding yourself accountable to take those steps on, you know, determining what that succession structure that sales structure looks
So Tom, we are taught about some of the transparency that really should exist if you’re the partner of the firm, right? If you’re the current person who has the ownership interest, it occurred to me. And I just wanted to pitch this out to folks who might be listening, who are in that associate role right now to step up and maybe be transparent if you’re in that associate role. And, and you want to own a part of the business that you’re working for. I remember I was very fortunate. I was at a big firm in an associate’s role and the partner that I worked primarily with was leaving. And he just had it in his mind because I wasn’t quite yet a partner that when we launched, we were gonna leave and start a new firm and that I would come over as an associate. It work for a few years and he’d talk to me about being a partner.
And at that moment, I don’t know what got into my head, but I just went into his office and I was like, listen, I’m about to launch this business with you. It’s gonna be like, let’s be honest. We all know who’s gonna end up doing most. I mean, the, the tactical work of the business, I was like, I’m ready. I’ll put in just as much money as you I’ll take just as much risk as you. I wanna be a partner. Now, if I’m gonna do this, I wanna own it. And he was kind of surprised, but then was like, yeah. Okay. That works. And looking back, I’m, you know, sometimes you have these surprising moments in your life where I was like, huh, I surprised myself cuz I live for it. I guess I just wanted to put a message out there to folks like it’s okay for you to say what you want and start that conversation.
I think that’s absolutely a great piece of advice because that communication, I mean, we hear every stereotype again, we’re dealing with a lot of generational differences, right. But also a typically attorneys are not that great on communication, you know, handling these different business discussions. And I do like one of the things that we hear a lot is I don’t think they’re interested, right. Like from our seller clients, like, you know, I have this, but I don’t think they’re interested or I don’t really think they want that. They’ve got so much other stuff going on. Right. You know, at home or otherwise or anything else. And so, yes, Stephanie, I think that’s great advice to open up communication, not be bashful, show them that you’re very open and eager to be an entrepreneur. All they can do is take that as a compliment, right. That you see the value that they’re building or getting ready to build and you want to be truly vested in it of timing, aspects, everything else. But there’s easy ways to structure that and put all that together. So yes, I would have those conversations be open, start opening those up. And a lot of times full circle to what we were talking about earlier of that fear of, you know, succession, retirement, that identity as an attorney, our senior attorneys don’t don’t wanna talk about it. So if you bring it up in the right and respectful way, it allows them then to have that conversation, move those step forward, you know, for everybody.
Yeah. That makes a lot of sense. And so I know a lot of the work you do is really finding those outside buyers for a selling firm. But what I’m hearing is there’s a lot of work that needs to be done for these internal sales. And you can really add a lot of value to those deals too, both in terms of, of coming up with what the business is worth and how to value it, but also, and how to structure it. I mean, you have so much knowledge around how to put these things together. I’m sure you’ve seen it. I’m sure you’ve seen everything by now. There’s probably no way to structure these kind of deals. I mean, you tell me though.
Oh yeah. I, I fully plan on attorneys surprising me with new structures cuz you know, the one thing is attorneys. We are all creative as anything. So from that standpoint, I, I plan on being surprised, but yes, I mean we encourage any of our sellers, even if they have a internal candidates to really build towards potentially a marketplace that if it doesn’t work with the internal, you have to be ready to go, right. You know, to that marketplace and seek a success or a buyer firm or otherwise in that. But the process is largely the same. It’s, you know, building the, the value building the structure is the payment terms, figuring out what the transition plans going to look like timelines. So we’re happy to find basically the continuation plan, you know, the preservation of value plan, whether that buyer and successor is inside your firm or outside, we just like, and part of the reason we’re big on having the marketplaces, we want you to have options. So if your one option is inside your firm and that doesn’t work out, we need to have that marketplace option. Or if you’re, you know, truly you don’t have any associates or anything else, this is your option is going to that marketplace and looking that, but the process can be very much the same. We can achieve the same goal, just different path.
Yeah. I wonder if you could speak a little bit more about that idea of a seller’s transition plan, you know, what is it and why is that important?
It’s what makes everything work. It really is. We talk about it in a law firm structure that, you know, getting the numbers right. You know, getting the marketing, the announcements, everything else, you know of the firm doing your due diligence. But a transition plan really is what helps take all that value that maybe an individual owner attorney has built and helps shift it over to that net or that next manager. So that might be introducing referrals, you know, referral network that might be the legal training and mentorship, you know, the client introductions. There’s so many other aspects that can come from a transition plan, but all of our sales are transition based. I mean, largely our seller stick around with our buyers, post a transaction for some period of time, they’re gonna lessen their role, their responsibility, typically their hours. But overall, our goal is to get them to a place where they’re really the, the mentor and the Goodwill ambassador for this new combined new ownership, you know, firm or whatever the structure takes, because then we can really take all that value.
They built up personally and professionally over a 30, 40 year, 50 year, maybe legal career and transition it as they kind of introduce their next generation, right, with that warm handshake, that warm, welcome everything else. And so I tell everybody that when we go through it, usually in due diligence, right, we’ve kind of gone through the financials, but really we’re gonna develop, how is this gonna work for seller to hand off the Baton to buyer or to the team, you know, in buyer firm that’s as important as getting all of those other aspects, right? Because if you screw it up, it can lead to loss of value. We just had a situation where again, we had in New Jersey, you know, great pairing of buyer and seller, but they really, during the deal kind of pushed off the idea of transition plan really wanted to handle some of that on their own.
And then they closed and then afterwards were kind of receiving some feedback from clients and referrals. So, and what we found as we kind of jumped in afterwards, when we’re able to bring it back together, was there was really no agreement on how that transition plan would work, right? Like how seller was going to introduce right. And who he was gonna introduce. Was it the owner attorney of the new firm? Was it the associates that would actually it’d be working the cases? The letters that the clients were receiving were just from the new firm, except for the one ethical required letter. Like I’m, you know, merging this firm, all of them were coming from the new firm who they really didn’t know. Right. And so getting those elements right. Having it really be focused on client referral of that Goodwill that you’ve built up is really key to making it a success maximizing really what I’d call that transferable value.
Yeah. If you’re a buyer I could see where you, you want it to be very clear, what’s expected. I mean, both parties really should want it, but to have that clarity around what is this gonna look like after we leave the closing table, who’s, who’s responsible and accountable for what so that you can make sure you do have that easy transition. That makes a lot of sense.
Yeah. We really due diligence gets so busy with financial legal, you know, looking at contracts of any business deal. But we actually have somebody on our team that specifically comes in just to help start those conversations and really an accountability plan because our sellers who are looking at usually retirement slowing down, like to your point, Stephanie, they wanna know, Hey, what am I gonna be doing? Day one after closing, am I still gonna be working seven days a week, six days a week with all these clients, or is the goal that, you know, this attorney’s gonna work with me. We’re gonna introduce to the buy side. If the strongest source of new clients is these 10 referral sources to the buyer, they’d love to see a calendar plan that says, when are we having lunch? When are we going to meet this corporate client to hand off and to work on that preservation of those values? So it makes everybody more comfortable, more excited, like going into closing. And then after closing, it just solves a lot of breakdown in communications or fear if there’s, you know, a week of low revenues, it’s okay. Everybody knows what’s going on and how those different structures would work. And everybody kind of knows their task and what they’re supposed to do.
Yeah. I’m reminded, I do a workshop for the lawyers in our program when they’re considering bringing on a new partner and we always talk about like, it’s a dating, you know, you’re dating when you’re thinking about being partner with someone. And we always talk about like all the stuff that feels like it shouldn’t matter, but it’s gonna be the cause of all the fights. Like you’re going to play golf every Friday or how much vacation do you get? Or I, I, you know, maybe pre COVID like, is it okay to work from home? Or do I need to have FaceTime in the office? Like it’s all these little things that cause the big fights, I guess if you’re a married couple, it’s like equating it to the toothpaste tube or something. I don’t know, whatever married people fight about. And I, I’m just, you’re talking and I’m like, yeah, this exists when you’re sort of at the other end of the process too, where now it’s like, okay, what you don’t want those resentments to build because one person had an expectation, you were gonna do thing and somebody else is like, no, I’m sold I’m outta here.
You know? Good luck.
So absolutely. And the transition plan, you know, we were just talking about it in the purchase sale, you know, marketplace, but it also functions like retiring partners from firms. Right. And I think that’s where you get to, you know, some just decide to check out, you have to, they’re not required to do that. So having that action plan ahead of time really works to focus on everybody’s point to preserve the value. Right. And then usually most of our deals from a financial sense are focused on that as well. Like everybody’s vested in making sure, you know, these clients stay and everything else. And if the deal’s structured right. And everybody’s pulling in the same direction from that transition plan. Yeah. You don’t have that breakdown in communication. Right. You don’t have those kind of popup issues, otherwise that can lead to, you know, just bigger issues which have financial impact. So it’s very important. It opens up as we go through it and due diligence that, you know, communication between buyer seller, between one generation to the next, they start to figure out differences of opinion, right? How are we gonna do marketing? How are we gonna do this? But it really helps us set a platform for both, you know, post sale, post closing, post succession.
Yeah. So great. I just wanna give you a plug because I think for anyone who’s thinking about going through this process internally or externally, it’s easy sometimes to forget why they would wanna get someone like you involved. And I think you just reminded everyone of all the value you’re bringing to this deal. It’s so much beyond just the numbers, but the fact that you’ve seen so many of these deals and you can help people with that transition plan, you can help them think through the emotional pieces that they’re gonna be going through. I love that you care for everybody beyond the nuts and bolts of the deals. I think that just speaks so great to you and your team. You know, I’m a big fan. And so I just would encourage anyone who’s listening and thinking at all about starting this process, reach out to Tom. He has a great team. They’d love to connect with you and help you think through those next steps and see if it makes sense to work together. So there you go. That’s my plug for Tom and Law Practice Exchange definitely connect with them.
Well, thanks so much, Stephanie, and we appreciate that. And again, we do believe there is more involved than just the financial transaction or otherwise law’s different. We understand that. I mean this platform, you know, our tagline is we were built by law lawyers for lawyers and, you know, knowing the nuances, knowing those emotions, knowing the transition plan elements that need to go into place for certain practices. Yeah. We’re trying to build it successful for all. And so I appreciate that comment and happy to help be a resource to anybody that we can be.