Episode Notes

In this episode, Stephanie talks with Tom Lenfestey from The Law Practice Exchange about law firm valuation. Every firm owner should focus on building something that has value. Having an exit strategy means what you’ve built will continue. Tom goes into detail about four different approaches to defining the value of your firm.

Links from the episode

Law Firm Buying and Selling Trends Report

  • 10:06. Thinking of your firm as a business
  • 15:33. Defining value
  • 18:18. Determining the value of your firm
  • 28:40. Value variation based on practice areas

Transcript

Announcer:

Welcome to The Lawyerist Podcast, a series of discussions with entrepreneurs and innovators about building a successful law practice in today’s challenging and constantly changing legal market. Lawyerist supports attorneys, building client-centered, and future-oriented small law firms through community, content, and coaching both online and through the Lawyerist Lab. And now from the team that brought you The Small Firm Roadmap and your podcast hosts

 

Zack Glaser (00:35):

Hi, I’m Zack Glaser

 

Stephanie Everett (00:36):

And I’m Stephanie Everett. And this is episode 401 of The Lawyerist Podcast, part of the Legal Talk Network today, I’m chatting with Tom Lenfestey about how to value your law firm.

 

Zack Glaser (00:47):

Today’s podcast is brought to you by Albatross Legal Workspaces, Postali and Posh Virtual Receptionists. We wouldn’t be able to do this show without their support. So stay tuned and we’ll tell you more about them later on

 

Stephanie Everett (00:59):

Zack, we talk a lot in our content and in our book about this idea of relentless incrementalism, that’s a mouthful,

 

Zack Glaser (01:07):

It is

 

Stephanie Everett (01:08):

And we also talk about experimenting and the two in our world kind of go hand in hand, right? This idea that you can run experiments and constantly improve your business by just a little bit that you don’t have to make leaps and bounds, but you can take steps. And if you just try to improve by 1% over time, you’ll actually improve a whole bunch.

 

Zack Glaser (01:29):

Right. You know, I, I think a lot of people overuse, well, maybe not even overuse, but the idea of Rome wasn’t built in a day, you know, we, we do things little by little, but at the same time, I have seen many, many people that I coach look at something that somebody else has built and think, oh, I wanna make that. And no, that was made over two years. So I think sometimes it’s helpful for people to see what that means, how it looks in real life and how this relentless incrementalism really works. So they can learn and think about how they might apply it to their business even.

 

Stephanie Everett (02:05):

Yeah. And so one way we’re doing that on our team this quarter is we, you know, we start with a problem, like, what is it we’re trying to solve? Or what are we trying to improve and make better? Because maybe it’s not a problem. Maybe we just wanna do it differently, do it better. And this quarter we’ve really challenged ourselves to look at how we as a team work together and can we be better? Can we work faster and easier and more efficiently and interrupt each other less? I don’t know. Like we just kind of look at how can we, as a team function better as a team. And so we started with this hypothesis and the idea was, if we do this thing, we should see this result. And then we run a series of experiments and see if it works. Did we get the results we expected or did something else happen? And so we thought it might be interesting for people to know what experiments we’ve been doing this quarter. Cause, it’s been interesting.

 

Zack Glaser (02:58):

We have some split reviews, mixed reviews, I guess. I think this is actually a good one to talk about specifically because, and I’m not gonna spoil it just yet, but because personally I think what we were doing was still good was still very good. And so we’re not even talking about taking something that’s failing and saying, okay, how do we fix this? It’s how do we experiment with it to see if we can make it better?

 

Stephanie Everett (03:24):

Yeah. And so this week, the experiment we’re running, we notice, so we use slack. Some you’ve probably heard us talk about that before. And that’s how we communicate as a team. And if you’ve ever listened to any of my productivity seminars, I always talk about how we shouldn’t live in our inbox all day. Like a lot of lawyers come into their office. A lot of people let’s be fair. They open up their inbox and whatever, whatever emails are there, it’s like that becomes the agenda for the day. And they’re just going to work out of their inbox.

 

Zack Glaser (03:53):

How many times have all of us sent that email that says, Hey, just bring in this to the top of your inbox. You know, cuz we know that that’s where people work from. And, and there are a lot of productivity applications that do that. But working from there and just being driven by that is not as productive as other ways could be.

 

Stephanie Everett (04:11):

Yeah. We know that if you get interrupted, it takes a long, 26 minutes to get your attention back. And so there’s a lot of research out there about having good focus, time and at the same time as a team, you need to talk to one another, like I need sometimes I need information from you and so how do we have those two things live together where you can get focus time and I again, get focus time and sometimes we need to talk. So the experiment we’re running this week is, and again, it was just an experiment, as we said, okay, let’s tell everyone if you’re gonna send a message in slack, schedule it to deliver at either ten or two everyone on the team will go in at the same time and know at 10 and two is when we’re gonna be talking to each other in slack. And so in a way, if I sent you a message, like I’m not even gonna check, like I could go schedule it to send to you right now. And depending on what time of the day is, I’m not even gonna look for a response. Like I know I’m not gonna hear back from you until the appointed time, which has been interesting.

 

Zack Glaser (05:12):

Yeah. And, and I think that is, there’s been major productivity benefits from this. Like that’s definitely one of them is that you don’t sit there and, and check back in, check back in. And I say that as somebody who quite honestly, I don’t like this this experiment, but I had a, a boss one time that would say, Zack, don’t come to me with problems, come to me with solutions. And so if you just look at this and say, oh, I don’t like it. That’s not what I’m saying. I, there are things about it that I think don’t work for us necessarily, but there are things that really do. It has given me a lot of focus time this week, which can be beneficial, well is generally beneficial. But at the same time, there are some moments where we do have to go back and forth with people.

 

Zack Glaser (05:57):

And then I think the thing that’s been difficult with this is the cheating. You know, be careful what you incentivize sometimes. You know, we wanna make sure that all our communication is in slack and that we have documentation of our communication. And if you incentivize, maybe we start using our task management platform to communicate a little differently or, or whatever. But if you’re doing this experiment with the spirit of the experiment in mind, it can work. I mean, it, it gets some certain results and I’m, I’m really interested to see what people think the benefits and the detriments of it are at the, in the end.

 

Stephanie Everett (06:34):

Yeah. And to be clear, we kind of announced this to the team. And the first day, all I heard were complaints. Everybody was really unhappy. They’re like, how, how could I work? This is crazy. What do you mean? I can’t just message someone in the middle of the day. And I was like, guys, it’s just an experiment. It’s just an ex. I, I must have said that 15 times, like the first day I was like, it’s just an experiment. We’re just going for a week. We’re trying it for one week. And then by it’s, you know, by the end of the week, it’s really quieted down. And honestly a lot has quieted down. And I think for me, like I’ve had a really productive week. And so, we’ll see what we learn out of this. And it’ll be super interesting, but it that’s the idea here is the idea is you run these little mini experiments with your business and try if you find that your team’s constantly interrupting you, they’re coming into your office, maybe experiment one week and say, Hey guys, this week, we’re gonna have a no interrupt rule.

 

Stephanie Everett (07:29):

I’m gonna have a prize. And I’m gonna put a little sign outside my door and you tick off every time you come to my office and decide not to interrupt me, you get a star. And at the end of the week, I’d give a gift card to the person with the most stars. Right? Like we can make it a game even. Yeah. It could be fun. Yeah. But whatever it is and just see what that looks like for a week. And maybe you learn something from it. And then you say, you know what, that actually worked and I wanna carry it forward. I’ll give you another example. I just got off a coaching call with some of our labsters who just spent six weeks in Italy and they worked from Italy. It wasn’t that they took a whole six weeks off, but they went with a plan that they were gonna work a couple of hours a day.

 

Stephanie Everett (08:08):

Cause they were still gonna run their business. And they were there visiting family. One of the takeaways from that they came back from is the way they had to structure their meetings while they were in Italy. They were like, that worked really well for me. Why did I have my meetings spread out all throughout the week instead of putting them and stacking them together? Yeah. So that was like a forced experiment that they didn’t even realize they were running it. And so then today we were talking about how can we take the things they learned from this trip and implement it into their everyday practice. And that’s what I think I just wanna encourage people to do is just be open to trying something different and seeing what would it look like if we didn’t talk all day or if we had appointed times to do our check-ins and go with that, or if we stacked your work. So that’s it just be free to experiment. People may complain and gripe and you just gotta suck it up and say, guys, it’s like, we’re gonna experiment it’s for a week and see what you learn.

 

Zack Glaser (09:04):

Absolutely. Well, I I’d like to hear what some of the people that are listening to this might want to experiment with. So if they want to go onto our, if they’re part of our Facebook Insiders group, you know, I’d love to hear what they’re experimenting with there, or even on our LinkedIn page or, you know, just however you found this podcast, pop that in the comments. And we we’d love to hear what people are thinking about and what they’re learning. And so we can kind of share it with the community.

 

Stephanie Everett (09:30):

Yeah, me too. I love that. So now here’s my conversation with Tom.

 

Tom Lenfestey (09:35):

Hello, my name’s Tom Lenfestey. I’m an attorney, CPA and the founder of the Law Practice Exchange. At the Law Practice Exchange we help buy, sell value and create continuation plans for law firms.

 

Stephanie Everett (09:47):

Welcome back to the show, Tom. I’m happy to have you today.

 

Tom Lenfestey (09:51):

Absolutely. Thanks for having me.

 

Stephanie Everett (09:53):

Yeah. We’ve talked about buying a firm. Another time we talked about selling a firm. Maybe it’s time we cover that third big topic valuing your business and how do you actually go about valuing a firm?

 

Tom Lenfestey (10:06):

Yeah, absolutely. That’s the hot topic, right? It’s you know, what is the value? Does my firm, how value and if so, how much value does it have?

 

Stephanie Everett (10:15):

Yeah, I wanna dig into all that, but I think just to kick us off, I think there’s still a bunch of firms out there that don’t think of their business as an asset. And I know you’d probably agree. That’s a mistake. So let’s just knock that one out first. How should firms be thinking about their business?

 

Tom Lenfestey (10:32):

Yeah, absolutely. So, you know shame or the booze or the hisses, if you’re not thinking of your law firm as a business, essentially, that has value. You know, I started Law Practice Exchange back in 2012, 2013, and lots of those conversations, whether it was, you know, a true solo practitioner or anything else, but your firm has value. I will assure, you know, most lawyers out there who doubt it, your firm has value, you’ve built it. A lot of it may be attached to you and that’s okay. And there’s ways to kind of still transact and monetize that. But overall you have a business, whether that’s built around your personal brand or it’s really escalated and you built this total separate brand as a law firm and entity and teams and process, wherever you are in that scale, you have value and you should focus on, you know, when you’re ready to, how are you going to exit from that ownership, that management role and hopefully, you know, transfer that value to somebody else and get something in exchange for it?

 

Stephanie Everett (11:36):

Yeah, I think for way too long, we’ve just sort of assumed some of us that, you know, they’re gonna carry us out feet first or one day when it’s time, we’ll just shut the lights off and, you know, head out to the cabin and go fishing. I mean, I hear so many people say that when I ask them, what’s your exit strategy? They kind of laugh and they’re like, I mean, I don’t need an exit strategy, Stephanie, I’m just gonna shut this thing down. And it just seems like a missed opportunity.

 

Tom Lenfestey (12:04):

Absolutely. I was just having a conversation with somebody the other day who asked what did lawyers used to do, right. You know, from the standpoint of if they didn’t sell their firm or if they didn’t and definitely the apprenticeship model, right. Trying to bring in an associate, pass it along or bringing in, you know, those non equity partners, building partnerships. Right. Kind of doing that. But even if you’re, like I said yourself, if that’s your exit strategy, just lock the door one day. Right. I do think it’s a disservice to you to the legacy that you have may have built and also to those clients, right? The community, the industries, as well as potentially, you know, the team that you’ve relied on, but they’ve also relied on you. So that’s why we talk a lot about it’s about continuation of what you’ve built is really how to take that value, transfer it to somebody else and not just have it be lock the door and go fishing. And you’re done practicing law. Hopefully it’s that your firm can keep going. Even if you wanna go fishing, right? Yeah. You can go fishing, but let your firm continue on and what you’ve built continue on without you.

 

Stephanie Everett (13:11):

Yeah. And I think, you know, the last thing I’d kind of point to in this line of thinking is we’re seeing a lot more young attorneys, especially approach this. As I wanna build a thing, I wanna build a business, a law firm do it for so many years, but then I have other interests I wanna do. So I think there was a time where lawyers just assumed they would work and own this business until they retired. And now we’re starting to see a lot more people say, actually, I may wanna go try my hand doing something completely different that isn’t practicing law. And so maybe we’re gonna start seeing those transfers and exits come faster.

 

Tom Lenfestey (13:51):

Absolutely. It’s actually probably one of the most exciting or happiest things just to see maybe it’s a generational shift or otherwise, but also we just released our annual report for 2022, a couple months ago. You can find that on our website. But one of the neat stats that came out of it was looking at the age and demographic right. Of our sellers, those looking to exit and do that. And I can tell you of, you know, from our transactional experience, it’s starting now to shift downward in age. So like last year it was to your point, Stephanie, we had a transaction where the attorney was in their, you know, early forties. They had built a great firm, but they had another business endeavor that they wanted to focus on. So they had made some money, right? They had done the right things to build this business that is their law firm.

 

Tom Lenfestey (14:43):

And they said, well, before I go and do this, I would love to have some funding in the bank. So I can go do that happily and securely. And those to me are the experiences and hopefully the transactions of the future, because it would be great to know if you’re gonna focus on building a business that has value that you do have an option to exit, right? You could have a spouse or a, you know, a partner that takes you across country with a move. And instead of just shutting down your practice and not getting anything to have it built to where you can monetize and go, or you can go fishing or you can go on temporary hiatus or retirement and then come back later. Any of those options being available to lawyers, I really think is gonna help with mental health as well. Just not feeling so locked in. I don’t have any options. This is where I’m stuck. If you build it the right way, you should have options.

 

Stephanie Everett (15:33):

Yeah. Well, let’s get some definitions going. I often hear people say the enterprise value of a business. I feel like there’s another term that is similar, but how do we define the value of a business? What, what are we talking about?

 

Tom Lenfestey (15:48):

Well, in the law firm world, I talk about it as transferable value.

 

Stephanie Everett (15:52):

I love it. Yeah. Let’s use that.

 

Tom Lenfestey (15:54):

So what we’re really talking about, especially because you know, law firms are still so different in kind of how they’ve been structured attached to personal brand or some that have no personal brand of the attorney, very little involvement of the attorney who is the owner. And so really when we talk about transferable value for law firm, it’s what do we have? What has been built in that personal value in that law firm, entity, enterprise value that can be transferred to another lawyer and the way that I typically define it as kind of a formula approach, that’s the accounting side of me. Right. But overall is take your personal value, that personal brand. And I think Stephanie, you and I have talked about this on previous podcasts, but take that personal value that you’ve built, the referral sources, you know, the clients that refer to you that you’re so great and everything else, that’s wonderful.

 

Tom Lenfestey (16:46):

That’s your expertise. That’s you are known in the community, but you also have that firm value. That’s the website, the phone number, the systems, the process, the marketing brand that you’ve built in the firm name, right? Maybe some other domains, other marketing platforms, it’s the employees, the team, right? Everything else from the business side, put those together. And the question is how much of those two is transferable to somebody else. And usually that missing component is a personal value for things that are attached to me, my wonderful brand. We need a transition plan to help us get it to somebody else. Right? So if you, you know, aren’t throwing the keys to somebody it’s really kind of a slow Baton pass. So to speak, to allow you to, you know, take what has made you and your community or for your clients or your referrals, introduce your, your buyer, your successor, but do that through transition plan.

 

Tom Lenfestey (17:44):

So overall, usually the way I look at it is what is transferable value. And that is made up of your personal value, your personal brand, plus that transition that you can offer, right? So if death disability, those different things strike, you may not offer that transition, but if you have time to build out succession or go through a sale, you can kind of pair that and then add that to your firm value. And hopefully, hopefully you get maximum, which should be, you know, the, the sum of the components do equal the same. Right? You have no loss, so to speak.

 

Stephanie Everett (18:18):

Yeah. That makes sense. It feels a little hard to figure out when you say it that way, but I know that’s your job is to figure out. So how do you go about calculating what those values look like?

 

Tom Lenfestey (18:30):

Yeah, absolutely. So the age old question of how to determine the value of your law firm, there’s lots of different methods. There’s lots of different experts. There’s lots of different opinions on what a law firm may be worth. So I’ll kind of give you what our approach is. Again, our goal is to create continuation plans, buy and sell transactions. And so largely what we look at is what is that transferable value in the hands of another? Or what better way to say it is, what would your market value be for your law firm? Just like your house, what’s the market value if somebody else is gonna come in and buy that. Right. And the way we look at that is essentially looking at four different approaches. Typically we sometimes bring in others, but our first approach is really a revenues approach. And so, as an example, if you’re doing on average, you know, 2 million in revenue per year for your firm, our market multiples, our multiplication quick estimate, paper napkin, you know, kind of calculation is your firm is probably somewhere between a 0.5 of that 2 million number.

 

Tom Lenfestey (19:39):

That’s a million dollars right up to probably one or maybe a little bit over. So 2 million. So that’s a wide swing on kind of those estimates. What it really depends on, are you a 0.5 or are you a one is how have you structured your business? How much firm value market, brand marketing, your intake, your systems, everything else, how strong is it? If it’s not as strong, you’re gonna be on the lower scale. If it’s stronger, you’ll be on the higher. The next approach is what we call our earnings approach. And in similar fashion, if you know, you are doing that 2 million a year in revenues, and let’s say you’re making 500,000 in actual net income. After you pay yourself a salary for the legal work, you do everything else on an earnings approach. We’re usually between two to three and a half right now, and that three and a half with some pretty awesome firms out there is probably pushing a little bit higher in the marketplace.

 

Tom Lenfestey (20:39):

But on that approach, if you just use, for example, you know, a three times that 500 that’s 1.5 million, right? So, so those are again, quick estimates back of the napkin type of things that you could deploy to say where maybe do I land in this world. The other two methods are the asset approach, which is real big in certain practice areas because we look at inventory. If you are a plaintiff’s firm, a contingency firm or one that may deal in a significant amount of case inventory like bankruptcy, immigration, you know, workers’ comp otherwise that’s an asset that can be potentially valued and transferred to another through that structure. So we’re gonna look at that asset value and kind of calculate, you know, what is that projected value today? Because at a minimum that should be, what you have to transfer is if your present value net profit from all your personal injury cases is $2 million, then we’re starting with a number of two, right?

 

Tom Lenfestey (21:41):

Hopefully your earnings, your revenues approach, and the last one, the market approach push you beyond that. That should really be your floor. And as I mentioned, the last method we deploy is the market approach. And the market is really us using comparables, just like Zillow, just like the real estate market and otherwise. But what do similar practices like yours financially, geographically, otherwise, what have they sold for? What have offers been accepted for, to give you a comparison of what that market supports? We take all four of those. We kind of wait, which ones, you know, matter the most for you and your firm and the market at the time. And we come up with your number.

 

Stephanie Everett (22:22):

I love that let’s digest it some more, but first we’ll take a quick break to hear from our sponsors.

 

Zack Glaser (22:27):

The Lawyerist Podcast is brought to you by Posh Virtual Receptionist. As an attorney. Do you ever wish you could be in two places at once? You could take a call while you’re in court, capture a lead during a meeting or schedule an appointment with a client while you’re elbow deep in an important case. Well, that’s where Posh comes in. Posh is a team of professional  US-Based live virtual receptionists who are available 24/7/365, they answer and transfer your calls. So you never miss an opportunity. With posh handling your calls. You can devote more time to billable hours in building your law firm. And the convenient Posh app puts you in total control of when your receptionist steps in. So if you can’t answer, POSH can, and if you’ve got it, Posh is always just to tap away. With Posh, you can save as much as 40% off your current service provider’s rates. Even better, Posh is extending a special offer to Lawyerist listeners, visit posh.com/lawyerist to learn more and start your free trial of Posh Live Virtual Receptionist Services. That’s posh.com/lawyerist.

 

And by Albatross Legal Workspaces. When running any business including a law practice there are critically important operations that are often overlooked and ignored by lawyers. Top on that list is data security, ransomware protection, data leaks, and data backups. Those tasks can seem unimportant and time-consuming or an added cost. And even with IT teams involved, they are often misconfigured and mismanaged. 

 

Albatross Legal WorkSpaces is an excellent solution for law firms to streamline those types of operations. Albatross Legal Workspaces was built to be the all-in-one cloud office for law firms. It stores all your applications, files, desktops, and servers on your own private cloud that is accessible from anywhere. No need for expensive desktop or server upgrades or unresponsive IT companies coming to the office; and the mundane yet-critical security and backup operations are seamlessly integrated and hassle-free. The service also includes a 24/7 IT Help Desk. Albatross Legal Workspaces covers you from A to Z.

 

To learn more and receive one month of free service please visit https://albatross.cloud/lawyerist that’s albatross with a double s . Again that is: {spelled}  A L B A T R O S S .cloud/lawyerist

 

And by Postali. Finding a marketing partner for your firm can be challenging. Are you getting sound advice? Is your marketing agency always working in your best interest? You shouldn’t have to worry about these things. At Postali, they believe marketing companies should adopt the same duty to their clients that is required of the legal profession. For this reason, they require that all team members sign a fiduciary oath to act in good faith and put clients’ best interests ahead of their own. They service with care, candor, and loyalty. Postali is a full-service digital marketing agency exclusively for lawyers. To learn more about how they’re different, visit postali.com/lawyerist.

 

Stephanie Everett (25:43):

All right. I’m back. And Tom, you just gave us a really helpful overview of these four different approaches that you take with those examples, which I know everybody was probably like me writing the notes down saying, ah, here it is the magic secrets, cuz it often feels like it is a little bit of a secret.

 

Tom Lenfestey (26:01):

Yeah. Sometimes the secret, although I tell you it’s the standard disclaimer, when everybody says, okay, here’s my firm, right? And I do this and you know, based on this. So as I’d say, you know, the, the qualifier is the favorite attorney answer. It depends, of course, you know, your firm is unique, you know, the practice area and everything else, but hopefully those help because if we do have a benchmark in mind and all of a sudden you didn’t think your firm had value before, and now all of a sudden you’re saying, well wait, wait, maybe it does have significant value that should motivate you to do some, you know, exit planning, some succession, some other continuation type strategies. So that’s the hope have a benchmark, it’s a goal, right. To work towards to see if you can achieve it and then what steps need to be done.

 

Stephanie Everett (26:45):

Yeah. And I think, you know, as I work with businesses and I ask this question of lawyers every day, as part of our strategic conversations that we have, and I say, you know, what do you think the value of your firm is? And oftentimes they’re like, well, I don’t know, but I help them because you’ve helped me come up with that formula. And we walk through it a little bit and I think it should be a standard KPI that lawyers start using. So as part of your process, when you’re looking at your annual budgets and you’re looking at everything else, it’s like, are we doing better? Are we increasing this transferable value of our business? And what levers are we going to pull this year to increase that number, maybe by making the firm less dependent on me, right? That idea that this isn’t just all dependent on me, it could exist without me. That would be a big step to getting some of those higher multipliers. And then also as you point out, there’s other levers you could pull by depending on which method you’re gonna take, right? How you’re gonna increase these numbers,

 

Tom Lenfestey (27:45):

Absolutely through work. If you can determine your KPIs, some of those of course are meant to maximize revenues or profits, but also those are going to hopefully increase your overall value. So a KPI can essentially be we’re doing these different things, but what is our valuation benchmark? Our estimate, right? Based on historical, are we making progress? Are we in increasing our transferable or enterprise value, right. To do that. And again, I think it’s a good feeling. Like all of a sudden, if lawyers shift from I’m just making money and putting it in the bank to I’m also building value for a future, you know, exit and something that I can monetize, then it makes the day maybe a little less, you know, struggling or, you know, as a struggle or anything else because you, you know, that you are building something for the future versus just what money did I put in my bank account this month?

 

Stephanie Everett (28:40):

Absolutely. I love it. I love having these conversations with people. I suppose one of the questions we may get is, you know, does valuation vary depending on practice area. And I know that you’re seeing some trends in that and reporting on that. So what do you see there?

 

Tom Lenfestey (28:55):

Yeah, I think that’s the neat part about building this marketplace for buying and selling, you know, law firms is we again are having these conversations with a lot of different practice areas, just like yourself, a Lawyerist and everything else. And through the coaching, you do, you know, it’s different struggles, similar struggles, but also different struggles. So we’ve seen a big push, like in insurance defense, especially over the last 12, 18 months where, you know, there’s this lawyer shortage or this lawyer, you know, movement. And they’ve had a really hard time keeping associates and otherwise to do that. And so that’s created then, you know, they need to merge, right? They need to go through some economical change, you know, for their firm or otherwise family law for instance, has been an area that’s been in high demand for the last 24 months as far as legal services.

 

Tom Lenfestey (29:46):

But it’s also been a challenge to bring those attorneys, those associates in to do that. One of the things that we’ve just seen in the market is that there’s less interested buyers when there’s such a demand for their services, right? Like family law, that they don’t need to look for the work, right. They’ve already got it. They’re struggling similar to insurance defense. They’re struggling to just keep up with it and find the right resources to help them get through. So that does slow. The market slow the value for potentially those practice areas, but then it shifts, right. It can shift over time and do that right now. I’d say there’s a lot of movement and funding. And otherwise in like plaintiff, you know, contingency fee practices still are transactional. Your estates, your real estate, you know, your corporate are still strong. Those are probably the most kind of consistent. They haven’t really spiked or anything else, but those are just seen as good, consistent relationship based practices. But yeah, I think the market can impact the overall value of your practice, but you can never time the market. That’s the other challenge. So you just have to build what you’re gonna build, focus on it and then give yourself time to really find the right exit strategy, the right value, the right terms when the time is. Right.

 

Stephanie Everett (31:01):

Yeah. I love that. Makes sense. What other advice do you have for people who might be thinking about this, maybe it’s new on their mind, or maybe they’ve been thinking about it for a while? What, what would you want them to know?

 

Tom Lenfestey (31:13):

Well, I think one of the things that I’ve kind of note is in valuation really goes along closely with payment terms. And so when we do any kind of valuation for a market prep for our firm or anything else we’re gonna go, of course determine what that benchmark number is. That’s our target, that’s our goal, you know, that’s based on firm performance, but the question is gonna be what would a buyer do right in the marketplace today to hopefully get us to that number? Right? So like I used the example, if, if your firm’s worth a million dollars, how are you going to get paid that million dollars? Whether that buyer is an internal, you know, associate or a couple associates or whether they’re an outside firm or they’re an outside attorney that’s leaving, you know, in house and wants to, you know, be an owner of a firm or they’re a tenure attorney somewhere.

 

Tom Lenfestey (32:04):

That’s not offering them equity, all of those different opportunities come in, how do we achieve, right? What are our purchase price payment terms to get us to that million dollars? And you know, some of those that I’d say is the market overall, still runs on what we’ll call performance based payment structures. Those are typically things like earn out seller variable note. These terms you can look up, but what they really are is to say, we will buy and kind of come together. We will help transition. And then myself as a buyer, I will pay you over time based on revenue performance, right? So if the firm did $2 million a year, I may pay you X percentage, you know, next year. And for the next four or five years, to buyers who right now are mostly, unless you’re in Arizona or Utah are certain jurisdictions that are kind of opening up.

 

Tom Lenfestey (32:59):

You know, our attorneys who are mostly risk adverse, we all are as attorneys. You know, they like that performance based structure. And so the key is to make sure you find the right buyer, right? You have to find the right culture match. You have to find the right one, that you are going to be able to help in that transition so that it will be successful. And the other component of that is don’t forget about that transition plan, that transition plan, which we usually do, you know, kind of in that due diligence, that in between stage of you’ve agreed on terms, but you haven’t brought it all together to a closing yet you really need to document, how am I going to introduce and transition over my top referral sources, my top clients, and really go through those different things to preserve that value. So overall, one of the things I mentioned is payment terms are important.

 

Tom Lenfestey (33:50):

The market still runs on performance based for most practices. The second thing I’ll recommend and kind of almost seems contrary certain practice areas. Funding is definitely available across the board for all, but in certain practice areas, funding is becoming widely available. And so if you’re in certain of those, like I mentioned, definitely in personal injury, other areas, right now, those case inventory practice or contingency fee ones funding’s available to buyers. So they can come in and do a lot more for a cash out act closing type structure. And if you’re not in one of those practice areas, and you’re just looking at passing it on to an associate who may need some buy-in that funding’s available to where I would say five years ago, there wasn’t as much funding available for law firm transactions. And so that really does open up a lot of structures, help get deals, done, everything else. And if you need those, you can go to our website too. We have a lot of those resources on there, but overall that really helps move things along. Funding is available to help monetize the value of your firm upon exit.

 

Stephanie Everett (34:59):

Yeah, it’s exciting. I see, you know, just in the time we’ve been working together so many more deals happening and just these opportunities are available, which I think should excite all of us as lawyers to know, yes, we’re doing all this hard work and we’re making money now, but there’s the potential to make, you know, even more money in the future when we exit. That’s what it’s about. I think partly.

 

Tom Lenfestey (35:22):

Yeah. Well, I think absolutely. I mean, again, to create a great legacy of what you’ve built, right. And then to know that it’s not just about what you’ve put in your pocket or the clients or communities that you’ve served, you know, during that time, but also that, that you’ve built something that you can transfer to somebody else, you know, don’t just knock the blocks down and have somebody else have to start from scratch in your community or in your practice area, you know, if they can build off of your blocks and make it bigger and better, right. And do more good and do more of what you’ve, what you started. That’s a pretty awesome thing. And I’ve always kind of thought, you know, what a great thing from a mentorship aspect too, which I think definitely suffers in law is the ability to say, you know, I built this, let me show you how I did it. And now let me transfer it to you and kind of let you carry forward. You’re putting that maybe, you know, senior attorney or that exiting attorney with the next gen attorney, you know, on a similar goal path, right. They’re both working towards transition, which leads into that mentorship and kind of other things which I think has struggled in the senior attorney associate world for years in law.

 

Stephanie Everett (36:32):

Yeah. Well, thanks for all of this. I know it’s so super helpful to hear. And just to start thinking about if this is new to you, you know, you should be thinking about it, another service that I will pitch for you, Tom, is that you do independent valuations. So obviously if you’re thinking of selling your law firm and reach out to Tom, he’s gonna take you through a valuation process because he has to figure out how to market your practice. But you also can do an independent valuation if somebody’s not, maybe they’re not sure they wanna know what, what it would look like. Sometimes you wanna know what’s the Delta, like maybe I have a number in mind, but it would be worth getting that gut check now. Or I don’t know what the right phrase is, you know, get a check now. So you know where you are and then we can help you pull those levers to get where you wanna be. And so people can also reach out to you for that independent valuation service, which I think is great.

 

Tom Lenfestey (37:27):

Yeah, absolutely. You wanna know if there’s a gap, right? Like, you know what your goal or what your exit value needs are, maybe that’s to fund retirement or fund you going off and exploring this next business venture. You just need to know, even if you’re three years out from doing that, is there a gap on what you can get for your firm versus what you know you need? And then the other aspect is I tell everybody, if you can start on determining how you agree on value, especially in partnerships and kind of make that part of it, then your succession plan becomes a lot easier, right? So that’s where we start with valuation with everything. So yeah, happy to help on those independent valuations is providing that analysis, that benchmark what drives value and where do you stand?

 

Stephanie Everett (38:11):

Perfect. We’ll make sure in the show notes, everyone knows how to get in touch with you, and also how to get a link to that report that you guys just put out on the current state of buying and selling law firms. So great to have you on the show today, Tom.

 

Tom Lenfestey (38:26):

Yeah. Thank you so much, Stephanie.

 

Speaker 1 (38:29):

The Lawyerist Podcast is edited by Britany Felix. Are you ready to implement the ideas we discuss here into your practice? Wondering what to do next? Here are your first two steps. First. If you haven’t read The Small Firm Roadmap yet, grab the first chapter for free at Lawyerist.com/book. Looking for help beyond the book? Let’s chat about whether our coaching communities, are right for you. Head to Lawyerist.com/community/lab to schedule a 10-minute call with our team to learn more. The views expressed by the participants are their own and are not endorsed by Legal Talk Network. Nothing said in this podcast is legal advice for you. 

Your Hosts

Stephanie Everett

Stephanie Everett is the President of Lawyerist, where she leads the Lawyerist Lab program. She is the co-author of the bestselling book The Small Firm Roadmap and is a regular guest and co-host of the weekly Lawyerist Podcast.

Featured Guests

Tom Lenfestey Headshot

Tom Lenfestey

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.

Share Episode

Last updated August 17th, 2022