Whether you are looking at retiring and selling your law practice or purchasing one, you first need to have it valuated by a professional, says Ron Seigneur, a former legal administrator and partner in Seigneur Gustafson Certified Public Accountants in Lakewood, CO.
Seigneur says there are three types of potential buyers for a law practice:
- Entrepreneurial buyers often looking for a lifestyle, image or outlet for talent.
- Financial buyers who are seeking an acceptable economic return.
- Strategic buyers who typically have specific motivations, such as one law firm wanting to buy out a competing firm.
Selling a practice
The American Bar Association (ABA) Model Rules of Professional Conduct – Rule 1.17, states that in most jurisdictions, a lawyer can sell a law practice to another duly licensed attorney as long as:
- The practitioner ceases to actively practice in the jurisdiction.
- The entire practice is sold.
- Clients are given notice of the transfer of their files to the new firm and their right to choose alternate counsel if they wish.
- The acquiring attorney agrees not to increase fees to recover the cost of the acquired practice.
How much is your practice worth?
“Once you have made a decision to move forward with an exit strategy, do you know how to sell your practice to either your partners or another firm, while minimizing the taxes you will be paying? Planning and preparation are critical here,” warns Seigneur.
He advises connecting with a competent accountant and other advisors as appropriate, including a transactional attorney, your banker and your investment advisor
If you are planning on selling your law firm, parties interested in purchasing it will request a huge amount of documentation. Here is what you can expect to be asked to provide:
- Access to all available management reports detailing practitioner, practice unit, and firm-wide utilization and realization statistics for the periods to be covered in the analysis.
- Details of all compensation plans and formulas used for professional staff and members of ownership, including any special deals or arrangements with specific individuals.
- Details on the firm’s client fee arrangements, including details on contingency fee work and the use of success fees and hybrid fees.
- Minutes and supporting documentation for any business planning retreats and related meetings, including any strategic planning initiatives and their status.
- Details of employee fringe benefit programs and allowances, including automobile, computer, cell phone and travel costs, continuing education allowances and business development allowances.
- Details on any soft costs incurred by the firm related to owner activities outside the business, such as sports tickets, vacation homes and the like should be disclosed.
- Details of prior ownership redemptions and related commitments for future stock redemptions for retirement, disability, death and withdrawal for competitive and non-competitive reasons.
- Copies of all buy-sell agreements, including current agreements and agreements in force during the past five years.
- Copies of any employment contracts including counsel and special counsel relationships, along with details on any terminated or withdrawing practitioners within the last five years.
- Information on any pending or threatened lawsuits or malpractice claims.
- A list of affiliated entities and related party business relationships, including investments in outside activities.
- Details on any honorariums, teaching stipends, directorship compensation or related subsidies received by the practice or individual lawyers.
- Details on all bartering transactions, including stock in lieu of fee arrangements and direct or indirect investments third-party entities.
- Access to all available departmental, branch office and client grouping performance data.
- Accounts receivable and work-in-process schedules with aging to 180 days or more as of the valuation date.
- Trust accounts.
- Details on all contingent fee work in process as of the valuation date and the methods used to evaluate the potential success of cases.
- Copies of firm brochures and other promotional sales literature.
- Copies of deferred compensation plans and commitments.
- A list of major clients and client groups, including the top five and top 20 clients in terms of annual revenues for each of the past two years.
- Martindale-Hubbell information on the firm and all members of ownership. See martindale.com.
Conclusion
Whether you are selling your law firm or planning on purchasing an existing one, Seigneur stresses the importance of doing your homework to ensure the most accurate valuation.
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