Buying a Law Practice: Not as Risky or Complicated as You Think
April 2nd, 2021
Purchasing another lawyer’s practice is fast becoming a popular and more common way to grow or diversify one’s law firm. There are three main reasons for this:
- Building a practice the old-fashioned way takes time and money.
- A well-planned acquisition can be a quicker and more cost-effective way to obtain new clients than traditional marketing activities.
- There are more opportunities out there than one might think. Plenty of boomer lawyers are retiring now and will continue to do so well into the foreseeable future.
The Primary Advantages to Buying a Law Practice
When buying a law practice, you gain access to clients and referral sources that you ordinarily wouldn’t. Also, depending upon the size of the purchase, you may be able to inherit qualified attorneys and staff. Further, the seller may have better systems, forms or checklists to enhance whatever you are using.
The Common Concerns: Risk & Complications
Even with its many advantages, several lawyers still see purchasing someone else’s legal practice as both risky and complicated. Let’s discuss each of those concerns to clarify why such deals aren’t what they seem.
Not That Risky
Buying a law practice is hardly a “bet the house” deal. Lots of transactions are structured as earnouts. An earnout is a contractual provision where the seller obtains future compensation only if the business achieves certain financial goals. In most arrangements, sellers receive a percentage of the future gross revenue attributable to the seller’s clients or referral sources, as well as a down payment. Structuring deals this way eliminates much of the risk of “paying something for nothing.”
Not That Complicated
Prospective buying attorneys often worry that the process will require too much time and be too complicated to be worth the bother.
Buying a practice is not the time-suck and distraction that you might think. Of course, you should do basic due diligence to make sure the seller’s practice is what it is purported to be. You should also review everything available to ensure future easy access to clients and referral sources.
But a “leave no stone unturned” approach is usually not needed. Under most circumstances, if the practice is not precisely what it was represented to be, an earnout formula prevents overpaying.
Negotiations & Paperwork
Speaking of earnout formulas, negotiating law firm purchases is relatively simple. There are only two key provisions: the earnout percentage and the payment term.
- Earnout percentage: The percentage usually ranges from 15 to 25 percent. Anything less than 15 percent is often not worth the seller’s effort to do a deal. Anything more than 25 percent and the buyer’s work would barely be profitable.
- Payment term: The usual term range is one to five years. As one might suspect, shorter terms may have higher percentages and longer terms may have lower percentages. There is no one way that “everybody does it.”
Additionally, structuring and papering up the deal doesn’t have to be a never-ending exchange of document drafts.
Perhaps the simplest way to do the deal is to have the selling firm stay open for the sole purpose of collecting receivables. The seller would then join the buyer’s firm in an “of counsel” role for however long the buyer and seller want the transition to last. Here, the essence of the “sale” is the “of counsel” arrangement, which can be as short as a few pages.
The complexity is further reduced since most transactions are prospective. Sellers are responsible for collecting their accounts receivable (AR), work in progress (WIP – unbilled time), and liabilities. In short, sellers are responsible for tying up loose ends, not the buyer.
Consulting With Experts Helps
A sale of a practice that necessitates asset or stock purchase agreements or mergers has more moving targets. These will require lengthier documentation but they shouldn’t overwhelm you. If you begin to feel it’s too much, it may be a good idea to bring in a consultant familiar with the process. It’s also a good idea to consult with an accountant to make sure you won’t have any unintended tax consequences.
The Real Challenge: Finding a Practice to Buy
Now that I have you all excited about the possibility of purchasing a practice, I do have a bit of discouraging news. It’s not easy to locate practices that are for sale.
The marketplace for law practices is a very immature one. There are no local, state, or national clearinghouses or classifieds for sellers like there are for other professional service firms. And anything that you may find online (e.g. bar journals, consultants), will hardly be comprehensive.
Your best bet is to run a classified ad yourself or network to get the word out that you are an interested buyer. Neither is ideal, but it’s probably the best you can do.
Is Buying a Practice In Your Future?
Purchasing a law practice can be an excellent way to grow your practice and is often a smart business decision. And, as far as deals go, they can be relatively low-risk and simple. Feel free to reach out to me to discuss this further. You can reach me at 612-524-5837 or you can contact me online.
Categories: Selling a Law Practice