CPAs, appraisers, and other business evaluators use various valuation methods to value law firms. To be quite frank, none should be relied upon as a valuation technique for legal practices. In this post, I’ll break down the common valuation methods. I’ll briefly explain how each method works and how it falls short in measuring the value of a law firm.
You own a small law firm. For the first time, you want to make one of your associates a partial owner. But how do you determine the price of admission for the “buy-in?”
Solo practitioners and small law firm owners wanting to know what their practices are worth frequently rely on the “rule of thumb” valuation method. The choice is an easy one to make, because the method is simple; even lawyers who can barely read a balance sheet or a profit and loss statement can understand it.
Appraising a law firm requires assessing numerous factors. During the appraisal process, some attorneys will say to me something along the lines of, “In my law firm, I’ve got this great system that can…. That alone should be worth…” The marketplace for law firms doesn’t work like that, however. Here’s why.
One of my truisms for valuing a law practice is that “all revenue is not created equally.” For example, revenue that stems from past clients or one’s referral network is far more valuable than the revenue generated from seminars or webinars.