Frequently Asked Questions

A smart buyer will look to finance the purchase using the firm’s future revenue through an earnout. In an earn-out, the seller is paid based on a percentage of future revenue over an agreed-upon period, rather than receiving the full price upfront. This reduces risk for the buyer since payments are only made if clients actually stay and revenue materializes. How much of the price should be tied to an earn-out varies by deal, but it is one of the most important negotiating points in any law firm sale.

Many lawyers already pay referral fees, and when viewed through that lens, structuring a deal this way becomes much more realistic.

This depends on two key factors: the nature and extent of the exiting lawyer's goodwill, and how well the transition is handled. In most cases, the more thoughtful and well-prepared the transition, the more likely clients are to stay with the buyer.

Not typically. Reviewing client files is usually one of the final steps in the due diligence process. Due to attorney-client confidentiality, this stage must be handled carefully and can occur only after certain protections are in place.

Most selling lawyers are retiring with little incentive to “un-retire” and compete and agree to that.

In some cases, the seller may stay on in an of counsel role instead, continuing to work with clients in a limited capacity while remaining aligned with the firm, which further reduces the risk of competition.

Some firms run on outdated systems that need updating, while others already use modern practice management tools. This is something to evaluate during due diligence. At the end of the day, technology can always be upgraded; what matters most is the quality of the practice you’re acquiring.

Rarely are law firm deals paid as a lump sum. Instead, they are structured as earnouts, where payments are tied to future revenue to help align incentives and reduce risk for the buyer, or as financing, paid over time.

Sellers usually remain and continue working for buyers in some capacity after a transition for everyone’s benefit. The length of time varies according to the preferences of both the seller and the buyer.

Valuation in small law firm sales is very often subjective and based on future earnings potential rather than hard assets. Working with an experienced advisor can help you assess whether the price reflects reality or inflated expectations.

The biggest risks are client attrition, overpaying for goodwill, and poor transition planning. A well-structured deal and a thoughtful transition can mitigate most of these issues.

If you have people working for you, the first thing to consider is an internal transition. The next options are to sell to an outside buyer or move into an of counsel role with another firm.

The final option is to either downsize or wind down. You may leave some sale value on the table, but this path allows you to continue generating income for as long as you choose to practice.

Systematizing as many operations as possible will minimize hiccups during a transition. Also, consider hiring a CPA to clean up your financials. Buyers need an accurate picture of the money coming in and the money going out. Finally, don’t do anything risky or unnecessary. For example, if you’re 75, don’t sign a long-term lease.

Most states have adopted some version of Rule 1.17, which governs the sale of a law practice. The rule is relatively straightforward and is designed to protect clients during the transition.

Beyond Rule 1.17, lawyers must ensure the buyer is competent, protect client confidentiality throughout the process, and respect client autonomy, including obtaining consent where required.

If you love what you do, can’t imagine stepping away, and your goal is to maximize profits, this approach may make sense at times. The most important thing is to have a contingency or emergency plan in place. Someone should know all the passwords, where key files are, and who needs to be notified in different situations.

You can do it yourself, though it takes time and risks confidentiality. The best option is to work with a consultant who can help you determine the best exit strategy, guide the process, and identify the right buyer.

Some local business brokers can assist as well, but if you go that route, make sure they have experience working specifically with law firms. Most do not.

This is typically negotiated on a case-by-case basis. For hourly matters, WIP is often collected by the seller or credited to the buyer as part of the transaction.

In contingent-fee cases, the usual approach is to allocate fees between the seller and buyer based on who did the work and who carries the case forward.

Tail coverage for solo lawyers typically costs about 1.5 to 3 times your last annual malpractice premium as a one-time payment. While the cost can be high, it is usually worth it, as it protects you from malpractice claims that may arise years after you retire.

The best approach is to send a clear, professional letter or email to clients, informing them of the transition and introducing the new lawyer. Clients should be told when the change will happen and reminded that they can choose other counsel or request their file. The goal is to reassure them that their matters will continue smoothly.

In today’s tight labor market, most buyers will keep staff because they provide continuity and help maintain client relationships. However, staffing decisions ultimately depend on the buyer and the deal structure.

One of the most common mistakes selling lawyers make is approaching potential buyers directly before any formal process is in place.

From the first inquiry to the final stages, a good advisor manages the flow of information at every step. That includes ensuring the NDA is in place before any meaningful detail is shared.

Primarily because law firm revenues are relatively unpredictable. Other professional service businesses that are frequently bought and sold, like accounting practices and medical or dental practices, have fairly predictable books of business.

The transferability of an attorney’s book of business is much harder to predict, largely because many legal services are one-time or, at best, sporadic. In addition, certain ongoing client relationships may not be as easy to transfer to a new attorney as the seller and buyer hope.

Many lawyers try to apply the “Rule of Thumb” valuation method because of its simplicity. Under this method, a firm’s value is expressed as a multiple of revenues—usually gross revenues. In most other industries, you can derive the multiple statistically from the sales of many businesses of the same type.

First, the marketplace for law practices is very immature. There is no meaningful database due to the low number of deals occurring in the industry. Second, and even more problematic, is the fact that most lawyers complete deals confidentially—no one but the lawyers themselves know the terms. Finally, even if a sufficient base of knowable transactions existed, you would be hard-pressed to find a worthwhile multiple due to incomparable data—practice areas are too different. For example, comparing a million-dollar family law practice to a million-dollar estate planning practice is like comparing apples to oranges. They are two fundamentally different businesses. The only thing they have in common is that their owners are licensed attorneys.

Appraising for divorce is much different than appraising for sale. In a divorce, the practice will continue to be run by the same person; there are few, if any, changes in the practice itself. Remember, the key to appraising a practice is predicting future revenue. In a divorce situation, it’s reasonable to assume that revenues from a divorcing attorney pre-divorce should be very similar to revenues post-divorce. In this setting, appraisal formulas make sense. The same cannot be said in the sales situation. For many practice areas, it is difficult to predict how much revenue a successor will be able to bring in. It will largely depend upon the practice area, and many CPAs are simply clueless about those nuances.

To get a sense of Roy's method, go through this little exercise:

Imagine it is a Friday afternoon. After years of hard work, you’re ready to ride off into the retirement sunset. When Monday morning comes, will existing clients or prospective clients still contact your office and agree to work with your successor?

If your answer is “no,” your practice is probably worth little to nothing. If your answer is “yes,” you’ll need to ask two more questions.

1. How much revenue do you think your successor will bring in during the first few years after the transition? Put another way, how much predictable future revenue will there be?
2. If you were still actively practicing and referred out all of that work, how much would you expect to receive in referral fees?

No. But thinking about future predictable revenue in the context of referral fees is a concept that lawyers can wrap their heads around.

He appraises practices by taking a percentage of predictable revenue over a timeframe. For many deals, Roy’s appraisal methodology is an excellent starting point for negotiations. Depending upon the circumstances surrounding the transaction, however, it may not be the ending point.