Paying a Premium for a “System”

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.

The Truth About the Law Firm Marketplace

The marketplace is not kind to lawyers who hope to be rewarded for what they think is a superior system. The biggest obstacle is the mentality of most lawyer-buyers. It’s the type that, when listening to an assertion of a system’s exceptionalism, instantly thinks, “Mine is good enough.”

In short, many buyers won’t care. They may be interested in the extra revenue an acquisition may yield. However, they won’t allow their ego to acknowledge that someone else may have a better way to do it.

When Systems Do Matter

There are a few situations where some buyers are more willing to admit that another’s method of operation is better than their own. Consider those practice areas where the focus is on handling paperwork efficiently, unlike the more contemplative activities that lawyers do in other practice areas. Consumer bankruptcy is a good example.

Bankruptcy practices are heavily dependent on the use of non-lawyer staff to push paper in a streamlined and systematic way. This gets clients in and out of the door fast. Needless to say, some firms do that better than others. The ones that do it better hope to get a premium for their “system” when they sell.

The question then becomes, how do you even begin to quantify the value of systems like this?

The Sticking Point: How to Quantify Systems

Most systems have been organically developed over the years from lots of sweat equity. Thus, there are no hard development costs that a seller could seek to recover. Further, there is no open marketplace for such a system to be sold as a standalone as a means to determine a price.

Where Does This Leave Sellers?

In short, sellers are left with an attractive feature that, in theory, should make the practice easier to sell to certain buyers. It’s similar to how, at times, a firm’s office location may make a law practice more attractive. But don’t expect to see that value reflected in dollars and cents.

Feel free to reach out to me to discuss the appraisal process further. You can reach me at 612-524-5837 or you can contact me online.

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