It almost sounds like a cliché, but your practice is worth what someone else will pay for it. There are a wide range of valuation methods, but many of them are difficult to comprehend and typically have little-to-no bearing on what is actually paid for a law practice.
Common valuation methods rarely work for law firms because other professional service businesses that are frequently bought and sold (like accountancies 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. In large part, this is because many services that lawyers perform are one-time or at best sporadic. In addition, certain client relationships may not be as easy to transfer as the seller and buyer hope.
Comparables do you no good. The marketplace for selling law firms is very immature. There are few comparable sales. Furthermore, there is no standardized way to find out what other law practices sold for. It is not like finding out what the house sold for down the street. Law firm deals are confidential. Furthermore, even if you could find out the terms of “comparable” deals, it is unlikely that the value was based on any strict accounting valuation method. Many are insider deals; the parties knew each other and have worked together for years. If the truth be told, the method in such cases is usually “what seems fair.”
And yes, I am well aware that law practices are routinely valued in divorce settings. However, such valuations assume that the divorcing attorney intends to continue practicing law. In other words, there is relative certainty about the amount of business going forward. Few factors change. If a lawyer going through a divorce has grossed $250,000 annually for the past three years, it is very reasonable to assume that those numbers will not change significantly in the near future. When a law practice is transitioned to a successor, many factors change. You can’t make the same assumption about revenues going forward.
Then how do you value a practice? When I’m asked that question, I pose the following:
“Imagine it is a Friday afternoon. After years of hard work, you want to ride off into the retirement sunset at the close of business that day. When Monday morning comes, will your existing clients or potential new clients still call you and be willing to work with your replacement?”
If your answer is “no,” your practice is probably worth little to nothing at all.
If the answer is “yes,” I then ask two more questions:
This rhetorical exercise should not be interpreted to mean that actual referrals take place. But thinking about future predictable revenue in the context of referral fees is a concept that lawyers can wrap their heads around.
When the math is done (a percentage of predictable future revenue over a time frame), we have a starting point to determine a reasonable value for your firm.
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