Pricing a Law Firm When Selling to an Insider
August 2nd, 2021
I always tell clients that my appraisal provides an excellent starting point for negotiating the price of a law firm with an insider, but that it is unlikely that it will be the final word. While it may sound like a cliché, for most small firm insider deals, parties ultimately agree on a price that seems “fair.” While “fair” may initially sound too ill-defined, the marketplace itself forces the parties to be realistic about what constitutes “fair.”
It happens in the following manner: If the owner asks for too much, insiders will make a completely new calculation: what would it cost to start their own firm as compared to buying it? Smart insiders realize the huge advantages of staying in place. However, they also recognize that those advantages are only worth so much. In essence, insiders will compare the risk and associated costs of hanging out their own shingle to the known cost of buying. Alternatively, they may compare the risk of the buyout to finding a comparable job at another law firm.
Determining a Fair Value – Keep Greed at Bay
Another factor that often plays a role in determining a price is the relationship itself between seller and buyer. At one extreme are retiring sellers who are more than happy to practically give away their firm to those who have been loyal associates for years. Others view a sale as an arms-length transaction and hoping to enhance their retirement portfolio. But sellers shouldn’t overplay their hands. It may backfire. For example, this is the reaction of a buyer who I was working with, to what he felt was a way overpriced offer.
“The term and price presented have put me off the whole deal to where I don’t want to participate or to even spend energy to architect a counter (which he is open to) to someone that ruthless, and who nonetheless insists that I’ve been presented the deal of a lifetime.”
If you’re a seller, don’t be greedy. As the saying goes, pigs get slaughtered.
Buyers also come to the table with differing attitudes. Some are more than happy to help fund the retirement for an owner who has provided them steady employment. Others take a more entitled view and believe that the firm should almost be given to them in return for their years of hard work. Buyers, too, shouldn’t overplay their hands. If they do with a low ball offer, the owner may shop the firm around and get a better offer and before you know it, a potential buyer may not even have a job with the new owner.
Setting a Fair Price & Terms for Insider Sale Success
Level-headed minds should be able to reach a fair price and reasonable terms based on marketplace insights. If you’re unsure of how to find the right information to support a fair selling price, look to an expert consultant who can help. 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.
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Categories: Selling a Law Practice