Consider an Associate Buyout
If you have lawyers working for you and you’re ready to retire, a natural option to consider is to have an associate buy you out. You may have even hired your associate with this outcome in mind. Here’s what you need to know about this popular choice.
The Basics of the Associate Buyout Option
Being a successful law practice owner requires a skill set entirely different from that of a good working attorney. Before passing the baton to one of your associates, you must ask yourself the following:
- Do they have good business judgment? Among other things, can the associate keep expenses low, effectively screen clients, successfully manage staff, get bills out in a timely manner, diligently pursue collections, and handle all the other tasks that come along with running a law practice?
- Do they have marketing sense? Does your associate understand that the phone doesn’t ring just because one practices law well? The phone only rings when others (potential clients and referral sources) know that you are a good lawyer. Getting the word out requires business development skills; do they have them?
Your answers to these questions will likely fall within one of the following categories:
- Are you kidding? Not on your life! It’s not even worth trying to teach them.
- Well, I’m reasonably confident that, with enough training and mentoring, my associate can get where they need to be to achieve success.
Is Your Associate the Right Fit?
If your instinctive answer was, “Are you kidding me?!”, there is no need to think any more about an insider deal. Many insider deals are partially funded from the firm’s future profits to make it feasible for successors to pay the retiring lawyer. There will be no future profits for funding if the successor mismanages the firm. That means it’s time for Plan B: find a third-party successor.
If You Think Your Associate Might Have What it Takes
If your answer is more along the lines of, “I think there’s a good chance,” what makes you so confident that the lawyer has the “right stuff”? Have you objectively evaluated the situation and your associate? It can be hard to recognize your own blind spots, especially when you genuinely like and value your associate.
Roy Ginsburg can help you make a truly objective evaluation. If he confirms your judgment, he’ll then provide you with the parameters of how to price and structure the buyout for a successful transition.
How Do You Fairly Price a Buyout?
A good place to start is to obtain an appraisal. That will provide an outsider’s judgment of the practice’s value.
Keep in mind that irrespective of the firm’s appraised value, the marketplace itself will usually then impact the actual selling price. How? Most insiders do a completely different calculation than an appraiser. They will ask themselves how much it would cost to start their own law firm. They will then compare that cost with any proposal.
Smart insiders certainly recognize the benefits of staying put, but also realize that those advantages are worth only so much. When selling, don’t be surprised when an insider makes a counterproposal based on this reasoning.
Structuring the Deal
There is no single way to structure a buyout. Perhaps the two most important variables that impact a deal’s structure are what the buyer can afford (along with whatever financing may be needed) and how soon the retiring owner wants to relinquish control.
Some buyouts can last as long as ten years. Others can be as short as one year. Most are somewhere in between.
Buyouts Can Be Win, Win, Win
An associate buyout can be an excellent exit strategy. It rewards an employee’s loyalty, your clients get uninterrupted service, and you get extra cash for your years of sweat equity. Everybody wins!
Want to Talk Through Your Firm’s Potential Associate Buyout? Contact Roy Today.
Roy Ginsburg is an experienced law firm succession coach as well as a seasoned attorney in his own right. Roy has helped dozens of attorneys successfully sell their practices, and he has the experience and insight to help you make the right choices when selling yours. Call Roy today at (612) 524-5837 or connect online.