The Three “Do Nots” of Law Firm Buyers
January 4th, 2023
I’ve written before about how buying a law firm can be a very effective, low-risk, and low-cost means to grow a practice. That said, what is it about the legal profession that, on occasion, makes it more challenging to sell a practice than hoped?
As a consultant and coach, I’ve worked with hundreds of lawyers of all shapes and sizes in virtually every state and practice area. From that experience, I’ve become somewhat of an expert in understanding the DNA of those in our profession. Here are three fundamental truths in the DNA that impact buyer behavior. I call them the “do-nots.”
Do Not #1 – Lawyers Often Do Not Have the Cash on Hand To Buy a Practice
Although many lawyers make a respectable income, most usually don’t have tens of thousands just sitting around. Indeed, some potential buyers are still paying off law school debt. When lawyers learn about the possibility of buying a practice, they simply assume it will cost money they don’t have or require financing they can’t access.
Those assumptions are frequently wrong. Many deals are paid via an earnout, in which buyers pay sellers from future profits. Traditional financing is not needed. Paying from profits should instead be viewed as an alternative to a marketing cost. Instead of paying Thomson Reuters or the like to get your name out there, you pay the seller for the opportunity to get in front of the seller’s clients. And unlike Thomson Reuters, in an earnout, you pay only if the clients come. Buying a practice can cost less than marketing.
Do Not #2 – Lawyers Do Not Like to Take Risks
Hell, lawyers make a living providing doomsday scenarios to clients. We’ve gotten so good at dispensing such advice it becomes hard not to take it to heart. I will not lie to you; buying a law firm involves risk. But the risk can be managed easily. Do an earnout deal as explained above. That way, you only pay if the purchase increases your profits. Counterintuitively, buying a practice can be a less risky strategy to reach new clients than the old-fashioned way of determining how much time and money to spend on marketing.
Do Not #3 – Lawyers Sometimes Do Not Know a Good Deal If It Hits Them on the Head
Let’s face it. Business acumen is often not a strong point for lawyers. They don’t teach that stuff in law school. At times, it can even be a struggle to get CLE credits for a seminar that, heaven forbid, tells you how to make more money. But you don’t need an MBA to understand how an earnout works and why it can be a low-risk, high-reward way to build a practice. Hundreds of lawyers have read my e-book, Exit Strategies for Lawyers. I’ve yet to have any reader tell me they didn’t understand it. Remember, I’m a lawyer, too. If I have the DNA to write it, you have the DNA to understand it.
Acquiring a law firm is a smart strategy if you’re looking to jump-start a practice. It’s not as costly, risky, and difficult to understand as you think.
Categories: Selling a Law Practice