Valuing & Distinguishing Goodwill When Planning Your Firm’s Succession

When it comes to planning succession, a primary area of concern for your successor is whether your clients will choose to work with them after you leave. One way to assess that is to evaluate the type of goodwill that exists with your clients and whether that goodwill carries any transferable value.

Professional Goodwill

Many believe that the goodwill of a law practice is usually too personal to have market value. This belief stems from the conventional wisdom that says a client hires an individual lawyer, not a law firm, due to that lawyer’s education, experience, skill, and reputation.

This type of goodwill is known as professional goodwill. Under most circumstances, it is problematic for a selling lawyer to transfer such goodwill to a successor lawyer when planning succession.

Think about the most prominent criminal defense attorney in your town. When someone wants to hire that attorney, the potential client wants that person only. That potential client is far more likely to go to their second choice rather than hire the prominent attorney’s successor. Here, the professional goodwill is so personal that it cannot be bought or sold.

For certain practice areas, however, professional goodwill can theoretically transfer from a selling lawyer to a successor lawyer.

Let’s say a selling lawyer has a handful of loyal corporate clients that depend on the lawyer’s relationship with the corporation’s general counsel. Here, in theory, the professional goodwill with these clients can transfer with the proper introductions. Indeed, the selling lawyer’s endorsement may go a long way to secure the future business for the successor lawyer. But there are no guarantees. All attorney-client relationships depend on the “chemistry” between the parties. If no chemistry develops between the client and the successor lawyer, the business will probably be lost.

Practice Goodwill

There is also another type of goodwill that, at times, can have a considerable amount of market value. This goodwill is known as practice goodwill (sometimes referred to as “business” or “enterprise” goodwill). Here, it is the firm’s reputation or brand identity that has value and stands apart from any individual lawyer’s reputation. This can exist for any size law firm—even a small one with one owner whose last name is the firm’s name—for some practice areas.

The scenario where clients hire firms, not individuals, is as follows. Think about firms that are known as the “go-to” firms for certain practice areas. For some of these firms in some practice areas, clients may not have any expectation, nor do they particularly care, which lawyer is assigned to them. They simply want a lawyer from that firm.

Who Does the Client Ask For?

If you own a firm and clients insist that you handle their case or they will take their business elsewhere, the type of goodwill you have is professional and of little market value. However, when a potential client asks to hire you but is content when you assign another attorney at the firm to the matter, this is practice goodwill and is the kind of goodwill that has value and can presumably be transferred to your successor.

It All Comes Down to the Predictability of Future Revenue

At the end of the day, what’s most important is to focus on the predictability of future revenue when firm ownership changes. The concept of goodwill is simply one way of several to analyze the situation. Feel free to reach out to me to discuss planning succession further. You can reach me at 612-524-5837 or you can contact me online.

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Categories: Attorney Retirement