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Mar 06, 2024

Law Practice Succession Planning for a Sole Owner – A Question of Value

Question: 

I am a sole owner of a three attorney firm in Chicago suburbs. I am sixty-five and have two associates in the firm. We do estate planning, elder law, and estate administration exclusively. While I want to continue working for the next five years I want to begin succession planning and gain some understanding of how to value the firm and what it might be worth, if anything. Your thoughts on this topic would be most appreciated.

Response: 

Prospective buyers whether they be attorneys in your firm or another firm must be willing to pay the price you are asking and they will, when determining what they are willing to pay for your practice, estimate the extent to which they are likely to make more money and improve their position economically by purchasing your ownership interest or practice. If they can do as well in salaried practice or within a short time by starting a new practice, they will be unwilling to pay more than a token amount for the goodwill of the your practice. Likewise, depending upon the individual personal and professional qualifications of a prospective buyer, the same practice may have a greater or lesser value.

Internal Strategy – Selling Your Interest to Other Attorneys in Your Firm 

This is the option that we like to see a firm start with. Determining and receiving a fair price depends largely upon obtaining the right buyer. They must have the ability to keep your practice intact and have the financial resources and inclination to take on the risk of owning a law practice. The right buyer must possess not only adequate professional qualifications, but also favorable personal characteristics which are just as important in determining whether a young lawyer will be able to take over an established practitioner’s practice. Most practices are not sold outright for cash. Usually, payments will be spread over a period of two or three, or more, years. If the buyer is unable to handle the practice successfully, he or she may be unable to continue your practice.

The plans for valuing a withdrawing, deceased, or otherwise terminating partner’s interest in an organized law firm are many. Law firms will generally turn to one or a combination of the formulas listed below:

  1. A dollar figure set for each percent of the share of interest or for each share of stock in a professional corporation (This can be reset each year or on agreement or formula).
  2. A valuation placed on the goodwill or contribution of those who originated the firm.
  1. A valuation placed on the contribution of a partner other than originators of the firm.
  1. Capital attributed to the partner whether contributed in the form of cash, library or other assets.
  1. A calculation to include unbilled work inventory and accounts receivable.
  1. A figure or formula related to annual earnings.
  1. Provision for a gradual reduction in earnings over a period of years.
  1. Provision for some participation for the rest of the life of the partner.
  1. Participation in earnings or other value based proportionately on the number of years of service with the firm.
  2. Funded pension arrangements under the partnership or professional corporation form of practice.

External Strategy – Merging Your Practice with Another Firm

While you have a couple of associates working in the firm don’t assume that they will have an interest in ownership. If not you may have to consider merging with another firm. This is a common approach taken in such situations. More often, the lawyer or law firm will first assess the compatibility and economic feasibility of the merger. After determining that it is appropriate to proceed to join forces, favorable billing and other economic arrangements can be concluded with further considerations including a plan for ongoing income distribution arrangements among the partner and salary arrangements for employed lawyers and others who become part of the merged organization.

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John W. Olmstead, MBA, Ph.D, CMC

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