Law Practice Management Asked and Answered Blog

Category: Succession/Exit Strategies

Mar 26, 2013

Sale of Law Practice – Proper Timing

Question:

I am a sole owner of a 4 attorney law firm located in Washington, D.C. Our practice concentrates on estate planning and administration. We have 6 support staff members. I just turned 60 the first of the month and am beginning to think about what I will eventually do with the practice. None of the associate attorneys are interested in partnership or in purchasing the practice – they just want jobs – they are not interested in owning a law practice. When is the best time for me to sell my practice?

Response:

You really have to give some thought to your timeline – how long do you want to work? Do you plan on pursuing another career? Have you put enough money away so you can simply retire without concern about the need to generate additional income?

If you need revenue for an additional ten years – a way to earn it – and if you enjoy what you are doing – then it will not be in your interest to sell the practice too early. Let's say you could sell your practice for one million dollars – this might equate to two years of earnings. If you worked another ten years – you could have earned five million dollars.

To a large extent owning a law firm is in essence a job where you work for a living where you have provided employment for yourself. It might be hard to find a job that pays as well as your firm. So if you need revenue for another ten years and your enjoy your work – you should probably plan on working another ten years. Build you timetable to sell your practice around your future work timeline. Things change – you may find that your associates change their mind or down the road you may end up with new hires that will have an interest in partnership.

Start with planning out how long you want or need to work and go from there.

Click here for our blog on succession/exit strategies

Click here for articles on other topics

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

Feb 20, 2013

Selling a Law Practice – How do I Value My Practice

Question:

I am the founder and owner of a law firm in downtown Cincinnati, Ohio. I have three other attorneys and 4 staff members. We represent primarily business and civic organizations. Our fee revenues are around $735,000 per year and I take home $175,000 to $200,000 from the practice. I am looking to sell the practice to either the associates in the firm or another law firm. Do you have any idea what my firm might be worth?

Response:

There is no one “right answer” when valuing a law practice. There are different types of valuations performed by different advisors for different reasons. Valuations can be extensive or ballpark estimates. 
 
While law firm owners and partners would like a simple “plug and play” approach to establishing a value for their firms, such an approach does not exist in the real world. There are too many variables that come into play. At the end of the day it comes down to what someone will pay you for your practice and the terms. Often the terms are as important as the price or value.

What a potential buyer is really the future cash flow (earnings from the practice) I suggest that you use the rule-of-thumb approach to get started. Multiply one year’s gross revenue by a factor of x. The result will be the stream of income’s value.

We usually suggest that you average the firm’s gross fee revenue over the past five years to even out any peculiar ups or downs in the revenue stream. Then multiply this average year’s gross fee revenue by a given factor. The factor varies with the industry and even with geographic location. Accounting firms, for example, are valued at 1.0 to 1.5 times (100 to 150 percent) annual gross fee receipts. A well established standard is still in its infancy in law firms. Some argue that the multiplier for the rule-of-thumb method for law practices should be between 0.5 to 3.0. However, based upon what we have seen in recent sales of law practices, the multiplier for the rule-of-thumb method for law practices is ranging between 0.6 to 1.0 (60%-100%) of annual year’s gross fee revenue. Another way to look at it would be 1.2 to 2.0 (120% to 200%) times net income. (Based upon partnership method of accounting and not including owner’s compensation as an expense) Whether the multiplier is in the lower or higher level of the range depends on the following:

1. Quality of owner earnings
2. Quality of personnel
3. Location
4. Practice area and types of services
5. Financial performance
6. Nature of clients
7. Fee Structure (hourly rates charged)
8. Repeat or one-time clients
9. Referral sources.

Start with a multiple of one and adjust for the above factors.

Based upon the figures you provided I would think you would have a difficult time getting a multiple of one for your practice due to the low margin of 24%. Peer practices average 35-45% margins. You might ask for around $700,000 but due to the low earnings, etc. $350,000 – $400,000 might be the best that you can hope for and that may be subject to a five year earn-out. The key is often to find the right person to buy the practice. Finding the right person could take a lot of work and time – so start early.

Click here for our blog on succession/exit strategies

Click here for articles on other topics

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

Nov 13, 2012

Law Firm Succession: Approaching 70 – What Now

Question:

We are a two lawyer firm in New Orleans. We are both partners in the firm. We have 5 staff members. My partner is 68 and I am 63. Recently, we have starting thinking about what we are going to do with the practice in the next few years and we aren't sure where to start. Do you have any thoughts along these lines?

Response:

You will need to consider whether you should consider merger, sale of the practice to an outside buyer, or sale of the firm to the other lawyers in the firm that you bring in and grow over the next few years. You need to find ways to institutionize the firm so that in additional to professional goodwill (your personal reputation and goodwill) you develop practice goodwill (goodwill of the firm that will remain after you have left the firm). If you bring in other lawyers develop them and create a desire and motivation for them to want to be owners/partners in the firm. Develop your staff and practice systems. Diversify and stabilize your client base.

If you decide to sell to attorneys in the firm – begin the process early so that most of the buy-in is completed before your actually leave the firm. The longer the planning horizon – the easier they buy-in burden will be for others.

Click here for our blog on succession topics

Click here for our article on succession strategies

Click here for our article on valuation

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

Nov 06, 2012

A Backup Up Plan for Small Law Firm Owners – Using Practice Continuation Arrangements

Question:

I am a 52 year old solo practitioner in Memphis with one non-attorney staff member. While I do have some concerns about my long term succession exit strategy my immediate concerns are more short term in nature. How do I cover and serve my clients if I take vacation, get sick, or get busy and need help? What are your thoughts?

Response:

Sound practice continuation arrangements can solve this dilemma and preserve practice value
and can help prevent a lawyer’s spouse or immediate heirs from facing a hasty sale or disposition of the practice in an emergency. A practice continuation arrangement can also give lawyer practitioners, their staff, and their family’s peace of mind.

A practice continuation arrangement is an arrangement – typically in the form of an agreement or contract – made between an individual lawyer or a small law firm and another lawyer or law firm. The arrangement describes a course of action to transfer a lawyer’s practice and sets payment for its
value. In the event of vacation, temporary or permanent disability, or death, a practice continuation arrangement protects the practice, the business interests of the lawyer or law firm’s clients and the financial interest of the lawyer and his or her family.

There are different kinds of practice continuation arrangements. Typically a lawyer enters into a one-on-one agreement with another sole proprietorship, partnership, limited liability company, or professional corporation in the community. Agreements can range from simple “dual coverage for each other” for vacation or other temporary absences to sale of the practice in the event of long term disability or death.

Look around for another solo practitioner or law firm that you can partner up with.

Click here for our blog on succession topics 

Click here for our law firm management articles

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

Sep 05, 2012

Selling Your Law Firm – Readying It For Sale

Question:

I am a sole practitioner in Bloomington, Illinois. My practice is general practice and most of my clients are either individuals or small businesses. I have one legal assistant and one paralegal that works for me. I am 62 and am starting to think about what to do with my practice and what I need to be thinking about concerning selling my practice. I would be interested in your suggestions.

Response:

I would start by asking yourself when you actually want to retire or quit. Do you really want to stop practicing law or do you want to work forever? Over two thirds of the solo and small firm lawyers that I speak with advise me that they want to practice forever – maybe not full throttle – but on a continued but scaled back schedule.

Review Rule 1.17 – Illinois Rules of Professional Conduct to insure that you understand the method and the restrictions involved in sale of a law practice.

If you want to continuing practicing determine whether selling your law practice is your best option given Rule 1.17. Some of our clients are exploring other options including bringing in other attorneys and forming partnerships or merging with other firms.

If you determine that selling the practice is the route you want to go here are a few ideas to begin readying it for sale:

1. Decide when you want to retire and leave your firm.
2. Determine who your would like to transfer the practice.
3. Determine the your goals for sale of your practice and the priority and what is most important to you. (clients, staff, money or sweat equity, etc.)
4. Determine how much the practice is worth today.
5. Begin finding way to institutionalize the firm so the client and other relationships are less uniquely you.
6. Begin implementing management practices that will systemize your firm and improve it's future value. (written procedures and policies, checklists, forms, automated case management systems, organized client files, accounting systems, etc. ) Document everything.
7. Draft and implement a succession/exit plan and implement same. Insure that it incorporates safeguards for your clients, employees, and family if the unexpected happens to you.

Click here for our blog on succession topics

Click here for our article on succession strategies

Click here for our article on valuation

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

Jun 19, 2012

Law Firm Dissolution/Winddown

Question:

Our firm has recently gone through a series of partner defections – we were a 40 attorney firm – now we are 10.  In our last partnership meeting we had some discussions about the possibility of dissolving the firm. If this comes to pass – do you have any tips or suggestions regarding winding down the firm?

Response:

Winding down a firm is like starting a firm but in reverse, harder, and has more steps. Sort of like building a house and then later tearing it down. You will have to deal with:

1. Clients (notification, termination of representation, and disposition of case files)
2. Retired partners
3. Current partners
4. Employees (associates and staff) – job placement, severance, etc.

Unlike other businesses – the major asset of a law firm are its clients, employees, and partners – many of which may have already defected or walked out the door. You may be left with only the liabilities.

One of your priorities will be to decide who will manage the winddown and who will manage internal and external communications.  Then you will need to develop a project management plan and dissolution/winddown plan/checklist. Major priorities will include:

1. Bank Loans
2. Building Lease
3. Retainer Obligations to Clients
4. Equipment Leases
5. Retirement and Other Payouts to Former Partners

Firm should consider if it will retain a caretaker or trustee to manage the winddown.

You should insure that you review the ethical requrements with your state bar association concerning:

1. Clients right to choose legal counsel.
2. Notice to clients
3. Proper and continuous handling of a client's matters
4. Protecting a client's interest
5. Disposition of client files
6. Conflict of interest due to any new affiliations

Click here for our blog on mergers

Click here for articles on other topics

John W. Olmstead, MBA, Ph.D, CMC 

Apr 18, 2012

Law Firm Succession: Using Affiliation As a Phase I Pilot Test

Question:

I am sole owner of a law firm in Chicago with an elder law practice. I have two paralegals and two legal assistants. Although I want to continue to practice as long as I can I am in my late 60s and am beginning to think about what to do with my practice. I have recently had several discussions with another sole owner that is interested in buying my practice. Since I want to practice as long as I can I am concerned about the timing of selling my practice due to the current ethical rules. I also want to insure that the other firm would be the right fit for my clients and staff. Do you have any thoughts or suggestions?

Response:

Making the right decision concerning the "Who" is usually more important than the "What" or the "How". Take your time to do the proper due diligence regarding the other firm. Get to know the owner as well as the employees of the other firm. Ascertain practice, client, and cultural compatibility. If you both determine that a a deal might make sense – then move to the "How". Even though you have done the best due diligence you can – you won't really know about the other firm until you try working together. So before you jump – consider taking a few baby steps first. You might start with an affiliation arrangement (Of Counsel) as a Phase I pilot test for six months. Under this arrangement you can both refer work to each other as well as have the other attorney work on some of your client matters at your office. Outline the details of the relationship in an affiliation (Of Counsel) agreement. After six months review the success of the arrangement and whether it makes sense to take the next step. If it does – a Phase II step might be to enter into a more formal practice continuation/transition arrangement with the other firm. Phase III would be either the eventual sale of your practice or merger with the other firm. Taking a phased approach allows you learn more about the other firm which will increase your odds of a successful transition and buys you time before actually selling your practice if that is the direction you should go.

Click here for our blog on succession/exit strategies

Click here for our blog on mergers

Click here for articles on other topics

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

Jan 24, 2012

Starting a Law Practice: Challenges and Tips – Partnership – Phase III

Sep 14, 2011

Law Firm Succession: Opportunities for Solos and Small Firms to Join Other Small Firms Looking for Talent to Implement Their Succession Strategies

Question:

I am a solo practitioner located in the Chicago suburbs. I have one staff member. I am 53 and have been practicing law for over 25 years. I try to limit my practice to estate planning and estate administration. However, I do have to take on other general practice type matters to stay busy. Practicing law by myself is beginning to take its toll on me – it gets lonely practicing alone, coverage and backup for clients is difficult, and I have the full burden of the worry 24/7. What do I do with the practice when I get older and reach retirement age? I have not taken a vacation in years. I have been thinking about the pros and cons of joining another firm? What are your thoughts?

Response:

One option would be to grow your practice internally. You could add a younger associate attorney. However, it sounds like you currently don't have the business that would support the position. Then you would have to train the mentor the assoicate and pray that once they become productive – two or three years down the road that they stay with you and don't leave for greener pastures.

Another option would be to bring in a more senior lateral attorney with experience and a book of business.

A third option would be to look around for another solo or small firm that is looking for someone to carry the firm into the next generation as a part of their succession strategy.

According to a 1995 American Bar Foundation Lawyer Statistical Report the number of bar admissions has been consistently around 30,000 each year since 1977. Further, the number of lawyers by age reached 30,000 for lawyers under 50. Those lawyers in 1995 who were in their late 40s will be reaching retirement age between 2010 and 2015. Law firms have a larger population of lawyers in their 50s and 60s that will be approaching retirement and must develop strategies for transitioning their legal and leadership skills as well as their client relationships and market presence.

Sixty-five percent of law firms’ equity partners are in their late 50s or early 60s. Over the next 10 years there are going to be a lot of successions.

There are a lot of firms looking for someone just like you.

I am currently working with several firms in the ChicagoLand area that have asked us to help then find someone just like you. So there is a lot of opportunity to join a firm that is looking for a succession strategy that will carry the firm into the next generation.

The big questions is always the "who" more than the "what". So put together a plan and start looking around and see if you can find a compatible firm.

Click here for our blog on succession topics https://www.olmsteadassoc.com/blog/category/successionexit-strategies/

Click here for articles on other topics

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

Aug 16, 2011

Law Firm Acquisition Due Diligence – Using Client Surveys To Ascertain Client Retention

Question:

Our firm, a 22 attorney law firm in Chicago, has been contemplating acquiring a 6 attorney firm in the suburbs. We believe we have done an adequate job of due diligence regarding financials, people, culture, systems, and practice-mix compatability. Our concern is client retention. What are you thoughts concerning how we can determine if the clients will stay with us?

Response:

Why not ask the clients.

Much can be learned by talking to the firm's clients. Structured telephone interviews and other forms of surveys conducted by a neutral third party can uncover many surprises as well as answers. Client satisfaction surveys can be one of the best due diligence tools that you can use. 

It is good business practice to see how clients might react to a acquisition or merger. Understanding where your prospective firm's clients stand and how they feel about service quality can be one of the most valuable inputs into your due diligence process that you can get your hands on. By finding out where your prospective firm's clients stand can tell you a lot of their future retention. 

Before you invest significant time, money, or effort in developing an overall acquision/merger implementation strategy, survey your prospective firm's clients to understand where their clients stand.   

You must be careful using this approach and insure that it is done with the permission and in concert with the prospective firm.  The approach must setup, communicated and coordinated properly. It must be sensitive to clients and done in a way to communicate and reinforce positive rather than negative signals to the clients involved. 

 Click here for our blog on mergers

Click here for articles on other topics

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

• « Later
• 1
• …
• 7
• 8
• 9
• 10
• Earlier »

Copyright © 1996 - 2024 Olmstead & Associates, All Rights Reserved

Home – Resource Center – News Releases – About Olmstead – Services Provided – Contacting Olmstead – Sitemap