Law Practice Management Asked and Answered Blog

Category: Valuing

Apr 03, 2019

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Valuing a Personal Injury Law Practice

Question:

I am the owner of a three attorney personal injury practice in Columbia, South Carolina and I am contemplating retiring in seven years. I have an associate on board that I would like to sell my practice over the seven years. How do I go about valuing my practice and determining how much I should ask for?

Response: 

A few of the various methods used solely or in combination with other methods for valuing a law firm include:

1. Asset Based – ignores the importance of a firm’s earnings and cash flow (Goodwill Value)
   1. Book value – adjusted to accrual-based financials
   2. Replacement cost
   3. Appraised value
   4. Market value
2. Comparable firm transactions
3. Discounted cash flow – based on projected future financial performance of the firm.
4. Rule of thumb using multiples
   1. Multiple of gross revenue
   2. Multiple of net profit or earnings
   3. Multiple of EBITDA (Earnings before interest, income tax, depreciation, and amortization. (EBITDA is a measure of a firm’s operating performance)
   4. Multiple of SDE – seller discretionary earnings after owner compensation adjustments (expensing appropriate salary)
5. Rule of thumb variables
   1. How much repeat business is expected
   2. Number and type of clients
   3. The transfer-ability of client and referral source relationships
   4. Dependence on only a few large clients
   5. Whether the firm has been institutionalized or is a personal practice and uniquely the firm owner
   6. Other attorneys and staff
   7. Firm infrastructure and systems
   8. Historical reputation of the firm
   9. Contingency fee practices

Personal injury firms are difficult to value due to the variability in cash flows that are often the case with many firms.  Some personal injury firms have relatively predictable cash flows and others have very large swings. When this is the case the typical solution is cash-based book value plus a percentage of case fees as they are concluded with a percentage of completion factor applied.

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

Oct 11, 2016

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Law Firm Management – Valuing a Personal Injury Practice

Question:

I am the firm administrator for a small personal injury five attorney practice in Des Moines, Iowa. The firm's owner is approaching retirement and is planning on approaching other law firms regarding sale of the practice or merger. He has asked me for reports in order that we can value the practice. QuickBooks is the only software that we use. What reports should I use to establish a value for the practice?

Response:

You will want to start by generating a profit and loss statement and a balance sheet from your software. I would run five years of profit and loss statements and the most recent balance sheet. The profit and loss statements will help you illustrate the revenue, expenses, and profit picture for the past five years. The balance sheet will provide a current financial snapshot of the firm's cash-based financial position. However, since most law firms keep their books on a cash-based basis the largest asset – contingency fee cases in progress – is not reflected on the balance sheet. Neither is any value for practice goodwill. Since you do not have a case management system you will have to setup a spreadsheet with columns for the name of the case, date opened, estimated settlement, estimated fee, client costs/advances, and projected date of receipt of fee. You will have to have the attorneys managing the cases help you with the estimates. These will be the key reports you will need initially.

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