One of my truisms for valuing a law practice is that “all revenue is not created equally.” For example, revenue that stems from past clients or one’s referral network is far more valuable than the revenue generated from Google Ads.
When acquiring a law firm, smart buyers want to gain revenue they would not otherwise be able to access on their own. Revenue from a seller’s clients and referral sources fall into that category. It is because of the acquisition that the buyer has the opportunity to provide legal services to those clients.
Contrast that with revenue obtained from clients who clicked on a paid Google ad. Here, a buyer doesn’t necessarily need a selling law firm to generate revenue from Google Ads. The buyer can simply run its own ad.
In other words, an acquiring firm pays the selling owner for the hope of future revenue from past clients and referral sources. This is not the case when a selling firm’s revenue depends on getting clients via paid ads on Google, however. The buying firm would have to continue to pay for the marketing campaign to maintain the seller’s revenue. In effect, the buyer would be paying twice. That is clearly not a smart business decision.
Buyers, be wary of purchasing a practice with revenue that is overly dependent on expensive marketing. Sellers, if your revenue depends on significant marketing costs, your practice may not be worth as much as you hope.