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 seminars or webinars.
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.
A buying firm pays a selling owner for the hope of future revenue from past clients and referral sources. 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 attend seminars or webinars. Here, a buyer doesn’t necessarily need a selling law firm to generate revenue from such marketing activities. Buyers can put on these programs themselves.
Now consider the situation of a selling firm’s revenue that depends on getting clients via seminar or webinar attendance. This is, for instance, a popular marketing tactic of estate planners. The buying firm would have to continue to spend time and money putting on such programs to maintain the seller’s revenue.
It’s not difficult to see that, from a buyer’s perspective, revenue obtained from a seller’s referral network is more attractive than seminar or webinar revenue because the former requires no additional costs.
Buyers, be wary of purchasing a practice with revenue that is dependent on either time-consuming or costly marketing. Sellers, if your revenue depends on such marketing endeavors, your practice may not be worth as much as you hope.