It should come as no surprise that the question most prospective clients ask me is, “What is my law firm worth?” My response is always as follows:
Imagine it’s Friday afternoon and you ride off into the retirement sunset never to return to the practice of law. Then, on Monday morning, the phone rings at your old desk, and your successor answers. The caller is a potential client and needs help and asks for you. When the successor tells the client that you sold the law firm over the weekend, will the client hire the successor?
To know what a law practice is worth, you have to be able to predict the future. You have to answer this question, “Will the prospective client work with your successor?”
My stock and correct answer to that question is simply two words. It’s the same two words that lawyers frequently use themselves when asked questions by their clients. It’s, “It depends.” It depends on many different factors, the importance of which often vary by practice area.
To identify the value of a law practice, you need to analyze several different components of a practice above and beyond the firm’s past income statements. Further, precision is impossible. Anyone who says they can accurately value a law firm then must think they can accurately predict the future. I can’t speak for anyone else but doing that is certainly above my pay grade.
Law firm owners must also recognize the realities of the marketplace. It is very immature and underdeveloped.
How often have you heard an attorney colleague say, “Hey, did you hear that the ABC firm sold for X amount?” Not often, if at all, if I had to guess.
Contrast that with how many times you heard, “Hey, did you hear that the Smiths sold their house down the block for $650,000.” I wager a lot of times. Because of that, knowing what a house is worth is far easier to predict than what a law practice is worth.
As a result of marketplace vagaries and unpredictability, attorneys are sometimes disappointed by what they ultimately obtain for their practice. With that said, yes, it’s definitely worth the effort to sell most (not all though) types of practices. However, one must keep the expectations modest and realistic.
I frequently tell lawyers that if you haven’t saved anything for retirement, selling your practice will not be your Hail Mary pass. Will it enhance your retirement portfolio? Sure. Will it be a sufficient substitute for a seven-figure IRA? Probably not.
I can’t tell you right now what your law firm is worth. But if you tell me some things about your practice, I can certainly give you a very rough idea. Feel free to reach out to me to discuss this further. You can reach me at 612-524-5837 or you can contact me online.