By ED POLL, Special to Lawyers Weekly
I’ve negotiated such deals, and it always strikes me as odd that such prospective buyers think that law practice is unique, that the process cannot be conducted as other businesses, professional, service and manufacturing, are conducted.
One such “difference” that buyers seek is to frame the price in terms of a percentage of revenue from the seller’s practice that is received in the year following the sale. In other words, equivalent to a referral fee, but not called such.
These lawyers say that there is no way to know how much of the present revenue stream will stay with the new operation, that law is a personal relationship business and many clients will “evaporate,” go elsewhere. These lawyers are unwilling to offer a fixed price, unwilling to say that the purchase price should be $X, and that such sum should be paid over Y years.
The same issues present themselves in discussing value billing. Value is ultimately determined by the client, but the attorney must educate the client about “value.” Most clients are willing to pay a fair fee for value. What they do not want is to pay for inefficiencies or unnecessary services.
To enhance the client’s knowledge of value, prepare a budget of events, time and costs for each matter of significance, and get the client to accept it. The bill for value thus measures achieving specific benchmarks.
Similarly, the purchaser of a law practice is often reluctant to agree to precise value measures. This attitude presupposes that the revenue stream of the seller will not continue and ignores the needs of the seller to know what their legacy is worth, to plan their future knowing they have a certain size nest egg, and to be assured that they will not have to return to practice if buyer defaults on his payment.
Buyer’s fear might be addressed by the “excess earnings” model of law practice value. The calculation reflects the amount by which the five-year average earnings of the practice, less the fair return on physical assets, exceeds the fair compensation figure of a comparable attorney, capitalized as a function of the risk of retaining the clientele versus the competitiveness of the practice. Essentially, this approach seeks to capitalize the net income stream expected by the buyer in the future.
This same approach is utilized by buyers of manufacturing and other businesses and, like law firms, buyers can lose their customers when smooth transitions do not occur and when the buyers fail to take care of their new customers. Whether manufacturing, distribution, retail or professional service organizations, the needs, wants and wishes of customers must be considered in order to transfer the revenue stream.
But, like manufacturing, distribution and retail businesses, a smooth transition with the seller and the buyer taking care of the needs, wants and wishes of clients will assure that a very large majority of clients will stay with the new owners.
Most law firm buyers seem to think that sellers have but a few choices and are willing to transfer their practices at fire-sale prices. Aside from one’s ego being bruised by such an offer, the fact remains that sellers do have other choices, but must give themselves adequate time to realize them.
The more urgent is the desire to sell, the fewer the options and the lower the price. Transitioning out of a legal practice into retirement should not be a spur-of-the-moment choice. It instead should be above all an issue of planning
Proper planning for the interests of seller and buyer is essential for success of closing the sale of a law practice. We have agreed on the sale price, a fixed number, and a short-duration payment plan.
The seller will retire from the practice with his nest egg intact. The buyer will be able to grow the practice, engaging his unique talents to offer a wider range of services and knowing that the growth will inure to his benefit, not to be shared with the seller.
Editor’s note: Poll is the principal of LawBiz Management, a national law firm practice-management consultancy based in Venice, Calif. For more information, visit www.lawbiz.com.