Law Practice Valuation
Greg A. Raffaele CPA CVA FCPA
The value of a business is usually the present value of its expected future earnings. Price is what you negotiate. Value and price, therefore, are not always identical (as evidenced by the differences between asking and selling prices). Time and timing, for instance, are factors affecting price. It takes time to sell a business and if wait until you are old or disabled, you may not have the leverage to negotiate a better price.
Like a typical business, the value of a law practice is affected by its location and reputation. Unlike a typical business, it is more difficult to value (and sell) a law practice because it is a service business that involves relationships of trust. This is why most lawyers believe that their sole practice has no measurable value. I partly disagree.
I believe that a portion of the law is becoming a commodity business. If a lawyer can charge a fixed fee for a legal service, then chances are that service is a commodity. If it is a commodity, then the law practice related to the commodity can be transferred to another lawyer with minimal loss of revenue. The strategy, therefore, is threefold: First, make a legal service into a product. Second, brand the product. And third, produce the product more efficiently by leveraging technology, for instance.
By making a legal service into a product, the buying lawyer benefits because he is buying a predictable revenue stream (and some goodwill) from an established law practice. The selling lawyer, of course, benefits by realizing a return of his investment from building goodwill. If the selling lawyer hires and associate or partners with another lawyer well before he retires, then the clients benefit because upon his retirement they continue receiving competent (and familiar) representation. Below are some price-to-sales (SP/GS Cap) and price-to-discretionary cash flow (SP/ODCF Cap) multipliers for legal service businesses (SIC Code 8111) that include mostly law practices.
As a footnote, a recent survey1 shows that 77% percent of owners have a will but only 33% have a succession plan for their business whether the triggering event is a buyout, retirement, disability or even death. Is your client's divorce today a triggering event for better legal planning that you can do? Do you, as a lawyer, have a succession plan?
1Wealth & Values Survey - Business Owners & Their Path To Happiness (pnc.com).
Important Notice
The preceding article is intended as general information and should not be considered legal, tax, accounting or other expert advice. As the author, I represent that neither the information nor its impact is comprehensive. If legal, tax, accounting or other expert advice is required, please use a qualified and competent professional.
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