Yes, Martha, there is goodwill in a law practice!

Both Tom Collins and Ed Wesemann support my contention that law firms do have goodwill! See my book, Selling Your Law Practice: The Profitable Exit Strategy.

It’s fascinating to me that smaller firms get it and, when negotiating for the sale of a practice, discuss compensation for goodwill. However, larger firms argue that there is no goodwill and will walk away from a transaction if the “seller” wants to be compensated for their goodwill.

The parties may not talk about goodwill; they may say there will be no deal if the seller insists on goodwill; oftentimes, however, there is a “credit” for a factor that might be analagous to goodwill in terms of the cost of the capital buy-in. There has to be some adjustment for this factor, irrespective of what it is called.

However, in fairness to the “buyer,” they are merely making a good deal in these circumstances. They are converting what would be a capital expense to an ordinary expense which is deductible. The seller generally receives a higher annual compensation than would otherwise be the case. And, when this happens, the seller is accepting ordinary income tax treatment (for compensation) in lieu of capital gains tax treatment (for goodwill).

One may wonder whether the lawyer would advise his/her client to do the same …

Categorized in: Buying & Selling a Practice