Selling a law practice for a fixed sum: Smart or not?

Question: When buying a law practice, why should I pay any price that is not calculated on a percentage of the revenue that actually is produced from that practice after I take charge?

Answer:  Many lawyers believe as this question suggests … that there should be a percentage of revenue paid, not a set fee.

To me, this sounds like hourly billing; you pay only for the time or effort you work, and receive no benefit from the technologies and efficiencies (both internal and marketing) that you bring to the table. This approach locks both sides into an agreement that allows no upside for the buying lawyer. Also, as a selling lawyer, there would be no real incentive to sell since the seller would basically be earning based on what the seller brings in; if that were the case, what is the incentive to retire? The seller could slow down, not sell the practice, and recover his/her own accounts receivable and walk away with similar, if not more, revenue.

I prefer, and I counsel my clients, to sell (and buy) on a fixed, set sum. There can be bonuses and payment terms that take into account the buyer’s legitimate concerns. I prefer to take advantage of my own efforts to increase the revenue and reap the rewards … usually with an appropriate involvement of the selling attorney during a transition period.

There are many nuances to this that can’t be set forth in a short response. However, suffice to say that both parties’ concerns can be addressed with a fixed sum … And this also moves away from Bar Counsel’s concerns about selling files, which is illegal.

I might note, in addition, that when a manufacturing company or a distribution company is sold, the same issues are presented: Will the customers stay with new management. There is little or no difference in the case of a professional service firm. Lawyers like to believe that it is all about relationships. It is, but so is it also in other businesses. That is my personal experience, coming from the industrial community before practicing law. I respect that others’ experience may be different. I have, however, seen instance after instance with the lawyers whose practices I have helped sell at fixed amounts

Categorized in: Buying & Selling a Practice