Selling Your Practice in the Internet Age, Part 1
Ed Poll discusses the issues in selling a law practice.
Ed Poll discusses the issues in selling a law practice.
My friend and colleague Carolyn Elefant, on her MyShingle.com blog, recently spoke to me about issues in selling a law practice (/). Carolyn raised an excellent point when discussing an advertisement by a 70-year old lawyer in Kansas who sought to sell his practice. The advertisement featured the fact that the firm uses practice management software tools like Amicus, HotDocs and QuickBooks, and has a database with a list of 4000 contacts. As Carolyn observed, such information is ample evidence that the firm has at least made an adequate investment in technology.
This is an important point in two respects. First, if a lawyer contemplating retirement has not kept the practice’s technology up to speed, the value is going to be diminished in negotiations once a potential purchaser realizes that a substantial IT investment will be necessary. The principle is the same as that of a house purchaser who wants $20,000 off the purchase price if the house needs a new roof that the purchaser will have to pay for.
The second important point is more positive. If you have done the right things with your practice – kept technology up to date, invested in new office space with modern infrastructure, maintained strong referral relationships with other firms – be sure to communicate those facts up front. Their value may not be easily quantifiable, but they definitely support the firm’s goodwill: its reputation, client base and client loyalty. The decision to sell a practice is no time to be modest, or to assume that the firm’s virtues are self-evident. Communicate those virtues up front, and make sure potential purchasers know how their worth supports your asking price.
I met with an attorney today … he’s 61 … who is terrified that he now is solo and has never had to do anything in his career to attract clients. He was always part of a firm that delivered litigation clients to his doorstep. Now, he doesn’t have that … What can/should he do?
No matter what he does, the ultimate challenge for him will be on retirement, not that far away. Will he have developed any goodwill to be able to add more wealth to his capital for his heirs? The answer is: Maybe, but more likely not. That will be a crime after having been a very good lawyer for his entire career.
What are you doing to enhance the value of your practice? Do you have a succession plan? Does your law practice have an "estate plan?"
More than 60% of the Bar is made up of lawyer firms ranging in size from solo to 9. In any business, one would think that paying attention to a demographic that provides such a high percentage of your revenue would be wise. Of course, that presupposes that your customer base has an alternative.
In the case of integrated (mandatory!) bar associations, lawyers must be members, must pay their dues no matter how they disagree with the policies of the staff or of its Board of Governors! Therefore, their views can be disregarded. Such was the case recently when sole practitioners objected to the new rule of professional conduct that requires lawyers to tell clients in writing when they do not carry E & O insurance (malpractice) coverage.
Today, in California, there was a hearing on the rule regarding the sale of a law practice. The proposed new rule will make the lawyers (both buyers and sellers) jump through more hoops and cause further delay to get a deal done, thus jeopardizing the entire deal. Who does this target? The sole and small firm practitioner. Only they are involved, to the extent this happens, in the sale of their practice. Large firms don’t sell their practice. They can break up, they can merge, they can combine … they can move entire practice groups from one firm to another … but they don’t "sell" their practice … at least they don’t call it that and thus side step rule 1.17 regarding the sale of a law practice. (I will discuss the details of the new proposal in later posts.)
So why should the Bar care? Why should they fix something that isn’t broke? Good question. I might attribute nefarious motives to the actors, but that would be unkind … and generally untrue. Because the folks on the commission are honest, hard-working and capable lawyers. But, in their zeal to do right, they are not doing good. They are like the law school professor who puts forth hypothetical situations that, if ever, happen rarely and can be dealt with on a case by case basis. The California rule ain’t broke; therefore don’t fix it.
When the ABA commission looked at the rule, they backed away from the precipice of considerable change … ultimately because they realized that there was no need to alter the rule. They made one change … and I’m proud to say I was the catalyst for this discussion. They now allow a lawyer to sell a practice area and still remain in practice, but not in the area sold. For example, a probate and estate planning lawyer may want to sell the estate planning segment, but retain the probate segment. This will allow him to work less, reduce marketing and still make a contribution to the law. Any other course would require him to sell/close the entire practice and wait for death … or continue his practice while serving his clients with less vigor because of aging … to the detriment of the clients. It is a shame that younger attorneys on the commission have little or no sympathy for this aging process.
I’ve seen it in my clients; I’ve seen it in my family. That was why I recommended that the ABA make the one change it did accept. Clients are better served, both those whose estate plans are handled by other lawyers interested in the segment they purchased, and those who are probating estates of decedents …
One example after another in recent years demonstrates the Bar focuses on its perception of public protection — I say its perception because I don’t think the public is truly protected by a number of its recent actions, two of which are mentioned above. It is also very clear, however, that the interests of the Bar’s largest demographic is either disregarded or adversely impacted by the Bar’s new rules. I have come to the conclusion that the Bar should be a voluntary organization … as is the American Bar Association … needing to justify its value each year in order to maintain its member participation and dues revenue. The "mandatory" Bar as we know it should only be a licensing agency ….
Do you know of other examples in the organized Bar that defiles the sole practitioner? Do you know other industries where such monopoly power gives them the right to disregard the interests of its customers/patrons/members? How about the health insurance industry? How about the increase in premium rates that recently went up 39% to people who literally had no choice of carriers, only the choice of paying the increased premium or dropping insurance coverage … How about the airline industry who, in response to recent "fliers’ bill of rights" announced a decrease in flight schedules and increase in fare prices? Other examples abound.
Unless the Bar is able and willing to enhance the value and contributions to lawyers from whom it receives dues, it should not exist in its present form.
PRESS RELEASE – NEW PRODUCTS
FOR IMMEDIATE RELEASE
Contact: Derek McIver
Public Relations, Ictus Initiative
NEW PRODUCTS FOR ATTORNEYS LOOKING TO LEAVE THE PRACTICE OF LAW
VENICE, CA. September 8, 2009 – LawBiz® Management, a leading provider of seminars and products on the Business of Law®, today announces the release of two new products. “Law Firm for Sale,” a 4-disc CD set and “Exit Strategy: Selling & Other Strategies to Leave the Practice of Law,” a 3-disc DVD set, are the latest offerings from LawBiz® Management and Ed Poll, JD, MBA, CMC that will help lawyers leave the legal profession, whether retiring, selling their firm, or otherwise moving on.
“Law Firm for Sale” and “Exit Strategy” present strategies that have been developed by Ed Poll over two decades of working in business and law as an executive, an attorney, and a consultant. These products will help attorneys make the best decisions that will maximize profitability and keep the best interests of clients in mind. In each, Poll discusses strategies to value and price a firm, to market its sale, and to consider ethical issues that might arise in the process.
“Over the next ten years over 400,000 lawyers are expected to retire,” comments Poll. “These attorneys need to have a succession plan that works not only for them, but for their clients and their firm. If they don’t, their life’s work might suffer once they’re gone.”
Click here to read more about this Law Firm for Sale: The Complete Audio Guide to Selling Your Practice.
About LawBiz® Management
In 1990, Ed Poll, J.D., M.B.A., CMC founded LawBiz® Management Company. A nationally recognized expert in law practice management, Poll is now committed to coaching, speaking, and training law firms across the country. He helps attorneys and law firms increase their profitability consulting with them on issues of internal operations, business development, and financial matters. Poll brings his clients a solid background in both law and business. He has 25 years experience as a practicing attorney and has served as CEO and COO for several manufacturing businesses.
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One of the objectives in creating LawBiz® Forum was to provide an alternative method of buying and selling a law practice. There is no opporunities broker of whom I’m aware that focuses on law practices. Some lawyers prefer to save their cash, not engage an expert in advance, but yet want an outlet to sell their practice on their own. Sort of like selling your house on your own. Some can do this while others prefer to continue practicing law without the distractions of dealing directly with prospective buyers. Now, there is an option open … see LawBiz® Forum and join the segment on buying and selling a law practice … and best wishes.
I’ve just returned from a presentation by accountants on valuing a law practice. They talked about "excess earnings," "discounted cash flow," and "market value." They essentially discussed the valuation of a law practice from the perspective of the divorce court which fails to recognize market value as an appropriate standard of valuation, ostensibly because they can’t find enough data points to make the information reliable.
However, with all due respect to the courts (and the accountants who parroted the courts’ standards, the reality is that the courts will use any logic (or lack thereof) to "do equity" as between the two spouses before the court. That does not reflect market reality.
In my experience, every law practice has value … what it may be is a subject of further discussion, but it has value! And to use formulae that are created to perpetuate a fiction does an injustice to the lawyers who have spent a full career building their goodwill and now want to retire and realize benefits from that goodwill … We are not in the divorce court!
Lawyers, ready to retire, must consider the value of their law practice as an asset that can be sold … With 401 Ks becoming 101 Ks (or less), the revenue from the sale of one’s law practice may provide the revenue stream needed for retirement.
In discussing the value of his law practice, my client mentioned the figure given to him by his financial planner, a number designed to assure his standard of living. This was the number he wants for the purchase price of his practice. I suggested that the two numbers were unrelated … and that the value of the practice may be more or less than the number his financial planner wanted for his style of life.
This caused us to return to the reason he wants to sell his practice and the time frame for achieving a sale. The more urgent is the desire to sell, the lower will be the price; the less urgency, the greater will be the price. Neither number has much to do with what it will take to reach and maintain your desired standard of living. Such a number may impact your decision to complete a transaction, but really has nothing to do with an objective valuation of the practice.
You may have heard me talk about the 400,000 lawyers who will be retiring from the practice of law in the next 10 years. When the financial crisis first hit, I began to doubt that we will face so many retirements. But, my phone continues to ring with people wanting to know how to sell their practice, how to value it (a requirement before selling) and then how to transition into the "second season" of their life. Thus, there must still be a market …
I still battle lawyers who are surprised to learn that they have anything of value to sell. But, yes Joe, "there is goodwill in them thar hills."
So, one night when I couldn’t sleep, I came up with an idea … and I need your help to test out the idea, to know whether to go forward. The following is the outline of the concept. Much is yet to be added to it if we go forward. But, I want your ideas and your expression of interest to confirm my belief that this is a viable concept.
Idea: My web site, devoted exclusively to a community of lawyers interested in buying, selling or merging their law practice. Each lawyer would be entitled to create and post a listing describing the nature of his / her practice that is available for sale, or the nature of the practice desired to purchase or with which to merge.
There would also be a discussion "board" that I would monitor and participate in … giving suggestions and commentary as I think appropriate. And I would post articles and other resources, including portions of my books and audio materials, for the further education and assistance of the members of this community.
In effect, this would be a multiple listing service … better than a listing like Craig’s List because of the substantive content and focus by and for lawyers … The monthly fee would be modest and would continue automatically on a credit card only so long as you wanted to continue to participate. Termination is at your discretion.
I would be available to help on an individual basis such as reviewing the description of the practice, etc. … My services in this field such as valuation and consulting to sell a practice would be available but not to be considered as part of the low monthly rate offered to the community … They would be negotiated separately, though at a reduced fee to any member of the community.
Please respond by email (email@example.com) with your thoughts on this … Thank you for your help and guidance.