A Comprehensive Guide to Buying and Selling a Law Practice

The Law Practice Sales Market

Research indicates that law practices are selling in record numbers and at a higher average sale price. There is continued interest by mid-size law firms and large multi-state firms looking to expand their practices through acquisition. Some of the highest growth practice areas can be found among solo and small firms, including specialties such as tax law, estate planning, bankruptcy and immigration .
Coastal cities such as San Francisco and Miami continue to dominate the hot market due to the high number of sellers and high demand among larger law firms to snatch up smaller firms with top-tier clients and revenue-generating lawyers. On the flip side, it’s still a seller’s market for most practices around the country. That means if your practice is considered to be a good candidate, you should be able to command a high multiple of profits. The market is also ripe for some industries as companies continue to consolidate and look for a greater geographical presence.

Selling Your Law Practice: Things to Consider

The considerations for the seller of a law practice are broad and multi-faceted. These include issues of valuation, accounting, transitioning clients and staff, and fitting with the buyer’s firm strategies. There are potentially long-term adverse consequences, including for one’s health, of simply walking away from a law practice that has been built over many years. Even putting aside concerns about potential legal malpractice claims that could arise, if only from simply leaving a "catchers mitt" behind the next day, many considerations come into play in making a well-reasoned and carefully considered decision to sell a law practice.
Valuation of the law practice becomes a key question for the seller. Many law firms that convey themselves as being high-end, high-quality, suitable for only experienced lawyers tend to use valuation formulas of $8000+ per month of revenue, i.e., a firm has $1 million of revenue could have a $8 million value. The reality is that this valuation is not accurate in most instances, since the high-end steady, long-term business is seldom, if ever, accurately reflected in a statement, resulting in too high of a so-called valuation.
The factors to be considered in valuing a law practice include: geography; sale to an associated law practice, i.e., in the same county; or sale to a local law practice; long term ties to qualified long-term clients; quality of the client relationships; reputation; and the foregoing factors with respect to the lawyers at the firm, if applicable.
Once firm location is established as a primary factor, if there are well-developed long-term client relationships with steady work, the value of the practice per se (a "per partner" value) will be increased and there for the asking, as opposed a higher value based on several years of retained revenue as a multiple of the revenue stated in the financial statements for the last year. Ultimately, if a firm or a practice can be consistently evaluated as worth more than the $8000 per month formula, that will generally result in a certain level of faith in paying that amount, assuming it fits within a buyer’s internal formula.
The terms and conditions of a buyout can vary and some issues to be included for consideration are: a shutting down of the firm right away with no transition period; responsibility for notifying clients of the closing or change in lawyer; what are the financial obligations to support the former partner if they are not able to practice for health reasons and for what period; trading down of the consideration to account for any client or non-compete risk for a period while the former lawyer establishes his new firm; did the former lawyer steal clients when they left; is the buyer a good long-term fit; is the new buyer willing to do something different to dramatically lower the overhead of the acquired firm, especially in highly competitive markets.

How to Buy a Law Practice in a Step-By-Step Process

Like the sale of a house, the purchase of a law practice usually begins with a period of consideration during which the buyer educates himself about practice purchase options.
This is followed by the negotiation and initiation of certain preliminary agreements such as a confidentiality agreement and letter of intent. Then due diligence is conducted, after which the purchase agreement may be negotiated and executed. Seller transition assistance is then provided to the buyer.
Educational period
The education period begins when a lawyer decides that he or she wants to become a practicing attorney. During a typical academic experience, prospective buyers are encouraged to gain some work experience in the practice area(s) of interest to them and to do so with several firms and attorneys. During this time, lawyers also do research about the marketplace to determine what opportunities might exist for them.
The next step in this evolution for a prospective practice buyer could be a long period of focus on selecting just the right practice to purchase and the networking opportunities that will be most effective in generating leads for potential acquisitions.
Negotiation and execution of preliminary agreements
The seller and buyer typically enter into a non-disclosure or confidentiality agreement during the initial negotiating phase. Such an agreement allows the buyer to proceed with due diligence and enables the buyer and seller to begin working toward a purchase agreement.
A letter of intent is usually prepared after a period of due diligence that follows the signing of a non-disclosure agreement. A letter of intent sets forth the basic terms and conditions under which a purchase agreement is to be negotiated and executed.
Due diligence
A typical due diligence provision in a purchase agreement allows prospective buyers to perform certain due diligence activities prior to closing to help determine specific issues and liabilities associated with the practice being purchased. Examples of due diligence matters include confirmation of
The terms of a purchase agreement are usually preempted following satisfactory completion of due diligence.
Purchase agreement
Like the sale of a business, the sale of a law practice may be negotiated on a basis similar to the "asset sale" and "stock sale" options that exist in the sale of a business. Where a law practice consists of a professional service organization under state law, a lawyer considering the acquisition of a practice or firm should thoroughly investigate the availability of transferable client lists and files before proceeding.
Seller transition assistance
A buyer may want the seller to assist with the smooth transfer of clients, cases, and matters to the buyer for a designated period of time following the closing of the practice purchase transaction. Depending upon the nature and complexity of the matters being transferred, an existing client may benefit from the advice and counsel of both attorneys.

Law Practice Sales and Ethics: A Guide

There is no shortage of legal regulations affecting the buying and selling of law practices, nor are the ethics of lawyers involved in the transaction or remaining in the practice lax. The factual matrix of each and every sale is different – the requirements for each are, therefore, case-specific. Even so, there are some generalities that are of universal application.
As a threshold matter, there can be no sale of a law practice unless the vendor is a licensed lawyer. Yet even so, the applicable jurisdiction’s disciplinary authority may require a vendor to obtain its permission prior to selling her professional practice. Often, the vendor suggests she needs such consent due to her belief that her repeated absences from her practice may have resulted in disciplinary problems for which she may have remedied through better supervision by a successor. By analogy, while a doctor may well seek the hierarchy’s approval to assign her practice, in most jurisdictions, such approval is unenforceable on the premise that it is merely advisory. As well, if a lawyer intends to borrow from clients or otherwise make any change in her fee arrangements, the lawyer should seek her clients’ consent in advance of the sale; otherwise, the buyers will face potential liability 8-3. If the lawyer preplanned for the eventuality of a sale, she would have codified in her client retainer letter and/or addition to any fee agreement the ability to delegate responsibility for her practice.
Where the vendor’s practice is to be distributed to a single buyer, that buyer may not be able to continue the practice under the original name or style due to a previously used trade name or trademark owned by the vendor. The remedy may be to establish a new business identity for the new entity to be the successor practice, using a name not owned by the vendor, perhaps by employing a name that is a little different from that of the vendor’s previous practice. To refresh the goodwill in the practice, some buyers and/or sellers may want to use an identical name, giving the parties their logo or name recognition at the time of the initial formation of the new entity. While the use of a different name is permissible and may preserve the client’s goodwill, many may view the adoption of a different style or name as discreditable effective procedures even if they were created unknowingly. (See, e.g., ABA Model Rules of Professional Conduct R. 7.5.) This can be especially true when the adopted name is similar to that of a currently practicing lawyer, especially where a joint marketing strategy is also part of the arrangement, "causing confusion as to the identity of the lawyer or the source of legal services to be performed." (See, e.g., ABA Model Rules of Prof. Conduct R. 7.1 and 7.5.)
By contrast, for a distribution of smaller portions of a collective practice to several lawyers, the better course may be to have the smaller practices differentiated by the use of their established legal or trade names, logo, or electronic connection, and to emphasize the fact of their affiliation as a subset of a larger practice.
If the buyer is an existing practice, the extension of its goodwill to a new practice that it may be acquiring may be subject to the goodwill provisions in the former’s partnership agreement or other comparable management document. Likewise, the extension of the goodwill or other intangible attributes of a lawyer’s practice may be governed by the rules of professional conduct. Thus, it may well be necessary to have the respective partnerships’ approvals prior to the proposed sale or distribution to iterate the vendors’ right to sell its practice or a part thereof. It is even possible that the constituent partnerships’ bylaws could expressly prohibit such a sale or distribution.

Buying a Law Practice Using Seller Financing

Many lawyers seeking to buy a law practice are surprised to learn that they do not have to buy the entire practice outright, and that there are multiple options for financing a practice purchase. These options may include a traditional bank loan, a Small Business Administration (SBA) loan, seller financing, or a combination of the three of these. Your retainer agreement with your clients could also be used as part of the financing by selling some type of interest in the retainer to the seller. A traditional bank loan would obviously be to get a line of credit from a bank, and pay the bank back over time. Some banks may not be willing to give you financing without some sort of down payment, but others will be willing to provide the financing you need as long as you can convince them that it is an otherwise sound investment. The SBA is a joint effort between the federal government and banks to help businesses get startup loans. There are lots of regulations to qualify , and unlikely that you will qualify if your credit is less than stellar, but the process can be very easy if you do qualify. The interest rates are slightly higher than traditional bank loans, but these loans would be for much longer terms (many as long as 15 years) and for larger amounts than most traditional bank loans, and you would receive more flexible repayment terms. Another option is seller financing, in which the seller of the practice loans you the money to buy the practice. This is often done when those above options are exhausted or not available, but can also be used as a combination to scoop out the rest of the financing once all other options are exhausted. These loans can be for short terms, such as 3 years, to long terms. Many times, the seller is eager to sell because of his or her age, and is open to these kinds of financing options.

How to Get Your Law Practice Ready to Have it Sold

Preparing a law practice for sale requires proper planning and executing well in advance of an intended sale. Most law firms are not ready to sell and obtaining maximum value for your law practice requires proper preparation. Proper preparation allows you to take charge of the sales process, eliminate unflattering surprises, bring stability to your firm, improve cash flow, enhance growth, attain fueling profit, and reduce risks which provides a market advantage.
Steps involved in preparing your firm for sale include the following: (1) Organizing your financials. When the time comes to sell your practice, having organized and easily available financial information will save time and make it easier to get through the rigorous due diligence process. Take the necessary time to ensure your bookkeeping and financial records are in order. (2) Optimize your operations. Optimize your billing processes, procedures and processes; ensure timely collections of receivables. Look around the office for anything that you are paying for, but are not currently using, and discontinue it. Evaluate your expenses and cut anything not essential to your firm’s successful operation. Consider hiring a temporary consultant who has experience in firm profitability. Go through your firm’s computer files and eliminate outdated files. Be sure to review your insurance coverages to ascertain if any are redundant or unnecessary. Make changes or eliminate any memberships or subscriptions you may be paying for but rarely or no longer use. Review your printed materials and eliminate any useless items you are paying for. Review your office supplies and eliminate anything you are no longer utilizing. Revisit your firm’s vendor relationships and renegotiate or eliminate relationships with those who are not providing good services or products. Additionally, developing a low-risk growth plan will increase the value of your practice. (3) Strategic marketing. Once you are organized, you can implement a marketing plan focused on attracting new clients and new talent. The best way to maximize the price for your firm is by ensuring the buyer walks into your firm as a growing entity, rather than one with stagnating growth. The foundation of any successful growth plan starts with identifying your firm’s unique selling proposition (USP). What sets your firm apart from your competition and how do you convey that USP to prospective clients? You should work towards having measurable results within a specified period. Consider hiring a consultant who specializes in law firm marketing. The goal is to target new, profitable clients who would be attractive to buyers.

Selling Your Law Practice: What to Expect

While the prospects of law practice transactions are promising, the potential for problems also abounds.
One of the biggest challenges lawyers face is finding a buyer willing and able to make the purchase at a price that makes sense for both parties. Potential lawyers interested in buying a practice may be concerned about whether or not there is sufficient business and whether the transition will go smoothly.
As with any major business transaction, each side involved must have a solid understanding of where the risks are and how to handle them. Prudent buyers need to be absolutely certain they have the capital to pay for a practice and then operate and grow it from there. Investors need to examine all financial statements and basically do a "deep dive" on the books of any potential target.
At the same time, the large number of baby boomers who are retiring creates a bottleneck of law practices that are changing hands or being closed altogether. A growing list of yellow pages ads, including those for general practice lawyers, have been rejected by their owners, as they have closed or sold their practices. This could mean a glut in the years to come, but savvy investors or buyers will still be able to find bargains.
A good example of a potential problem is the case of a husband and wife law firm where one spouse decides to leave and take his or her book of business with him or her. That generally means that the spouse who stays with the firm will be left with virtually nothing because the firm’s clients were tied to the departed lawyer. Buyers or investors have to be careful to evaluate this sort of situation and how it might work out over time, to avoid unexpected surprises.
Another common problem is one of expectations; the seller’s expectations of what the firm is worth and the buyer’s expectations of what the firm is going to do over time.
From the seller’s perspective, the biggest challenge might be having enough patience to wait for the sale, rather than rushing into a deal that comes along.
Some experts in law practice transitions see a trend of lawyers who are moving toward corporate practice from solo or small practice work as a result of lucrative and highly specialized corporate deals. Those investments are often paid back over time rather than as a lump sum, but they require the attorneys to rely on existing business to help fuel the purchase.
Even the most carefully negotiated and structured law practice transitions have been derailed due to financial issues. Those problems typically change the terms of the deal or the entire arrangement. There is no question that a law practice transition is one of the biggest businesses deals a lawyer will ever face. Money is the most common point of contention.

Law Practice Sales Case Studies

We will be adding several synopses of some successful recent law practice sales, all law practices represented by the Law Practice Transition Counsel LLC, in this section.
Senior Partner Transition. One of our senior partners decided that he wanted to spread his wings and leave his original firm to start a new law practice on his own. After using my services for his departure from his former law firm to the next, he called again to assist him in the transition of the new practice to a larger firm. He allowed me to be involved in the negotiation and drafting of contracts and plan to transition the practice from his small shop to the much larger firm. The transition was scheduled over a period of a few months and was very successful. He was able to keep everyone who was working for him and was able to grow his practice with additional associates and new clients. The transition was relatively painless due to the work and planning that was put into the process. He is now happy and successful at his transition and the new firm is reaping many rewards as well. This kind of process is usually very successful for senior partners that find themselves at a mid-sized firm with no help in sight when transitioning to "retirement."
Practice to Practice Purchase. A medium sized firm with a growing practice, but not enough , had an opportunity to purchase a solo practitioners practice that was started over 20 years ago. The practice was full of records and assets, from the vintage typewriters to the computer software, the assets were typical of a long-time growing firm with many happy clients. I was able to make a purchase offer to the seller that made it a little too good to be true. I advised him that what he was asking for was just too much. He advised me that he wanted out, plain and simple. I advised my client to stick with the negotiated price that was more reasonable and they would certainly get the deal. At the end of the day, the seller realized that the law practice was worth about $200,000 less than he was asking and he was not making any more money than he could if he worked by himself. He sold the law practice for a price closer to the reasoned valuation. The buyer had a wonderful practice ready to go and funded the entire deal with an accumulated money market account. He added more clients and had the opportunity to hire an associate. The only downside was the fact that the owner of the practice was still employed by the firm but as a consultant. Had he been a full-time employee his practice purchase would have been even better. The moral to the story is to have an experienced firm transition attorney to assist in the process. It saved both sides a lot of heartache.