Valuation of a Law Firm and a Law Practice

Valuation of a Law Firm and a Law Practice

Lawyers leaving a law practice have an economic interest in monetizing their career-long investment in building a client portfolio and a referral network.  They have invested time, knowledge and care into relationships created to solve clients’ problems, advance clients’ interests and navigate clients’ legal and regulatory responsibilities.  They have devoted much effort to establishing professional credentials and a visible presence for their particular experience and expertise.  How each lawyer has accomplished this depends on his or her particular practice, market and style.  But while the means may vary, the results are the same – access to clients who have legal needs.  And this is the value the  acquirers wish to capture.

With a changing marketplace for legal services, many of the old rules for valuing a law firm or law practice need to be reexamined.  Due diligence must be more thorough and conducted with greater skepticism.  The market of sellers (retiring lawyers from the Boomer generation) is growing rapidly.  At the same time, the market of buyers (the successor lawyers) have become more experienced with the challenges of transferring practices.  And those clients and referral networks (the assets being monetized) have become more unpredictable.   Clients  are more willing to seek alternatives to the traditional, longstanding relationship  with a single trusted advisor for their legal and regulatory needs.  Add rapidly changing advances in technology which change how the profession works and where it works; which affects the lawyer-client relationship and ultimately the value of that relationship.  And finally, potential buyers and sellers should take note of the liberalization of standards in the UK and elsewhere that, for the first time, have allowed outside investment in law firms by non-lawyers.  A similar change in the US would be a potential game changer for firm valuation.

Even without the liberalization of ownership standards, the valuation landscape has changed and generally not for the better from a seller’s perspective.  Buying professional practices is recognized as a much more difficult activity today than it was a decade ago.  Pricing models, and reasonable hopes and expectations for pricing conversion and future pricing increases are vastly different today. 

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