General Practice, Solo & Small Firm Division

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Practice Area Newsletter

American Bar Association - Defending Liberty, Pursuing Justice

June 2008

Vol. 4, No. 3

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Business Law

 

Practical Advice for Selling Your Practice

For years, the sale of a law practice had been prohibited. The rules prohibiting such a sale had little effect on large law firms that have mechanisms for transferring files and ownership interest to other members of the firm when an attorney retired, became disabled, or was elevated to the bench. Small firm owners, however, had no other method for benefiting after passing on a career’s worth of clients and ownership interest to another lawyer.

In 1989, the State of California became the first state to adopt a rule allowing the sale of a practice. In 1991, the American Bar Association added Model Rule 1.17 to the ABA Model Rules of Professional Conduct, and many states soon followed, adopting a version of the rule permitting such a sale. In 2002, the ABA modified Model Rule 1.17 adding language allowing the partial sale of a law practice.

The change came for a few reasons. The creators of the rule recognized that the prohibition of the transfer of firm ownership created inequities between large- and small-firm practitioners. Proponents of the new rule also pointed to the fact that client matters were better handled through the peaceful transition of firm ownership. The benefit of making sure the client’s matter is not neglected and put into new hands seems to outweigh the risk of the potential negative reaction when a client finds out their matter is being “sold” to a new lawyer.

When you have decided that your practice is for sale, it is reasonable to assume that the likelihood of a sale will leak out in the community. Therefore, you may want to consider, as an initial step, preparing your clients and your employees about the possibility of a pending sale.

Some will suggest that you forgo informing your clients of a pending sale, and that you notify your clients of a pending transaction only until after you have a buyer and a full agreement in place. However, if the communication is done carefully, notifying the clients while you are actively looking for a buyer will often not alarm the clients and will prevent a potentially unfortunate situation where a client comes to learn of the possible sale from another source.

Likewise, it is also important to communicate to your staff about the possibility of a pending sale. Ideally, the purchasing attorney will see your staff as integral to the continued success of your practice, and their work will continue on under new firm ownership. It may be necessary to retain key employees under contract to ensure a continuous and smooth operation of your practice up until the transfer of sale.

Many lawyers have seen bar publication advertisements for the sale of a law practice in the jurisdictions that allow such a sale. Print advertising in legal publications and journals continues to be a popular method for promoting the sale of a practice. Sellers will choose to describe the practice type and the location of the firm, but often they keep details such as the firm name and contact information out of the ad, requesting that interested buyers respond to a blind box to preserve confidentiality. Internet bulletin boards and email listservs are fast becoming affordable alternatives for spreading the word that your practice is for sale.

Size is not necessarily a determining factor when deciding whether a firm is salable. All firms, big or small, can be an attractive purchase to a prospective buyer; however, not every practice is salable. Some practices are so small and personal that, by taking the attorney out of the picture, the practice cannot go on. The key to finding a buyer is to adequately convey a realistic picture of the firm’s potential for profitability, and to provide the prospective buyer with the confidence that they can achieve the same results.

Selling attorneys will often put key information about the firm’s financial picture in a confidential information memorandum that is available to a prospective buyer. Such a document will usually include:

  • A short history of the firm and its practice areas.
  • A description of the open files and billable workload.
  • A current financial picture of the firm operations.
  • Key information regarding the firm’s business plan and it success.

The more detailed the memorandum, the more likely it is to attract a potential buyer. Here is where an agent or an individual with experience in the sale of a business can make a difference to help quickly attract a serious buyer.

Because of the nature of the business information in the memorandum, you should have all prospective buyers agree to preserve the confidential information through the use of a confidentiality and nondisclosure agreement.

One of the reasons that valuation methods for the sale of a law practice are not often readily available is that such a sale was considered a prohibited transaction for so long. Fortunately, there are professionals who can assist an attorney who is preparing their law practice for eventual sale.

Your law firm has assets that are both tangible and intangible. Tangible assets are those that physically exist and have some value (although their value may be diminishing over time). Examples of a firm’s tangible assets are furniture, equipment, supplies, books, software, work in progress, and completed work that has yet to be billed.

A firm’s intangible assets are also important to the sale of a law practice. Although a buyer may not always recognize them, a seller who has put many hard years into developing a successful law practice may recognize these and understand the value they bring to a law practice. Examples of intangible assets may include a well-known address or an often-used phone number, or the firm’s unique history within the community, or its reputation for producing quality work.

There are professionals in business, banking, and accounting industries who are qualified to review your law firm and to help you determine a sale price for your law practice. It is important to find an experienced business appraiser when trying to determine the sale price of your firm. Although the eventual “number” that the appraiser gives you may not be the eventual sale price of the firm, it will provide for you a reasonable starting point based upon a qualified assessment of your law practice.

The sale of your practice will take some time from beginning to end, so give yourself an appropriate amount of time to prepare yourself, and the firm, for the sale and to find the right buyer. Consider the fact that there are several phases to the sale including: determining the value of the practice, advertising for a buyer, preparing a confidential memorandum, negotiating the sale, and transferring the practice to the new owner.

Todd Scott is the Vice President of Member Services for Minnesota Lawyers Mutual Insurance Company. He is a recognized author and lectures nationally on the topics of malpractice, ethics, and practice management systems. Mr. Scott had previously served as Attorney/Claims Representative for MLM, and was the head of their technology subsidiary, Mutual Software. He is a a member of the Minnesota State Bar Association, where he serves as Co–Chair of the Practice Management & Marketing Section, and the Nebraska State Bar Association.

© Copyright 2008, American Bar Association.