General Practice, Solo & Small Firm DivisionMagazine

 
Volume 17, Number 1
January/February 2000

Law Firms for Sale...Everyone Benefits

EDWARD POLL

"My practice is personal. My clients will move with me wherever I go, but my practice has no measurable value to anyone else." Sound familiar? This is one of the ingrained beliefs that helps explain why lawyers miss the opportunity of "selling" their practices, even when moving laterally to another law firm.

With more than two dozen jurisdictions now having provisions permitting the sale of a practice (and with more states considering proposals similar to ABA Model Rule 1.17), the benefits of buying and selling law firms are increasing-for everyone.

Take the tax impact, which for both sides of the bargaining table can be significant. If "goodwill" (the expectation of continued business or patronage) is part of the sales package, the moving lawyer receives favorable tax treatment when the goodwill portion of the sale is taxed at the lower capital gains rate instead of the higher ordinary income rate. At the same time, the buying party, whether a firm in the case of a lateral move or an individual, cannot write off the payment portion allocated to goodwill as an expense where otherwise it would be deductible if paid as salary. This is the typical conflict between buyer and seller during negotiations. (It's also one reason why some large firms fail to support the movement to recognize goodwill for lawyers. Instead, they make it clear that they will not pay for any goodwill to a lateral partner. At the same time, they admit that they will not accept the lateral partner unless he or she has a "book of business" or client following.)

The benefits of selling a law practice go beyond lateral partners and sole or small firm practitioners. I recently spoke to a lawyer in a small state that now permits the sale of a practice. This lawyer was excited about the opportunity that new law school graduates will have to "indenture" themselves to experienced practitioners who may want to retire in several years. Contract negotiations can provide for the eventual transfer of the practice to the younger lawyer.

It reminded me of those television shows where the new M.D. learns from and ultimately steps into the shoes of the older, more experienced practitioner. Maybe all this buying and selling of law practices will rejuvenate the mentoring process that has all but disappeared from the legal profession because of the pressures for more billable hours and higher revenue that leave little room for teaching new lawyers.

CLIENTS BENEFIT, TOO
Whether we look at this buy-sell issue from the perspective of a new lawyer connecting with an older lawyer or the older lawyer developing an exit strategy so that his or her spouse will benefit from the professional (capital) asset, the net result is that clients will also benefit. Why? Because someone who is interested in their well-being will take over the practice. The client won't be stranded-forced to look for another competent, interested lawyer.

Who better to help clients than someone who has paid for the privilege to serve them? Who better to assure that the needs of the client are conveyed to the new lawyer so that the attorney-client relationship is protected than someone who has received money for his or her practice? Even in a lateral move, the moving lawyer may be motivated by the desire to bring more resources to the table. Thus, there is self-interest on everyone's part to learn the needs of and to protect the client.

WHAT'S IT WORTH?
So how much can a lawyer expect to be paid for a practice? There are, of course, many methods of estimating financial data and marketplace guidelines, but no amount of analysis will determine the precise price a willing buyer and a willing seller will accept. That figure is subject to myriad factors, including terms of payment, geography, nature of the practice, history of client retention by the selling firm, and size of the practice.

Whatever the price, a key issue for the buyer is whether there will continue to be revenue generated by the practice. One way to handle this is to have an earn-out or payout pegged to actual collections. The buyer only makes payments when and if revenue from the practice is received. This will motivate the selling lawyer to help the buyer retain clients. Of course, sellers who want to merely "cash out" and be gone must first overcome their reluctance to accept this idea.

Can every practice be sold? Maybe not. Some practices are so small and so personal that without a continuing involvement of the first lawyer, a second lawyer would not succeed in keeping the clients. However, even the smallest and most personal practice might be saleable for the right price and under the right terms. If the buying lawyer is confidant that he or she will actually receive what is negotiated-a practice with a certain volume of revenue or client base that is stable for a designated period of time-a sale would be highly likely even for the smallest firm.

Until individual lawyers begin to believe they have a valuable asset that they can transfer, the fiction that law firms have no value will persist. If, however, you believe that there are few unique legal matters, and that the law is becoming a commodity business, it is easy to understand how an individual's practice can be transferred to another person with little loss of revenue.

And to everyone's benefit.

Edward Poll, J.D., M.B.A., CMC, is a certified management consultant in Los Angeles who advises lawyers and law firms on how to deliver their services more effectively while increasing their profits at the same time. He is the developer of The Tool Kit for Buying or Selling a Law Practice. He can be reached by e-mail at edpoll@lawbiz.com.

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