The top four trends in law firm sales for the remainder of 2023 and beyond consist of the following:
(1) Most would-be internal successors do not want to purchase law firms from the senior partners who originally hired them;
(2) Growth by acquisition has arrived to the legal industry;
(3) The Post-2020 3.0 Digital Era will continue impacting the value of senior attorney-led law firms;
(4) Law Firm Sales 2.0 has begun, which consists of a fixed price in consideration of a law firm’s digital value and brand equity, plus earnout payment terms.
In May 2023, the New York Times reported that “[o]f the $84 trillion projected to be passed down from older Americans to millennial and Gen X heirs through 2045, $16 trillion will be transferred within the next decade.” In addition, in its 2022 Profile of the Legal Profession, the American Bar Association reported that as of January 1, 2022, the United States boasted approximately 1.3 million lawyers, of which approximately 13% are 65+ and another 18% are between ages 55-64. Taken together, circa 500,000 lawyers in the United States have practiced 30+ years (senior attorneys), many of whom have begun wondering: (1) What is my law practice worth? and (2) Who can purchase my law practice?
Law firm valuation post-2020 consists of the cumulative value derived from the following components: (1) the firm’s client; (2) the referral sources who refer clients to the firm (together with the client list, the book of business); (3) the good will that a senior attorney and a senior attorney-led law firm has earned over the course of decades locally, regionally, and sometimes, nationally or even internationally; (4) the subject matter knowledge that senior attorneys have developed in their given practice areas; and (5) the firm’s digital value.
Logically, associates or partners at a senior attorney-led law firm should view purchasing the practice from its owners as a proverbial no-brainer because internal successor lawyers satisfy the following four “knows:” (1) Know the clients; (2) Know the referral sources; (3) Know the law; and (4) Know the staff. However, when asked to buy a senior attorney’s practice, internal successors often say “no thanks” for these reasons: (1) They joined the firm as a key employee and want to remain an employee; (2) They went to law school to practice law and not business school to become a small business owner; (3) They cannot afford to purchase a law firm based upon an overwhelming number of personal expenses, including home mortgages, ongoing student loan debt, car expenses, saving for retirement, raising children, etc.; and (4) Even though senior attorneys express interest in retiring, most would-be internal successors assume that their boss will never retire.
Private practice law firms in America share the following common need to sustain growth: Clients.
Growing law firms recognize that acquiring a senior attorney-led law firm presents the following benefits: (1) Instant client growth; (2) The addition of well-trained attorneys, together with non-lawyer staff (paralegals and legal assistants); (3) The cumulative expertise in multiple practice areas that senior attorneys have developed; and (4) The marketing value that senior attorneys present, including the potential for troves of new content that growing law firms need during today’s Post-2020 3.0 Digital Era (See, Trend #3).
In the author’s experience, when growing law firms acquire senior attorney-led firms, they do so primarily via Law Firm Sales 1.0, which involves negotiating an earnout price, the terms of which typically consist of: (1) applying a fee sharing percentage to the collections derived from a selling firm’s book of business; and (2) assigning a number of years to which the fee sharing applies.
Society’s digital pivot during 2020 accelerated a shift in behavior by consumers of legal services (clients) from seeking word-of-mouth referrals to more convenient means: searching for lawyers via Google and additional digital resources such as Facebook, Instagram, LinkedIn, YouTube, TikTok, and more, all of which potential clients have easy access to by simply tapping their smartphones, today’s version of “let your fingers do the walking.”
As Jason Hennessey writes in his 2021 book, Law Firm SEO, Exposing the Google Algorithm to Help You Get More Cases, “Google dominates 87 percent of search engine market and web traffic. If a potential client searches for a law firm, about nine out of ten times, they’re using Google.”
Considering the importance of the client list to the value of a law firm, today’s senior attorneys need to either: (1) Supplement their Pre-Google 1.0 Word-of-Mouth Era business development efforts with multi-channel digital marketing; or (2) Consider merging or selling their practices to digitally committed, growing law firms that want and need the Books of Business that Senior Attorneys offer, plus their untapped digital value (egs. e-newsletters, podcasts, YouTube videos, LinkedIn posts, Facebook groups, etc.).
Otherwise, those senior attorney-led law firms that continue maintaining a pre-2020 status quo approach to business development will not replenish their client lists at a similar pace as yester-year, which will negatively impact the value of their law firms on a going forward basis.
Since the emergence of law firm websites in the 1990s and the introduction of customer relationship management (CRM) software, law firms have begun collecting and tracking data analytics capable of attributing the percentages of new clients to their digital marketing efforts. Also, post-2020, the scope of such data analytics has significantly expanded as law firms conduct multi-channel digital marketing to attract the attention of today’s modern client, who relies more on “Uncle Google” when searching for a law firm than asking their Uncle Mike or Aunt Judy for a referral. In addition, law firms have begun developing brand value by adopting trade names and reducing the number of surnames for those firms that continue utilizing a surname approach to their law firm names.
By maintaining reliable data analytics with respect to client development, selling law firms can now make the proverbial case that their law firms have quantifiable digital value and brand equity, as compared to value limited to the good will of particular lawyers at their firms. As a result, Law Firm Sales 2.0 has arrived, in which sellers and purchasers have begun negotiating fixed prices attributable to a selling law firm’s digital value and brand equity, plus an earnout price.
As approximately 40% of lawyers in America head towards retirement, law firm sales will continue increasing nationwide. Even though internal successors typically do not want to purchase a senior attorney’s law firm, growing law firms have already begun realizing the benefits that growth by acquisition presents, including the instant client growth that senior attorney-led firms offer.
As the 2020s continue, those law firms that do not adopt multi-channel digital marketing risk sustaining client growth at a pace comparable to the pre-Google word of mouth era, which will negatively impact the value of their practices. By contrast, those law firms that continue developing digital value and brand equity will benefit from fixed pricing at future law firm sale closings now that Law Firm Sales 2.0 has arrived.
