How to Sell Out – The Right Way, November 2009
How to Sell Out – The Right Way, November 2009
Aug 19 2010, 02:58 PM
Joined: 17-July 09
Member No.: 125
from Lawyers USA
The global financial crisis and recession have created great apprehension for lawyers in small firms and solo practices, who have seen savings shrink dramatically and fear they may outlive them if they don’t continue working. Such lawyers may think retirement is only feasible if they significantly reduce the expectations and standards of living that they anticipated not long ago. However, senior lawyers in small firms may be better able to retire than they realize because they have something of value to sell: their practices.
As the starting point for selling a practice and retiring, ask yourself what you want to do with the rest of your life, and whether you actually want to retire. The value of your practice may be more or less than the amount of money you want for your retirement standard of living. The more urgent is the desire to sell, the lower the price will likely be. Not every law practice is salable. Some practices are so small and personal in nature that the purchaser might not succeed in keeping the clients. This, however, is a rarity. Even the smallest and most personal practices might be saleable for the right price and under the right terms, especially those with solid clients and little debt.
How do you let it be known you want to buy or sell your practice? Business opportunities brokers, law firm management consultants, accountants, valuation firms and appraisers are excellent resources to spread the word about buyers or sellers. A professional consultant, involved in selling law practices, knows how to sort through the many non-qualified potential buyers to get to the few who actually do have the means and motivation to buy the law practice.
Negotiating the Sale
Negotiate the sale by looking at the future and the expected future earnings of the practice. Many people believe that the price to be paid must be based only on this figure as generated by the existing practice, but you can also include future earnings that may be based on the buyer’s talents brought to bear on the purchased practice in some cases. However, it’s generally preferable to sell on a fixed, set sum. There can be bonuses and payment terms that take into account the buyer’s valuation concerns.
Purchasing attorneys may well prefer to take advantage of their own efforts to increase the revenue and reap the rewards, usually with an appropriate involvement of the selling attorney during a transition period. While many lawyers believe there should be a percentage of revenues paid and not a fixed fee, this approach locks both sides into an agreement that allows no upside for a buying lawyer. Both parties' concerns can be addressed with a fixed sum. And this also moves away from ethical concerns about selling files, which is illegal.
One of the thorniest issues in selling a practice involves the issue of goodwill and how to value it. “Goodwill” in this sense is the reputation, client base and client loyalty that the selling lawyer has created over the life of the practice. The issue of whether goodwill exists mainly has been limited to the selling negotiations. Typically smaller firms understand the value of their client relationships and reputations and, when negotiating for the sale of a practice, discuss compensation for goodwill. However, larger firms argue that there is no goodwill and will walk away from a transaction if the "seller" wants to be compensated for their goodwill. The parties may not talk about goodwill; they may say there will be no deal if the seller insists on goodwill. Often, however, there is a "credit" for a factor that might be analogous to goodwill in terms of the cost of the capital buy-in. There has to be some adjustment for this factor, regardless of what it is called.
Goodwill issues illustrate that a business is worth only what someone is willing to pay for it. Valuation may be different at different points in time, and valuation and price may not be the same thing. But the fact remains that ever since the American Bar Association affirmed (in 1991) that an entire practice could be bought or sold, and permited (in 2002) the sale of part of a practice, every practice has some inherent value that can be sold. After investing years of hard work and financial resources in growing the practice and building goodwill, it is the lawyer’s privilege to reap the benefits of that investment.
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