Life Beyond the Briefs
At Life Beyond the Briefs we help lawyers like you become less busy, make more money, and spend more time doing what they want instead of what they have to. Brian brings you guests from all walks of life are living a life of their own design and are ready to share actionable tips for how you can begin to live your own dream life.
Life Beyond the Briefs
Unlocking the Sales Value of Your Law Firm | Jonathan Hawkins & Ed Alexander
Looking to accelerate your law firm's growth? Forget the slow grind of traditional marketing. Firm acquisitions might be your smartest strategic move.
In this eye-opening conversation from the 2024 Great Legal Marketing Summit, attorneys Ed Alexander and Jonathan Hawkins—who have closed 24 law firm deals since January 2023—reveal why buying an existing practice delivers faster growth, instant client acquisition, and remarkable ROI potential of 33-40%.
We're facing an unprecedented moment: as baby boomers retire, $5.1 trillion in business value (including countless law practices) will change hands. For forward-thinking attorneys, this creates extraordinary opportunities to acquire established revenue streams and apply superior business systems for dramatic growth.
The speakers break down everything you need to know about law firm transactions: which types of firms are most valuable, how valuations actually work, what makes a practice truly sellable, and real deal structures they've used to close successful transactions. They distinguish between "process firms" (high-volume, systems-driven), "relationship firms" (ongoing client engagement), and "brain surgery firms" (bet-the-farm matters)—each requiring different acquisition approaches and commanding different values.
Whether you're looking to grow through strategic acquisition or preparing your own firm for eventual sale, this episode delivers crucial insights about maximizing value. You'll learn why the less owner-dependent your practice is, the more valuable it becomes, and why starting exit planning 5-10 years in advance gives you the runway to build a truly valuable asset.
Ready to transform your growth trajectory or create a valuable asset you can monetize down the road? This conversation gives you the roadmap to make it happen. Subscribe now and discover why the most successful attorneys are thinking beyond marketing to build practices they can truly capitalize on.
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Brian Glass is a nationally recognized personal injury lawyer in Fairfax, Virginia. He is passionate about living a life of his own design and looking for answers to solutions outside of the legal field. This podcast is his effort to share that passion with others.
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Hello, my friends, and welcome to a special episode of Life Beyond the Briefs, the number one podcast for lawyers choosing to live lives of their own design and create practices they actually want to show up to on Mondays. This is going to be the last of the recent or the last of the May episodes that are recordings that are non-interviews. I have built up my bank of interviews and we're going to be getting brand new content out to you here shortly, but I want to share this episode with you. This is another recording on the 2024 Great Legal Marketing Summit.
Speaker 1:It's a discussion between Ed Alexander and Jonathan Hawkins, who are lawyers, who represent lawyers in the buying and selling of law firms, and so if you've ever thought about buying a law firm or selling yours someday, this is the conversation you didn't know you needed, and in this episode, jonathan and Ed break down what's quickly becoming one of the smartest strategic growth moves that any lawyer can make acquiring a practice.
Speaker 1:These guys cover why acquisitions are often cheaper and faster than growth by traditional marketing. What makes a firm actually saleable and what doesn't. Real deal structures from real deals they've actually closed. There's so many people talking about this stuff who have never done it. These two have actually done it. The three types of law firms and which ones sell the best, and the truth about valuations, earnouts, sba loans and why Goodwill matters more than most lawyers will ever realize. So, whether you are two years or 10 years from exiting your law firm, retiring and heading off into the sunset, this is a must-listen episode from two of the most active dealmakers in the law firm space today. Let's get into it.
Speaker 2:Who here thinks you can sell a law firm Can? Does anybody here think you cannot sell a law firm? Okay, good, good, all right, anybody here actually buy a law firm? We've got one. Has anybody sold a law firm or a practice? So the title of our talk is about acquiring practices for strategic growth. But what we talk about also can apply for anybody who thinks maybe one day they want to sell. So you're going to think about what a buyer is going to be looking for and then you can design your firm potentially one day to sell. So questions you know we'll take questions at the end, but if you have questions throughout, please ask. We want to make this as informative as we can for you guys, and so let's start with sort of the opportunities that we have now as law firm owners. So, ed, why don't you take it away?
Speaker 3:So, from an opportunities perspective, the purchase of a law firm really solves some problems that a lot of attorneys experience. That'd be, you know, kind of this concept of growth right Instead of having to grow organically and pay a lot of costs associated with marketing, that you really acquire kind of a chunk of revenue and a chunk of clients all at once. It also addresses a problem of finding good people, because if there's a practice you're buying and it's operating well typically or almost always, the that people go with, and then, honestly, just buying that revenue and putting it into your current systems really works out pretty well. I think the thing to remember here is that right now we're in a time when I don't know that we'll see this again, but the baby boomers are all aging, right, so they're all now 60 or older, and so what we're going to see is a massive transfer of wealth. Right now there's $5.1 trillion in businesses, which is about 11 million businesses themselves that are going to transfer Obviously not all law firms, because that includes all different businesses. A lot of those businesses will go away and there's an opportunity there to have those businesses acquire those.
Speaker 3:But you know, at the end of the day, this transfer there's going to be a lot of law firms and a lot of businesses generally that come on the market and then you know, being here at the GLM conference, you're learning great marketing skills that now you can overlay on these practices, right. And you've got to remember that in the group that we're in here, we have a completely different view, because we're looking at people who have really good business management skills. But most attorneys do not have good business management skills, good business management skills. So the opportunity for you is to acquire a practice that maybe isn't run as well and then apply these skills to that practice so that you're buying the revenue at a multiple and then you're able to increase that revenue and probably increase the profitability as well. So a great option there, and then you know.
Speaker 3:The other thing to remember is that as a law firm, your return on investment as the owner of that law firm should be somewhere between 33% and 40%. So for every dollar that comes in, 33 to 40 cents should fall to the bottom line. Now that includes owner compensation, right. So if you buy a practice and you either have one of your team members or you install somebody in to run that practice and to do the legal work, then you should see about 25 to 30 percent as a return on investment, and there's not many opportunities to get that type of return on investment in today's market.
Speaker 2:So just a couple more things, Some strategic reasons why you might want to buy a practice instead of trying to create it yourself. Maybe you want to expand your practice areas. I've represented a number of plaintiff's firms that did not do workers' comp, for example, and they wanted to get into that. And it is easier to sort of grab an established practice instead of trying to build it up on your own, and it's faster. You can just sort of get an existing practice. It's got revenue generation. Another strategic reason is sort of geographic expansion. If you want to go another city, it's easier if you acquire someone who's already there and you know obviously you want more clients. You know, during COVID it was hard to get talent, it was hard to get people, and so law firm acquisitions climbed during COVID and the play was just to get the people. So there's lots of reasons to do it, not just to grow your practice or just get more money. Obviously we all want some more money.
Speaker 3:Just one thing to add too is you know, if you are acquiring a complementary practice, you can then take your current existing relationships and then apply them to that practice Right. So you're you're buying the ability to do that and then apply the goodwill that you currently have with your clients and referral sources to that practice area so you can get more out of it.
Speaker 2:All right, so yeah. So why listen to us? Who are we? I'm Jonathan Hawkins, founder of Law Firm GC. We represent law firms from formation to disillusion and everything in between, and part of what we do is buying and selling law firms. You know, and it's been pretty active over the last year this past summer, our firm closed three deals, two acquisitions of plaintiff's firms. One was a full acquisition, one was a majority stake in a pretty big, established practice. It was a big transaction and we actually sold a bankruptcy firm. Well, they had three offices and they spun one of them out, sold it to one of their senior associates, got rid of that. So this is happening. I know Ed's done a bunch too. He can tell you about some of the deals he's done.
Speaker 3:So since January of 2023, so over the past 21 months we've done 24 law firm deals. 60% of those were what we call internal sales, so the buyer came either an associate or was inside the firm some way partner, that type of thing and then 40% were external. Of the internal sales, greater than 90% of those actually get to the closing table. Of the external sales it's closer to about 50% and unfortunately, you know when we're representing buyers, the buyer will find some problems and you know eventually that just craters the deal. So at the end of the day, the takeaway is this is happening quite a bit right now.
Speaker 2:And I'll just add we'll get to some of this later. But just because it's happening a lot, just because the opportunities come across your desk doesn't mean you should actually take all of them. So we'll get into some of that.
Speaker 3:So when you say not following through, I so you just said that if an external buyer could be sending a deal close which I assume you could too that's right. So the reason they don't is there's a fundamental flaw with the firm right. So an example would be one that just recently died. The associate left right as the deal was coming together, and so the new buyer cannot produce the same level of revenue without an associate, and wasn't willing to take on the risk of hiring a new associate and getting them trained up, and then the seller wouldn't adjust the price because now the revenue was completely different. And is that?
Speaker 1:trend of these deals external deals falling through on the rise or on the decline.
Speaker 3:I think that's a pretty standard number. I don't think it changes all that much. The International Business Brokers Association, their statistic is that 20% of businesses that are offered for sale actually sell. The other 80% do not and it kind of tells you. If you think about law firms in general, right, some of them have just fundamental problems and you can't overcome those or you can't overcome the owner's thought about how much the firm is worth.
Speaker 2:So okay. So what is it that you're acquiring? You know most people think of when you're selling a business you're getting the whole business. In the law practice it's a little different, obviously. We're all in it. You know one thing you're going to get existing inventory of clients. That's good, but that's really not enough to make. Well, you know you're going to pay less for that.
Speaker 2:You know the things that, as a buyer, you want to look for. You know strategic reasons to buy it. So what sort of assets do they have? What's the brand? You know what sort of volume or practice area is it? Do they have systems? Do they have certain soft IP? Do they have trademarks that maybe are valuable? You know, here at GLM we've been taught and we learn how to build all these marketing systems. Tim, yesterday on stage, you know what those guys have done is just really impressive. I mean, they've got so many different channels, that just sort of flow that to me as a buyer would be extremely, extremely valuable? I know Tim does a lot of it, he's in charge of a lot of it, but it can run without him. Sorry, tim, but that's what you want, that's what you want. That's what you want. So you know, as you guys out there are building your firms, thinking one day you might want to sell, continue to build these sorts of assets, because that is what I would want or what a buyer would want.
Speaker 3:And I would say on the building side, one of the most important things you can do is have really good financial records, because that's what the buyer is coming in looking at. That's how they either become comfortable with your firm or they get scared away from your firm.
Speaker 2:So let's talk about sort of the types of firms that are out there. So Ed's got a pretty good framework for that. So why don't you explain that?
Speaker 3:So I look at law firms in three types. There are process firms, there are relationship firms and then there are brain surgery firms. So if you think of a process firm, it's high volume, low cost. The relationship firm is more of an ongoing type of client relationship, going type of client relationship. And then the brain surgery firm they handle the bet, the farm type transactions or litigation matters.
Speaker 3:And if you look at brain surgery firms they're really centered around typically one person or a small group of people and so those are the most difficult to actually transact and for those you have to have an internal sale because you've got to have people coming up who are who can? The owner, the brain surgeon, can pass the baton to that person. Right, we did one of those in a criminal defense area and the associates. So we had, we did the internal sale, the associates were the one who came in and the passing of the baton took five years to actually make that happen. And then the easiest one to sell would be the process firm. Right, because that's all about management, it's all about cost maintenance.
Speaker 3:The ones in the middle are most firms are in the middle and that requires that transfer of goodwill.
Speaker 3:Right, because essentially the brand, the client relationships, the referral relationships tend to be centered around one or two attorneys, and so we typically have that attorney remain of counsel with the buyer post-closing and that we set up a process for introducing the buyer to the referral sources and sending out information to the clients and developing the newsletter with now two pictures instead of the one, that type of thing. So we're slowly putting it together so like a bankruptcy firm or a no fault, the forced firm, you know that type of thing. So some PI practices can be that way, and the one that I would say is like a Morgan and Morgan would be the perfect example of that. Yeah, very high volume, very, you know, low cost oriented. It's really difficult to do that under one roof because the process firm requires really low costs. It's just about moving things along fast and the relationship firm is usually let's deal with this Now in a PI firm you might have different departments, right? So you have the high case value would be in a different department than your typical ordinary garden variety injury.
Speaker 2:And so to piggyback on that. So PI firms, I say the advertising firms, the TV advertising firms, in my view. I say the advertising firms, the TV advertising firms, in my view largely are the process firms. Some of them have trial departments but they're not like the boutique trial lawyer firms, right, that do super low volume, high dollar cases. Typically the process firms are easy in my view. So the one I did this summer where a majority stake was sold was an advertising firm and it was sold to another law firm, the majority stake so, and they just I mean they just bought majority ownership in it.
Speaker 2:The process firm is continuing to operate under its brand. Owners are still on, yeah, and that's what they wanted, that's what the owner wanted, that's what the buyer wanted. Stay there and keep running this thing the way you've been doing it. And then, of course, I won't get into too many of the details, I can't, but there were reasons why it made sense for everybody and it was a sizable chunk of cash check at closing Cash, lots of money. And so it's being done.
Speaker 2:And I would say too, on the brain surgery firm, a traditional sort of sale. I agree it's hard to sell, but there are sort of alternative structures you could do. I've seen you know you've got we'll do trial lawyers still. So you've got a really good trial lawyer that just doesn't want to run his firm, wants to plug in somewhere, try a few cases in a year, has a great reputation, can bring in cases and just wants a place to sort of park. So it's sort of an acquisition but it's really, you know, might be enough counsel or whatever. They just go to another firm.
Speaker 2:It works for everybody because they don't want to deal with running a firm anymore and they just want to try some big cases. And then the acquirer is like hell yeah, bring them in. So there are ways to do it. The other thing I'd add on the spectrum of the process to brain surgery is we'll get into this too, but the valuations are going to be very, very, very different. The process firms are going to be at the higher end of the valuation and again it's because they just run. You're buying a revenue stream where, if it largely depends on the owner, because if something happens to the owner that you're buying revenue stream, where, if it largely depends on the owner, because if something happens to the owner that you're buying, it's done. So the process, are easier to sell and often sell at a higher level.
Speaker 3:Yes, so build that you know it's interesting. The transaction that Jonathan talked about is almost. If you think about it, it's really a private equity transaction, because that's exactly what private equity does. They come in, they buy a majority stake, the owner stays on for a 20% or 30% interest and then is bought out subsequently. So the opportunity there is obviously. Private equity can't come in and buy your practice, but you can act as your own little private equity and go in and buy too. Yet Yet.
Speaker 2:Yet Now we are seeing some. I'm seeing some structures that are sort of being floated around and that are non-lawyers buying into law firms or sort of. Of course, arizona here is like, yeah, it's easy. Yeah, arizona here is like, yeah, it's easy, and I think probably I could be wrong, but I really feel like over the next decade it's going to spread just about everywhere. I mean, it's been in DC for a long time. Arizona is just wide open and it's going to put pressure, I think, on the other states. They're going to be the holdouts for sure, but I think it's going to crack. So, you know, in my view, you got 10 years probably where we still have these regulatory moats to help protect the outsiders while we build these things, but by you know, within 10 years I could be completely wrong, but I feel like it's going to start really opening up. So for you guys that are building firms, and they're already trying to make inroads.
Speaker 3:now they're coming up with alternative structures, like they did in medical and dental. So that's a separate topic.
Speaker 2:All right, so what to look for if you want to acquire a firm. Why don't you take that?
Speaker 3:I want to start off with what not to look for, right, or what to avoid, okay. So there's a lot of true solos out there that have no systems, no support, no people, right? So if you are interested in that type of deal, that's completely contingency-oriented, right, and I don't mean contingency fee, I mean the entire payment is contingency oriented on the clients that come over and the revenue generated by those clients. You know the. I mean you guys know all these, so because you're GLM members but you know the lawyer is a sole intake person. This is a huge problem if they're going to retire because nobody can do intake for them. I also the shag carpet and the paneled walls, right. So you know the piles of files on the desk. That kind of thing. Not really a business is really what it amounts to, okay. And then one that I've encountered so many times I'm absolutely shocked about is no electronic database of clients, right. So if you don't have that, that's kind of the. To me, that's table stakes today. You've got to have that, because otherwise what you're ending up doing is you've got to hire somebody, put all that data in. You've got to hope that data's right. It's probably only the last year to two years that it's going to be worthwhile, because people move and change and all of that.
Speaker 3:So the other thing that a lot of people don't think about is EIDL loans. So these are economic injury disaster loans that were made by the SBA after COVID, and so these were 30-year loans that are at really low interest rates. They were given them out like candy and so you encounter those, and what happens is you know, the lawyer got a loan for one hundred fifty thousand dollars or two hundred fifty thousand dollars. That's going to drive the cash that has to be put into the deal, because you've got to clear that loan, you've got to pay it off. It's a lien on all the assets. Now we have some ways to try and get around those. John and I were talking about those the other day. You might be able to, but it's not going to be a simple transaction. Just know that. So that's one thing I would look for right away, because a lot of law firms have those.
Speaker 2:So same topic, but some red flags. You find a firm looks great, seller's like I want this closed in three months. If they want out fast you should be thinking something's wrong. It doesn't necessarily mean there is, but you got to wonder about that. You know, I had a deal fall through earlier this year, made lots of sense. This guy wanted out, of course. He wanted his cake and eat it too. He wanted a high salary. He wanted all this payment guaranteed. When we asked for things in return, he really pushed back. It got to the point where we thought maybe this guy had some terminal illness that he wasn't telling us about and he's just basically give me all the money now and I'm going to get out. So that deal thankfully did not close. My client was the acquirer. He said I'm not doing it. So it was very tempting for him to push through and get it done. But luckily he said no. And me as an attorney you know I was saying maybe there's a problem here, but I'm not going to be the deal killer. So that one did not go through.
Speaker 2:So here I've got a due diligence checklist. It is very, very, very, very extensive. It might be too extensive for every deal you're looking at, but it is very over-inclusive, extensive. It might be too extensive for every deal you're looking at, but it is very over-inclusive. There's a lot of stuff in there that you know. If you ever want to acquire a firm, these are some of the things you want to ask for All sorts of documents, information, etc, etc.
Speaker 2:And the one thing I'll say too I won't go into detail, but as you go through one of these deals you know we do have certain ethics rules that apply about disclosure of client information and confidential information. So there you've got to be careful about the ways you get the information and also the timing. So, for example, certain, certain data for a firm, you probably would save till you've gotten far enough along in the in the process before you sort of hand that all over, at least as a seller. But yeah, if you scan that you can get that due diligence list Again. It's long, so don't let it scare you.
Speaker 1:Hey, it's Brian Just coming in for a second to let you know that there's a question from the audience at this point. The audio is not very good because we didn't have a microphone that was passed around. So the question is basically asking Jonathan to back up and take a look at retiring lawyers who may have medical issues. And the question is if you have a law firm that you're trying to buy from a lawyer who has a medical issue and you can get that lawyer out of the business and you don't need his or her help continuing to run the law firm, is that lawyer's health an issue in the sale of the asset?
Speaker 2:It really hasn't. So one of the reasons why I started to think something was wrong the seller wanted key man insurance, all these things on our guy in case he passed away to make sure that the funds would get paid. And we said, well, we want the same thing for you. And he was like, uh, so he just he pushed back on that it was. It was a little odd to me Uh, now, some people you know are uninsurable, so I get it. Uh, some insurance is really high, but he, he just said no, and it was.
Speaker 2:It sort of raised some flags to me and usually if an attorney is going to stay on, you need them to stay on. We'll get into this a little later to help with some of the transition. That would be something as a buyer, I would ask for to protect my downside. And if the seller is pushing back on that without really giving a clear, legitimate reason, that would concern me. Did you have? Okay, absolutely, absolutely. So everything we're talking about on the acquiring side. Think of it the opposite if you're selling it, you know if a buyer comes to you, what are they going to be asking for and that you know. We'll get into some of this too. But it's like cleaning up your books, cleaning up your finances. The cleaner your firm is and the easier it is to pull the stuff and hand it over, that the more comfort a buyer is going to have. If they ask for these things, you're like, oh, I don't have it, I've got to put it together, they're going to think you're disorganized. I don't want to buy into that.
Speaker 3:So good question. The mindset of attorneys buying is typically extremely conservative, right? So you want to dot every I, cross every T. You want to make sure that they find nothing you haven't already told them about. You want this process to be smooth so that they feel comfortable, because they already come in with a scant view of what they're doing. Right, this idea of there's got to be something wrong here and I'm going to go ahead and find it, of there's got to be something wrong here and I'm going to go ahead and find it.
Speaker 2:Go ahead, I don't want to screw you guys up, okay, all right, we're about to touch on the question that everybody here this is the only question anybody wants to know about. It's the first question anybody asked me how much is it worth? How much is the firm worth? So I get that question. I've gotten it while I'm here, but I get that all the time and my smart-ass answer is it's worth whatever. Somebody will pay for it. But Ed's got a more nuanced, a more detailed statistical way to approach the valuation.
Speaker 3:So, ed, why don't you explain? So the value of any business, a law firm or anything, is the cash flow that's come out of the business over the past few years, what's expected to go forward and the risk of that cash flow continuing forward. So the first part of that is pretty much a mathematical equation. We take the financial statements or the tax returns better, the tax returns and we back out everything that went to the owner, right? So whatever your comp is, that comes out. Whatever the tax is that comes payroll tax that comes out. If you have health insurance, you probably wouldn't. If you're an S-corp, that would come out. You know, the pension plan contribution, the car, all of those things back out. The whole goal is to figure out what is the true earning potential of that law firm. So we take all of that out. Then we take out all of the financing things. So like, okay, you got interest in there, we back that out. Then we take out the non-cash expenses. Then we take out the non-cash expenses like depreciation and amortization, and then we look at it and we say, well, and this happens in a lot of law firms, I've got a working spouse who either doesn't get paid or gets paid below market value. So now we need to adjust for what the value is that that spouse provides or children. So the opposite is true Some people employ their children and they don't really need to employ their children. So we add that back in because that's an owner benefit. The bottom line that we get to is a cash flow called adjusted net earnings, and so that adjusted net earnings.
Speaker 3:Then we can go to data and we look at law firms that have sold over some extended period of time. I could talk about why it's extended, but just take my word for it that it applies no matter what the economic circumstances are. And we look at it. We compare the your law firm or the firm you're buying to those statistics and we figure out, okay, what's the multiple. So we take the cash flow, we multiply it by the multiplier and we come out with a value. Now the multiplier or the value, however you want to do it is then adjusted for a risk factor. So you look at it and you say, oh well, you know, adjusted for a risk factor. So you look at it and you say, oh well, you know, it's one individual. There's no team in place. You know any. You pick the risk factor. We can apply it and that'll either reduce or increase. Obviously there's a multiplier effect. Right?
Speaker 3:We talked about the, for example, the process firms. And so if we got a process firm and the owner isn't involved at all in the process firm, maybe we bump that up, but typically it's going to get bumped down and so that gives us what the selling range is going to be for the firm. And then what I do is I back into it. So I do a back-and-back approach and I say, okay, if the buyer is going to finance this transaction because most of the time they do finance a transaction then the business, the law firm itself, has to pay all of the expense associated with that financing and it has to pay for an attorney to come in and actually sit in that seat and get paid fair market value. And if we plug all that in and it works, we know we got a good pricing right. So it's the forward method and then we check it through the backward method there.
Speaker 2:So, ed, let me cut you off for a second. Here's a question I get a lot. You're probably thinking what's the multiple? What's the multiple? That's what everybody wants to know.
Speaker 3:The multiple varies depending on the gross revenue of the firm, and it can. So the multiple of SDE, or adjusted net, which I just said before, is going to vary anywhere between like a 1.7 and a 2.5. So it's a pretty vast range. We also look at gross revenue and put a multiple on gross revenue, and that typically doesn't go above one. It's somewhere between 0.75 and one is typically where you're going to be.
Speaker 2:So I don't know if this applies to anybody out here, but there are some firms that are getting into this sort of subscription or membership-type model, at least for part of their cash flow. And, generally speaking, if you can show that there is that sort of residual subscription income, that would be a higher value. That'd be much higher than the range you just gave right.
Speaker 3:Yeah, so subscription components are you know, you got to look at it standalone, right, because what is the service that's being rendered? So what's the profitability of the subscription component? Because sometimes they're lost leaders, right, Because what is the service that's being rendered? So what's the profitability of the subscription component? Because sometimes they're lost leaders, right, and that's really just kind of a different marketing avenue. But if you're making money off of it, yes, that's a much higher multiple.
Speaker 2:And you mentioned risk factors, tim, I'm going to pick on you again, but the numbers you went over in our mastermind group, that kind of data for a buyer, in my view would reduce the risk factors Because you can say we get this much revenue from these types of buckets and they don't necessarily rely again on you. It's just sort of the system and you can point to that and the more data you have, the more proof you can provide and the quicker more data you have, the more proof you can provide and the quicker you can pull it, the more comfort a buyer is going to get and, I think, the less risk that you're going to apply to the valuation Absolutely.
Speaker 3:Yeah, 100%, because, especially, we'll use Tim as an example, right, because he has his team out there doing this. It's not just Tim doing this, so that's a huge issue. John, have you guys ever served as expert witnesses for valuations? I do not.
Speaker 2:I'm not a valuation expert. I will say this too about valuations. In my view they are one data point, a starting point. It's not the value of a firm, and so I see this a lot. So you know they can get expensive. I mean there's a range. You can get, maybe a back of the napkin $2,000, $2,500 valuation up to I've seen them $30,000, $40,000. There's a huge range.
Speaker 2:If you're in a big city they're going to be more expensive than somewhere else. So maybe you can go to a smaller city to get your valuation. But I've gotten them back and sometimes the owner's like it's not worth this much and the buyer's like it's not worth that much. And then sometimes you have competing valuations Seller gets one, buyer gets one and it starts the negotiation, and so there might be some risk factors built into each of the valuations. But then you're going to be negotiating that anyway. So you know. The other thing I'll say is there are some firms that you know I call it back of the napkin valuation. They call for more of that approach than one of these really gigantic formal ones. You know a small firm. It's just not justified in my view. But maybe what would the income level be for a firm?
Speaker 3:where you would say it's not worth going through the process. So I would actually say it's by the transaction, right? Because if you're doing an internal sale, there's some negative tax effects that can arise by selling to an employee at less than fair market value, right? So the safest method is then to get an appraisal that would satisfy IRS requirements if you're going to be selling to people internally. If you're going externally, then we have the arm's length transaction rule, right? So obviously, if you're selling to your brother, that's not an arm's length transaction, but you get the point. Then, as long as you and the buyer come to, or you and the seller come to an agreed upon amount and everybody's happy, that's fine. I prefer the back of the napkin approach primarily because you know it gives people an idea of where to start, and just because an appraiser says it's worth X doesn't mean that you're going to get to X in terms of that.
Speaker 2:And the other thing about valuation. So he just mentioned sort of internal, external. So a lot of you people out here let me ask this how many of you are 100% on your firm OK? So at some point do you have senior attorneys or non-equity partners that are knocking, saying, hey, let me in, ok, so we'll, maybe we'll get into this? This is a long actually. We'll get to this in a second.
Speaker 2:So, in the terms of getting evaluation, I think that in that instance it's helpful, as the owner, you get some cover from a third party who's valued your firm, instead of just going to your senior attorney and saying, hey, it's worth a million, pay me a million, because what are you talking about? It's not worth that. So you have something to point to. So I would encourage you in that situation to probably get evaluation. Again, keep in mind that it's probably a starting point and your senior attorneys you know most attorneys are risk averse. We are sort of unique folks here. We are entrepreneurial, we're risk takers, we'll do it. Most attorneys are scared, shitless. They don't want to buy anything. You tell them you got to buy in and they don't want to do it, and so you got to convince them to do it. So we'll get into that in a minute, but I just put a pin in that.
Speaker 3:On that side. I'm doing a transaction right now where I'm, believe it or not, doing it for a business firm, and so it's really interesting because you know they come back and they deal with valuation all the time. So they'll come back and pick on my valuation the entire time and they're. Well, you know we should have this and we should have a discount and we should have that. And the bottom line is, if you're doing the internal transaction, you're going to be financing the buy-in, and so you know, from that perspective, you are doing your key employee or whoever it is that's coming in, hopefully a key employee a huge favor, because typically they would have to come out of pocket 10% at least in cash to buy in. And so you're financing that 100% and typically in the internal, and so this is good deal.
Speaker 3:So so, remember I said there were two components there is the, the mathematical component, and then there's the qualitative risk factor component. So what? What I did is because this is really the number one question we get we put down, I created this law firm value calculator and so so if you follow the link, it'll get you to the point where you can download it. It's got because of the way we do it, it has to have macros in it. So when you see macros coming up, it's not malware, it's just the calculation method, and if you have any questions, please give me a call on it. I'm happy to talk to any of you.
Speaker 2:And so the last thing I'll just say to sum up, sort of valuation from my perspective. You know, the less your firm depends on you, the owner, the more valuable it's going to be and everything that that means. You know, the less you're doing the legal work, the less you're running the day-to-day, the less you know you're doing the onboarding or whatever it is. So as you continue to grow, you know some of us like to try cases, so you're never going to remove yourself completely. But you want your firm to be in a place where you know you could sit on a beach for six weeks and the thing is still going to run. So the more you can get to that point, the more valuable your firm is going to be. So it's easier for some practices than others, but that's what. If you ever want to sell, that's what I would strive for.
Speaker 1:Hey, it's Brian Kutner one more time, because the audio isn't great on this question, which is when is the best time to start thinking about the sale of your law firm, and how much runway do you really have to give yourself in order to maximize the value that you're getting at the date of sale?
Speaker 3:So the answer is yes, I like to see it five to 10 years, right, Because you can make minor modifications all along the way. If you're two years out or three years out, you're making much bigger modifications to get to the point that you're two years out or three years out. You're making much bigger modifications to get to the point that you're saleable, right. And so the more time you give yourself I call it make time your friend, not your enemy, because the more time you give yourself, the better.
Speaker 2:And there's really there's two time frames here. There's one is getting it ready and then there's one is sort of like doing the deal. So getting it ready, I think a minimum three years, five deals ideally. But you know, for the younger folks out there starting now, if you've got 15 years, just keep turning the knobs and making it more and more valuable. And the thing is the other thing the side effect of making your firm easier to sell is you're going to make it more enjoyable, to run more profitable along the way, so you're going to make more money along the way too. Get going, get going.
Speaker 3:And more money means greater price, so that's always good too. The thing you got to remember in the background is depending on the size of your firm. If your firm is less than a million and a half, probably a max two million in terms of overall value, the buyer is typically going to be using SBA financing. Because if you go to a lender, you know lenders want some assets to back up their loan. So, unless you know, you have a free and clear house or something real estate that they can take, most of the time they're they're not going to do the deal because they want hard assets. So that's why you typically go to an sba lender.
Speaker 3:And so the way it works is a bank makes the loan and the sba guarantees uh, 70 or 75 percent I don't remember which one. It is 75, I think percent of that loan. So it has to meet SBA guidelines, and part of that is a little bit different way that they create that cash flow, the way they analyze that cash flow. So just be careful when you do that. That you're, you know, a few years out you have an idea of what the SBA lending requirements are, so that you're making sure you don't violate any of those. The one thing to remember right now, the way the SBA requirements are is you have to be gone in 12 months, and so this always puts issues into the deal, because the buyer typically doesn't want the seller to leave in 12 months, and so the way we deal with it is there is a 12 month of counsel agreement and you may renew it. You may not renew it right, that's your decision. But honestly, that that is the one. That's one big issue that comes up often with SBA.
Speaker 1:Another question in here from my friend, tim from Iowa off the top of your head, what are the top two or three things that make for a successful co-counsel relationship?
Speaker 3:Being very specific about what you want them to do, for how long you want them to do it right. So lunches, meet and greets, events typically I would say that I would go out a year. I wouldn't expect it to go beyond a year. We were talking about this earlier how, for most business owners lawyers included you sell your practice, you're in there for a period of time and then the buyer makes changes and you get irritated with the buyer, so it typically only lasts for a year. So try and get everything done within that one-year time frame.
Speaker 2:I would say I've seen it last forever Forever, I say so. I've done a lot of trust and estates firms. I've helped them and that's like a growth strategy is acquiring these retiring folks and usually we structure it as a three or four year sort of tail. And you know some. You know, for those kinds of firms it's all about the relationships. How do you monetize relationships? How do you transfer the relationships? That just takes time, and so part of what you're going to want in the agreement is a requirement that they're going to introduce you to everybody.
Speaker 2:I've had some firms where they acquire the person. They're like we don't want you doing any more legal work. That's part of the requirement. You're not going to do any legal work because we're going to do it our way. We think we're better than you and you know you're getting old and we don't want you messing anything up, so we're going to do all the legal work. All we want you to do is transfer your relationships and maybe bring in more work. You know, it's a good.
Speaker 2:I think it's a pretty good setup for maybe an attorney that's, you know, a solo that's got a bunch of relationships. They don't really want to do the work anymore, but they want to get paid and an of-counsel relationship, a true of-counsel. You can do fee sharing, fee splitting. It's different. It's not quite a referral fee but you've got to structure it and put the pricing and sort of the fee split in the right way. But it's something that could last forever.
Speaker 2:It's almost like an annuity for the retiring attorney. As long as they're bringing in the work, they just continue to get paid. If they want to really try to bring it in, they can get paid a lot. If they don't, if they just want to play golf all the time and not do that, they don't get paid anything. The other thing I've seen you know a lot of attorneys just as you get older, once you hit past a certain age, all your contacts are retiring, dying, all these things. It's just it's harder to to originate the business like you used to. So there's going to be a natural fall off anyway. But I think that could be a really good structure for firms and for the retiring attorney and I would not necessarily put a 12-month cutoff on it. It goes on as you want. Now at some point you want the ability to kick them out, but um, I don't know if that answers your question.
Speaker 3:I want to make one clarifying point, because there's number one if you're buying the firm and you're paying a price for the firm, a set price for the firm, you don't want to double pay for the, the, uh, the origination of the owner-attorney. So if you don't use SBA financing and you're doing an earn-out right, so whatever comes in I'll pay you for. If you're doing an earn-out, then at that point you can keep them on for longer and you would have to. Typically you wouldn't be able to pay the full purchase price in one year because the numbers don't line up right. So you typically end up paying it over a three-year period and then that would absolutely make sense in that case.
Speaker 2:And I'll say there is a tension. You know, there's risk and there's reward on both sides. The seller generally just wants a big check and they want to leave the buyer's like no, no, no, what if I buy this? And then it just falls to nothing the next day. So you know, there are ways to structure these things to sort of balance the risk. The earn out is a good way to do it Because, again, you never quite know what you're buying until you get in there, and so that's one way to structure that.
Speaker 3:So the key with an earn out right is a lot of people will come in and they'll try and do 100% earn out and sure. So an earn out would be look, we identify a client base right or a referral source base, so as matters come off of those. So you know, mr XYZ accountant sends a matter in, right, so whatever that is will give you a percentage of what that matter is. So everything that accountant XYZ sends in for the next three years you get paid on okay. So that type of earn out can work great. But I always, you know, I want to caution that you're going to have to put some cash into the deal, because otherwise all I'm doing is just handing over my practice to you, right? So why would I hand it over to you? I, you know there's got to be some skin in the game, otherwise you could just walk away from the deal.
Speaker 2:And just a another point on that. You know I've structured some where you sort of set a price 900K, whatever it is and then you sort of over time you whittle down and then once that's hit, it's considered done and maybe some handover, some other things happen.
Speaker 3:And then, after that's done, you could then have sort of this tail on top of that. I call it guardrails, right? So we set the what do we expect the price to be? That's the middle range, and then we do a plus 20 and a minus 20, or maybe a plus 25 minus 25. And so when then we set the three-year time period, if the minimum hasn't been paid in the three-year time period, then the payments continue. If we've gone over the minimum in the time period, then payments stop at the end of the three-year period and payments stop if we hit the upper side of the guardrail.
Speaker 2:So the buyer signs a personal guarantee to pay you. I mean it's not in every deal. I mean every deal is a little different, but those are some of the things you can put in place. I don't know what else have you used.
Speaker 3:Yeah, personal guarantees, I mean, if you really, I would say that if you don't trust the buyer, don't do the deal.
Speaker 3:Yeah so I mean you've got to do your due diligence on the buyer right to make sure that they're going to follow through right. So they're taking as much risk as you are because they don't know are you going to do the same thing the default right. So this is kind of what we're talking about. There's no guarantee in this right. So if you sell your firm and the buyer completely goes off the rails, yeah, you're going to have a note and you're going to have security interest in the assets. But what are the assets of the firm worth?
Speaker 2:So let's talk about real quick. So how long does it take? And so the two sales. So you've got an external and an internal. So an external is probably going to be, I don't know, one to six months from hey, here's an LOI letter of intent term sheet to getting the thing done. An internal sale, from my experience, takes a little bit longer and it can happen and it's on, it's off. It's on, it's off, it's on it's off Because again these associates or senior attorneys, they get spooked. So part of it is, in my view, there's a long education process educating them on why this is a good deal for them, why it's in their best interest. I know, ed, you've got a speech you give right.
Speaker 3:Yeah, we have a specific convert. I walk them through the valuation and the metrics and the numbers and how. The most important thing they want to know is is this going to reduce the amount I take home? And so we show them how it will not do that, and we show them every way that we've protected them in this process. I think Tim's question, though, is how long it took to transfer the goodwill.
Speaker 2:We need to pick the right horse or horses. Not everybody is a right candidate, and you just sort of know it, I think. And if somebody, if they're not there, I don't think you'll ever be able to convince them, and that's probably the wrong horse to bet on. I'll give you that.
Speaker 3:Yes, and the thing I would say is you got to to bet on, I'll give you that yes, and the thing I would say is you got to. There's an owner non-owner dichotomy, right. And so the minute they become a shareholder, you've got to elevate them throughout the entire firm that they are now owners and you've got to include them in the you know. I don't know what kind of meeting schedule you have, but the owner meeting schedule. They have to be there and maybe they don't have that much or any vote initially, but long term, you're getting them educated, you're starting to bring them in to make the decision making and all of that.
Speaker 2:We're getting close to maybe we're at the close here. Any other questions?
Speaker 1:What steps would you take if you wanted to grow your law firm through acquisition?
Speaker 3:So the first thing I would do is look for older attorneys that are in your area and I would be sending letters to them or having a lunch with them. The lunch is better, right, and it's having that initial conversation. Hey, you may not be ready to retire now, but if you're interested, when you're interested in retiring, let's have a conversation. The earlier you get that conversation started, the better, because they may be thinking oh well, I'm just going to close shop, right, because so many attorneys think all I'm going to do is just lock the door and leave, right. So that's the first thing I would do.
Speaker 2:And I would just say it takes time. You've got to find the target. If you go too directly at them, you're going to be repelled. You've got to sort of come at the side, I think. And it takes time. These things just take time. It's going to take a few years probably. I mean maybe you get lucky, but you need to let them know you're interested. It depends on the person. I mean you're going to ask the question. But if you just come straight up to them, say, hey, some of your firm, who are you, what are you doing? I mean absolutely at some point you're going to put it in front of them. But I think you've got to date a little bit, you know, and you've got to get to know each other before you just take them home, right? Any other questions?
Speaker 1:What if I'm not interested in buying the entire firm but really I'm only interested in certain assets of the firm? Can I buy something like a phone number or a website or something else that doesn't involve taking on the risk of the entire law firm?
Speaker 2:Yes, you can do that. There are not a ton of assets. To be honest, I've dealt with firms that the owner died suddenly and it's like it is a mess. It absolutely is.
Speaker 2:The owner died suddenly and it's like it is a mess, an absolute mess and it just any value that was there goes very low very fast. You know, staff jump, clients jump, all sorts of stuff happens. So there's not a ton of I mean assets of a law firm. I mean you've got computers that aren't worth much, furniture that you've got to pay somebody to take out Digital footprint. Yes, yeah, you can do it. Yes, the answer is yes.
Speaker 3:So a friend of mine in New York actually does that. So if he finds an attorney who has either just died or an attorney who is, you know, retiring, he'll say all right, well, give me your website address, give me your phone number, forward it to me and then, whatever comes in off of that, he'll pay the widow which is ethical under the rules, widow or widower a percentage of the fee that comes in.
Speaker 2:And so just a couple things to sum this up. You know two takeaways I would just say expand your view about what you can do in terms of acquiring firms and then, on the flip side, as you guys here, as we all want to grow our firms, think about what would a seller want and build that, design that, build that, and again, it will be more enjoyable along the way, more profitable along the way, and then hopefully you can have an exit along the way, more profitable along the way, and then hopefully you can have an exit.
Speaker 3:Reach out to us on email, linkedin and certainly follow Jonathan's podcast, the Founding Partner Podcast and mine is Law Deals. Thanks, appreciate it. Thank you.
