Everything You Need To Know About Selling a Legal Practice
High M&A activity and industry predictions make it an excellent time to sell a law firm.
The legal services field is an incredibly prosperous sector to be in, especially with the current trends and predictions forecasted for the industry. Legal services is one of the fastest-growing industries in America and due to start-up costs and difficulty of replication, M&A activity in the sector is at an all-time high. There are currently around 425,000 law firms in the United States and on average, firms can bring in as much as 18.2% profit! The legal services industry is slated for 4% growth every year until 2019 and since 2010, over 73,600 lawyer positions have been created. With such high growth on the horizon for this sector, owners of law practices may want to start thinking about their futures and the future of their businesses.
Smaller firms are merging as a way to stay competitive against the major firms and if you have been thinking about planning your exit, this puts you in a very advantageous position. Firms that are looking to grow and expand are actively seeking practices to merge with and in order to rise to the top, you will want to begin prepping your law practice for sale about 6-12 months prior to actually listing it. The first step to planning your exit is finding out how much your law firm is worth. While only a professional business intermediary can tell you the true value of your business, these formulas can help you determine the most important factors that go into determining a law firm’s worth.
- 4x SDE includes Inventory
- 5x EBIT, EBITDA
- 90-100% of annual fee revenues (estate work closer to 100)
Now that you have an idea of what goes into valuing a law firm, you can begin taking steps to increase the value of your business and make it more attractive to buyers. After selling several law firms throughout the Southeast, we have compiled these tips to help you prepare your business for sale and secure the highest asking price possible.
Having a developed, strategic marketing campaign for your legal practice will not only boost revenues, but it will show potential buyers that your firm is on track for future success. A robust website, social media presence and active blog can help build credibility in the industry and contribute to better SEO rankings. Your website should describe your service offerings, attorney accomplishments, explanation of fees and updated laws and policies that apply to your clients. Social media is a wonderful platform that can be used to engage with clients on a personal level while staying on their radar and building brand recognition. Implementing a strategic marketing plan gives you the advantage of an established web presence and customer base who actively wish to hear from you; buyers will appreciate that you have laid the groundwork for them.
One of the most heavily weighed factors in determining the salability of a legal firm is customer concentration. Customer concentrations explain revenue streams to buyers and how much of a business is tied to one client. Every buyer’s fear is discovering that 30% or more of the business is linked to one client who has a relationship with the owner and not the firm. This creates a huge risk for the buyer and sometimes even becomes a deal-breaker. Usually, in the legal services world, we see two main types of clients; corporate accounts and individuals. Review your client concentrations to identify the major revenue sources within the company and focus on bringing in smaller accounts to offset these imbalances. Changing client concentrations takes time and we recommend semi-annual reviews to gauge improvement on this step.
Our legal system is often outpaced by advances in technology. But when the law finally does catch up, being one of the first firms to offer services in that sector can significantly increase your revenue. Broadening your service offerings can help any business increase sales and build value, but when it comes to a law practice, it can be challenging to stay current. Having your attorneys brush up on relevant topics such as intellectual property, environmental policies, technology law, and cyber bullying can put your business ahead of the curve for when new legislature is introduced regarding these subjects. Buyers will also be impressed with your ability to stay current will take note of your improved cash flow and revenue.
Recurring Revenue/Repeat Clients
Like most service businesses, recurring revenue to key to showing buyers stability and keeping balanced financials. The first step to obtaining recurring revenue is to build up your client base. On-boarding more clients with a variety of needs not only opens the door to recurring revenue but also balances your client concentrations. Once you have established a solid customer base, begin charging retainer fees. Retainer fees can come in a few different forms, with one being an annual fee that is fixed for a number of years. With this type of retainer fee comes a contract which further cements your financial stability with buyers. An alternative to a retainer fee is assigning a fixed billable rate to recurring activities over the course of a long project. Relationship building is the key to locking in repeat clients at a law practice; take the time to foster relationships and make your clients feel appreciated.
One of the most valuable components of a law practice is client relationships. Clients stay loyal to lawyers that they feel they can trust and have known for many years, and while your firm may have a large customer base of loyal clients, there could be a problem with this. It’s critical that the relationships are with your attorneys because should you choose to transition, this poses a major risk to buyers. Buyers are always wary of businesses in which the main client relationships lie with the owner. If you are planning on selling your law firm within the next 6-12 months, begin transitioning your major accounts to your lead attorneys. Pricing is highly based on client loyalty and the ability to transfer those relationships, and if the relationship lies with a tenured attorney, buyers will feel more at ease.
If you are thinking about selling your law firm, the times have never been better. Our economy is thriving and M&A activity in the legal services industry is at an all-time high. SBA back loans are being approved more frequently and for higher dollar amounts than ever before, opening up the pool of qualified buyers and creating a favorable market for sellers. The first step to selling your business is getting a valuation. Valuations are one of the most important tools a business owner can equip themselves with. At Viking Mergers & Acquisitions, we offer no-cost, no-obligation valuations to business owners. Give yourself that extra edge; call us today and find out how you maximize the value of your business and make this the year you take the next step.