This past year the global financial crisis has created fear and confusion for countless people. Lawyers, like many others, suddenly have seen nest eggs shrink dramatically and fear outliving their money if they don’t continue working. Driven by fear, many lawyers want to know how to value and sell their practices for cash before their retirement situation worsens further. These thoughts are the product of panic mode, which arises from the “fear of fear.” To counteract this fear, look at the facts of your practice, your life and your anticipated or desired retirement. Assess the reality of your financial resources and your physical health. As they say in the airline business, put your oxygen mask on first before trying to save anyone else.
It’s also possible to view the current situation as an opportunity. If the stock market hits a low, those with ready cash can make a great deal of money in the long term when the market rises. The same holds true for law practices. Those law firms that are well run and free of debt will also be positioned to take advantage of many opportunities offered by purchasing other practices.
Preparing For A Sale Needs To Be Deliberate
Transitioning out of a legal practice into retirement needs to be planned. Rather than rushing to sell your practice, make a timeline of all the tasks that need to be accomplished. Include detailed descriptions of each and list them in order of priority.
First, ask and answer several questions that set the stage for all further deliberations. Consider why you want to retire or sell, what you want to do with the rest of your life, and whether you in fact actually want to retire. Remember that the value of your practice may be more or less than the amount of money you want to have for your standard of living in retirement. The more urgent your need to sell, the greater the downward pressure on the price to be paid. Not every law practice is saleable. Some practices are so small and personal that the purchaser might not succeed in keeping the firm’s clients. However, even the smallest and most personal practices might be saleable for the right price and under the right terms.
If your practice is not sold or closed, the best alternative is grooming a successor brought on board as an associate or a lateral partner. Ideally the succession plan takes place over a period of up to five years, as client responsibilities gradually move to the new lawyer. Think of these five years as the “red zone” of your career the time right before you reach the goal line of retirement. During this period you can identify a successor, have ongoing conversations with key clients about the upcoming transition, forge new ties between your successor and both current clients and new contacts, and ensure that the new lawyer is completely up to speed on what clients need and expect.
Preparing for this kind of smooth transition can ease problems that may arise over the issue of good will when the time comes to turn the practice over to a successor. The term “good will” refers to the reputation, client base and client loyalty that the selling lawyer has created over the life of the practice. If the new lawyer seeks to buy the firm outright and change the name, thus deleting yours, you may question whether the value of the firm’s good will is decreased or even destroyed. Often when a firm is bought by outside interests, the buyers assert that clients will not remain with the firm once its proprietor leaves, and thus offer a lower purchase price. The selling lawyer then is left to assert that good will infers that the reputation of the firm continues beyond the removal of any one individual. Along with the firm’s reputation, the client list, phone number and on-going nature of the practice (with staff and systems in place) are also transferred. Grooming and transitioning a successor from inside the firm can eliminate discord over this issue.
Rely On Professionals For Help
If you do not have a successor, 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 who have had previous experience buying and selling law firms are excellent resources. These professionals know how to winnow out real candidates from those who aren’t really qualified.
When negotiating the sale, look at the future and the expected future earnings of the practice. Though most assume the price should be based on current earnings, you can also include future earnings that may be based on the buyer’s talents brought to bear on the purchased practice. However, it’s generally preferable to sell (and buy) on a fixed, set sum. Bonuses and payment terms can take into account the buyer’s legitimate 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. Agreeing on a fixed sum can address both parties’ concerns. This also removes any ethical concerns about selling files which is illegal.
After investing years of hard work and financial resources in growing your practice, you owe it to yourself to implement a planned transition that will allow you to reap the benefits of that investment.
One question remains: if you retire from the law, what will you do with the rest of your life? What will you do with your “second season?” Will you seize the opportunity to begin a new, or be warehoused and wait to die? Your life expectancy is longer than ever: how will you occupy yourself? Don’t neglect these questions. With the proper preparation, you will develop the answers that will allow you to spend the final years of your life enjoying the fruits of your labor as you choose.
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