Navigating the sale of your legal practice

Handshake on building background sell your law practice KPA Lawyers

The Law Society of Ontario has begun to mandate succession planning for lawyers. This makes sense as an initiative to provide clients with certainty for when a lawyer wishes to retire or passes away suddenly.

I have heard many stories of clients who have phoned up their prior lawyer who was in possession of their will, only to find that the doors have been closed for some time. Having a lawyer succession plan makes plenty of sense and one efficient avenue that some lawyers may want to consider is to sell their practice. The sale of a professional practice has grown in prominence in other professions (such as accounting and dentistry) but there is a dearth of information and past cases surrounding the sale of a law practice outside of mergers between larger law firms. As someone who has acquired three law practices, I thought it prudent to explain some considerations to those readers who are thinking of selling their law practice.

In my experience there are three ways to sell your law practice:

  1. To a family member who takes over the business over time. This is very helpful as it relates to client and employee transition; not so helpful if you have no children or none who wish to take over.
  2. To an existing senior employee or partner who either takes over the business over time or buys out your interest. Again, this is ideal for transitioning clients, but it is rare to find an employee who takes the risk of ownership. Also, as an owner, it is difficult to make the mental shift of viewing an employee with a different lens as capable of this new responsibility.
  3. To a third-party buyer as a straight sale. As mentioned, while this is rarer in the legal community outside of larger mergers, if done effectively, it could provide equity value for your business, proper transition of your clients and staff, and a general succession plan that does not involve winding down the practice.

Many lawyers do not realize what the value of their practice may be worth, even if they are, ironically, corporate lawyers who assist other clients in the sales of their own businesses. While a lawyer can obtain a third-party valuator, the value of a law practice (like the value of anything) is ultimately what a third party will pay for it. 

The following are factors that a buyer looks for in determining valuation:

  1. Financial viability over a period of time: This involves an exercise of looking at the financial statements of the business to determine if it has been profitable over a long period of time and the trends inherent in the financial picture.
  2. Customer type: Does the practice have recurring billings from clients (i.e. a wills bank, minutebook reviews, securities filings etc.). How many clients make up most of the billings and what are the chances the owner can transfer these clients to the new firm?
  3. Staff: How many lawyers work at the practice and does the practice have any support staff, the length of their service and quality of work?
  4. Brand/sales: How does the practice generate new sales? Does it have a strong brand or are sales tied to a relationship with the exiting owner?
  5. Location: This has become less important over the years given virtual practices but is still important enough to have an effect on valuation.
  6. Internal Reporting and Processes: Is there an internal process (beyond file management software) that can automate the business to make it easier for transfer? How is technology used, if at all?

All of the items above are qualitative factors specific to a buyer who will ascribe a value based on your practice. From there, given the risks of client transfer, you can also expect holdback or performance-based terms for the acquisition of your practice.

On the sell-side, as a lawyer looking for potential buyers — it depends on the lawyer’s personal goals and reasons for selling. For example: does the retiring lawyer want to maintain its name and staff for a period of time? Does the buyer need particular expertise to take over the files? How long is the selling lawyer willing to stay on?

In order to get the best valuation for your practice, it is important to prepare the practice for sale. Preparation can take several years in advance based on internal tax structuring but also preparing the information package to provide to a potential suitor, which can be difficult while practising and keeping this quiet from other staff. That being said, while preparation is important, lawyers are consistently amazed at how quickly the closing of these transactions move forward. As a result, in selling your practice, you need to be prepared emotionally for retirement and the idea of another lawyer taking over and potentially losing some long-standing clients.

The sale of a law practice, as with any business, is a large endeavour but if done correctly, you can see real equity value built out of a practice built over many years and a true succession plan. It may not be for everyone, but the time may be right for you.

This article was originally published by Law360 Canada, part of LexisNexis Canada Inc.


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