Americans are aging. According to the Census Bureau, by 2030, when the last baby boomers reach 65 years old, the older population will make up 21 percent of our total population, up from 15 percent.
The average age of attorneys is also getting older and many are winding down their practice. You may want to sell your practice when you retire. In Illinois, the ARDC provides guidance on what to do if you sell your law practice including providing clients notice of the sale and informing them of their rights.
When you buy a law practice, you may acquire all of the firm’s assets including, among others: physical assets, personnel and the firm revenue stream. What is a law firm’s most important asset? Its revenue stream. For this reason, it’s important for you to invest in your marketing before selling your law firm.
Traditionally, law firm revenue stream-based assets included the law firm name, its existing clients, and referral sources. Today, the revenue stream includes a law firm’s digital marketing assets as well.
In a recent study by legal industry leader Clio, 57% of consumers reported that they do not seek referrals when looking for legal representation. Rather, they’re going online to find counsel. As such, it’s critical before you sell your practice to have your digital and other marketing functioning at a high level in order to increase the value of your law firm.
Law Firm Assets
Before attempting to sell your practice, identify what assets you have to sell. These assets include, among many others:
- Physical assets: computers, furniture, software
- Personnel: associates, paralegal, assistants
However, the most important asset you are selling is your law firm’s revenue stream. This is the reason why your soon-to-be former partners or associates or a third party are interested in paying money for your firm.
Your revenue stream might include and/or be based upon, among other things:
- Your law firm name and reputation
- Your existing clients
- Your referral sources
- Your existing law firm marketing assets
All the above are important. In this article, I will share with you why your law firm’s marketing efforts are as important as any asset involved in the sale of your firm.
Revenue is King
I recently spoke with Tom Lenfestey who is the managing member of The Law Practice Exchange. For the past 8 years, Tom has worked with primarily solo law firms who desire to sell their law practice. Tom’s clients are looking to retire and want to cash-in on their many years of experience practicing law.
On the other side of the equation – the ‘buy side’ – are often the retiring attorney’s former partners or associates. However, most often there are third parties looking to kick start their own law practice by buying another’s practice. Most of these attorneys have 5 years legal experience.
According to Lenfestey, the primary asset buy-side attorneys look for when buying a law firm – a reliable revenue stream. However, not only a current revenue stream, but one that will continue to bring in revenue long after the firm is acquired.
The Challenge of Traditional Revenue Streams
The sell-side attorney has often worked with clients for decades. S/he has built a personal relationship with the client. As such, when the attorney retires, there is the threat that the client may look elsewhere for representation. That of course defeats the purpose of purchasing the practice.
The same holds true for referral sources. If you’re an employment lawyer and have a long-standing relationship with the National Organization of Women, it may be difficult to pass that relationship on to the purchasing attorney.
For this reason, often when a practice is sold, the selling attorney will remain with the firm for a period of time to ensure the succession of clients from her or him to the buying attorney.
The Benefit of Selling a Law Firm’s Marketing
It is far easier to protect a stream of revenue generated by a law firm’s marketing efforts than it is to protect referral sources. The firm’s marketing is generally immune from issues involved in the transfer of ownership, as long as the same investment and effort is put into the marketing after the sale. This is due to the fact that to a web searcher, the transition is seamless.
Even more important, according to Lenfestey, having an ongoing and successful law firm marketing platform is instrumental in driving up the value of the sale. If a seller can provide solid marketing metrics that document the success of their marketing efforts, it can only help the selling attorney. For example, if the firm has been able to bring in ‘XX’ dollars from online marketing for the three years prior to the sale, that success can be monetized and sold as a firm asset which will help establish the value of the firm. Other metrics are also available such as ROI, number of conversions and many more. “This is a huge value driver and a seller will feel much more comfortable driving up the price if they can monetize the value of their marketing.”
The Lesson to be Learned
If you are considering selling your law firm in the future, ensure that your law firm has a marketing plan and platform that is transferable to the buying attorney(s) and invest in your marketing before selling your law firm.
What might your marketing assets include?
- A high functioning, optimized and content rich website
- An ongoing search engine optimization (SEO) campaign
- Social media channels: Facebook and LinkedIn
- An email newsletter
- Countless other options
There are many marketing agencies qualified to work with you to get your marketing to the level it needs to be in order to count it as a true ‘asset’ when selling your law firm. To speak with LawFull Attorney Marketing reach out to us.
How Might the Sale Get Done?
One last issue to briefly address is how to value your law firm’s book of business so that you can sell it. This is important because in most transactions, the law firm’s revenue will modify post-sale due to any wide variety of issues.
This puts the buyer at risk and as such, terms are often included in the deal based on firm revenue post-sale. One option might be an ‘earn-out’ sale.
Common Example – the ‘Earn-Out’
The Law Office of Tom Jones has revenue of $1,000,000 per year. Tom makes $400,000 per year himself. However, all this revenue is based on Tom’s personal relationships with existing clients and referral sources. As a result, in year one post-sale, the buying attorney’s take home is reduced to $250,000.
To counter this scenario, the parties could have entered an ‘earn-out’ agreement. The earn out would have included a post-closing percentage of revenues that Tom would be compensated on. In this scenario, Tom’s profit would have been reduced since post-sale revenue went down. The buyer however was protected.
There are numerous other approaches to valuing a law firm’s revenue, including, a hybrid approach. For more information on how to value reach out to Tom Lenfestey.
Hopefully this article helped you understand why it’s important to invest in your marketing before selling your law firm. For more information about how to market your law firm, contact LawFull Attorney Marketing.