By Camille Stell
Have you ever considered buying a law firm?
Based on my personal experience, most lawyers have not thought about it. If the idea has crossed your mind, you may think that is only an option for larger firms or for individuals with more capital than you.
However, you may be ready and not even know it. A conversation with a succession expert or a law firm broker may change your mind.
Why Buy a Firm?
Why would you buy a firm? There are several reasons: to increase your geographic footprint, to increase your areas of practice, to add to your firm revenues, or to jumpstart your practice with a firm that already has an infrastructure and clients in place.
How Will I Pay for It?
Buyers are often pleasantly surprised to learn that they do not always have to pay the full purchase price up front. While every sale is unique, most buyers are going to prefer to pay over time to make sure the revenue continues to come in as projected. This provides incentive for the seller to continue to market the firm, make introductions, assist with transition of clients, and connect referral sources.
In some situations, bank loans are going to be necessary for buyers. Typically, your broker will have banking relationships in addition to the relationships you have. You may want to explore options. The process of getting a bank loan is not for the faint of heart. There are lots of hoops to jump through and more paperwork and forms than when you were applying for your bar license!
Getting your records in order and maintaining them throughout the process is important. You will be sure you have already provided a document to the bank when the underwriter on your loan asks for the same paperwork. Keep in mind, this is a process, everyone’s doing their best, and the reward is when the bank approves your loan.
The closing date for financing the firm is fluid. I’ve seen instances where on Monday the bank still can’t confirm a Wednesday closing. While this is frustrating, it is also beyond the control of the buyer, the seller, or the broker.
Negotiating the Terms of the Deal
This is a negotiation. Yes, the seller has a price in mind, as well as how they would like to receive payment, and a timeframe. However, as the buyer, you are making a long-term investment and the terms must work for you as well.
The due diligence time frame is when you dig deeper into the details, meet the seller in person if you aren’t acquainted, meet the staff, and learn more about the firm’s processes and procedures.
While a law firm broker will have likely prepared the firm valuation, as the buyer you may want to consult with an appraiser about the value of the real property, and to consult with a CPA about the cash flow and value of the firm. While these will be additional costs for you, it may provide peace of mind. You may decide to continue negotiations with the new information in hand or it will help you realize that the purchase price is reasonable and a good financial deal.
Typically, the buyer is told to ask plenty of questions, however, you often are not sure what questions to ask. For most buyers, understanding the firm financials is going to be the biggest challenge unless you have involvement in the financials of your current firm.
Don’t be afraid to ask questions until you understand. If the financials are not your strong suit, consider hiring a business manager or work with a trusted bookkeeper and CPA to help you after you take over the firm. Keep in mind, it is dangerous to delegate all financial responsibility to someone without you having a working knowledge of the firm’s finances. The goal is to hire experts to help you learn, not to abdicate responsibility.
There are many business documents that must be generated such as articles of incorporation, d/b/a documents, corporate resolutions, and leases. If corporate documents are not your area of expertise, you will be wise to hire a business attorney and a real estate attorney (if you are purchasing real estate). Even if your broker is a lawyer, your broker will likely not want to act as the lawyer in the deal.
Transition to the New Firm
Understand that there may be a period of time when you have offered your resignation to your current firm, yet you can’t start at the new firm because you are not yet the owner. Plan to save money for living expenses for a period that you may be unemployed between your last day of work and the closing date for the new firm. During this same time, you may also be moving to a new city, looking for a home, and finding a school for your kids.
Also, many lawyers are buying a firm while they are still working, in effect they are working two fulltime jobs. Scheduling afterwork calls, Zoom meetings, completing paperwork, visiting the new firm on a weekend to see the office space – all of this is necessary but time consuming. Keep in mind, everyone in the process wants and needs the process to be as smooth as possible, but show grace and mind your manners, as these are your new team members!
Once you have a firm closing date, the seller may be receptive to have you start moving into the office and getting used to working with employees though you won’t start meeting clients and working on files until everything is official.
Timeline for Retirement
Set a date for the seller’s retirement. Ideally, you will want the seller to be available during the transition and to make sure client relationships remain with the firm. This may be 6 – 18 months. The seller may want to work for several more years and that could be a financial benefit to the new firm. But it is important to have at least a fluid timeline in place. You will also want to discuss the seller having access to office space after retirement. It’s better to have realistic expectations in place early on than to be surprised when the seller wants to come into the office every day, even in retirement.
Buying a law firm is exciting and the reward can be great. This is a practice that is already running, with a support team, infrastructure, and clients. Consider buying a law firm as part of your strategic plan for growth.
About The Author
Camille Stell is the President of Lawyers Mutual Consulting & Services and the co-author of Designing A Succession Plan for Your Law Practice: A Step-by-Step Guide for Preparing and Packaging Your Firm for Maximum Value. Continue this conversation by contacting Camille at firstname.lastname@example.org or 800.662.8843.