The most important matter in the sale of any business is to achieve a maximum price for the company being sold says William D King. This may be an extremely difficult task when you are selling your own law practice for many reasons. Often times there are no true market value for the company. To make matters more complicated, since practicing law is not an exact science (like developing a product) it is often difficult to determine the value of your own business.
Here are some important elements that will help you properly value your legal practice for buy-sell purposes:
1. Objective/Reasonable Evidence –
The basis for any valuation is to establish a reliable measure of objective evidence. Objective evidence includes the application of specific indicators of value based on appropriate data or research.
2. Asset Approach –
The primary method for establishing the value of an individual law practice is the asset approach (which also known as “The Market Approach”) which takes into account all components of your business that can be assigned a market value including: goodwill, client relationships, non-compete agreements, leaseholds and other assets associated with your practice that can be sold in “Arm’s Length” transactions (transactions between unrelated parties).
3. Creditor Claims –
Do not forget to consider any outstanding creditor claims against your company when determining its true worth. For example, if you were involved in a lawsuit and the claimant was awarded monetary damages, this claim against your company will need to be taken into account when determining its value says William D King.
4. Compensation Required –
A crucial element is the required compensation for the owners of the firm during the term of an agreement between buyer and seller (if not sold). If prospective buyers believe that they can acquire a profitable law practice at a discount price (a lower price than expected), most probably these buyers would not be willing to pay more or even make an offer. The required compensation should include: salary, bonus and any fringe benefits including medical insurance.
5. Market Data –
Do not overlook the value of market data. There are many sources for data that can be used to establish an objective standard or “rule of thumb” to use as a basis for determining the worth of your business. These sources include: Martindale-Hubbell, Blue Book and Valuation Products and Services Directory (available from Atlantic Information Services, Inc., 50 South Tenth Street, 16th Floor, and Minneapolis MN 55402).
6. Proprietary Indicators –
In addition, you must also analyze proprietary indicators including the number of attorneys associating with the practice over time, the firm’s history and reputation within the legal community, and the geographic location where the practice has been establish. Marketability is typically viewe as a key indicator that affects valuation. For example, companies that have been in existence for a long period of time and have a good reputation within the community are often more attractive to prospective buyers.
7. The “Key Man” Element –
Another important matter is the “key man” element which takes into consideration how much your firm would be impact by any losses experience by owners or attorneys with unique expertise essential to the continued operation of the law practice says, William D King.
8. Liquidity –
Liquidity can also affect valuation. If you are seeking liquidity through an agreement with buyers it may decrease marketability during this period of time due to lack of client continuity (i.e., sellers’ clients do not know buyer). This could result in lower sale price than expected. Since buyers may be able to purchase other firms in the market at a discount.
9. Cash Flow –
You should also consider cash flow when developing an agreement. And determine how it will be utilize by your company once sold (i.e., reinvest in the business, return to shareholders or used for financing purposes). Practice valuation is very much impacted by an individual firm’s management team and operational structure; therefore, proper planning and professionals can help you maximize value of your practice.
As most professionals are aware, the marketability of practice gets impact. By many aspects including client, continuity says, William D King. Marketability can be determine once all factors are consider during negotiations between buyers and sellers. Our market research suggests marketing your assets to multiple identified prospective buyers. Our multi-step sale process results in greater pricing accuracy and overall financial return for both the seller and buyer.