One of the biggest factors in valuation of a law firm is what is often called “going concern.” This refers to how much cash the firm can be expected to generate for the new owner, assuming the former owner is no longer part of the firm. If client relationships are strongly bonded to the individual lawyer’s personality and not the firm, they are less likely to stick around during a transition.
3. High-Risk Business
Because law firms are generally small, closely held businesses that depend on client relationships, they tend to be high-risk businesses for buyers to purchase. On top of that, most firms have greater volatility in income than other types of businesses, especially personal injury firms. Unreliability of income is a major risk factor.
4. Lower Valuation
Finally, most law firms operate with a backlog of unbilled work of about 8-9 months. All these various risk factors reduce the potential valuation of a law firm to a potential buyer. However, despite a potential lower valuation than other types of businesses, law firms still have value and can be sold.
How to Value Your Law Firm
Your law firm has value. Here are some of the potentially valuable assets that a buyer may be interested and which could fund your future retirement:
- Physical assets. This includes your office or building, equipment, desks, furniture, etc. The sale of your building could be the largest contributor to your valuation.
- Digital assets, such as your website, your online presence, or social media accounts.
- Non-tangible assets such as your reputation, brand awareness, and goodwill. If you are one of the most well-recognized firms in your area, your firm already has significant value to a potential buyer.
- Information assets, such as your processes, proprietary information and systems, workflows, intellectual property, and databases.
- Accounting assets such as cash, costs advanced to clients, work in progress, and accounts receivable.
- Your relationships with clients, referral partners, and colleagues.
So what is your law firm worth? A great way to find out the exact number is by hiring a valuation expert to perform a formal appraisal of your business. This person will examine the assets of your business and determine their value based on various factors, including risk and liquidity.
It’s also important to remember that selling your law firm is a long transition. It doesn’t just happen overnight, so be ready to play the long game when you decide to sell. But law firms do have value! And starting and building your own firm can be a great way to build long term wealth. Looking for resources on how to start your own firm? Check out Clio’s Guide to Starting a Law Firm.
Reach Out to Us
Schedule a no-obligation consultation with Wurz Financial Services, and together let’s find out if selling your law firm is the best next step for you. Contact us at 859-291-9879 or email@example.com today!
Also, join us at one (or all!) of our free webinars:
- Social Security 101: The 3 Rules to Maximize Your Lifetime Retirement Benefits!
- Will I Have Enough to Retire?
- Retirement Planning Strategies for Solo & Small Firm Attorneys
Darren Wurz is a co-owner and financial planner at Wurz Financial Services, an independent, family-owned and operated financial services firm dedicated to helping its clients transition from their working life to a comfortable retirement with confidence. Darren received his Master of Science in financial planning from Golden Gate University and also holds the CERTIFIED FINANCIAL PLANNER™ (CFP®) designation. He operates the Northern Kentucky/Cincinnati office of Wurz Financial Services and is an active member of the Northern Kentucky Bar Association, the Northern Kentucky Chamber of Commerce, and the Covington Business Council. To learn more about Darren, connect with him on LinkedIn.