Retirement for Law Firm Owners Pt 2: Valuing Your Law Firm (Ep. 70)

As a law firm owner, have you ever wondered if your practice could be worth more than you realize? Imagine doubling or even tripling its value without generating a single additional dollar in revenue. Sounds too good to be true? It’s not.

Five Key Takeaways:

1. Understanding the Wealth Gap:
We start by recapping what a wealth gap is—the difference between your current net worth and the net worth you need to be financially independent. This foundational understanding is crucial for your retirement strategy.

2. Assessing Your Law Practice’s Value:
Your law firm isn’t just a collection of clients and cases. It’s a significant part of your financial portfolio.
Learn how to evaluate its worth using our simple formula: Earnings x Market Multiple = Value.

3. Overcoming Common Misconceptions:
Many law firm owners underestimate the value of their practice, often due to owner dependence or the perception that clients are the only asset. Discover how to identify and enhance the intangible capitals—human, structural, social, and customer—that make your practice truly valuable.

4. Strategic Sale Options:
Whether you’re considering an internal sale to an associate or an external sale to a competitor, understanding your options can help you make informed decisions. We discuss various buyer types and what they might bring to the table.

5. Boosting Your Firm’s Value:
Find out how improving your earnings and operating efficiency can exponentially increase your firm’s value. Through real-world examples, see how small changes can lead to substantial gains.

Conclusion

The opportunity to generate extraordinary wealth lies in strategically enhancing the value of your law practice. By focusing on increasing earnings and maximizing your market multiple, you can transform your law firm into a valuable asset, securing your financial future.

Resources:

Transcript:

Darren Wurz [00:00:15]:
What if you could take the current value of your law practice and multiply it by two or three times without generating a single dollar of additional revenue? Welcome to the Lawyer Millionaire podcast, where we deliver financial planning insights to help you expand your business, maximize your profits, and grow your wealth, even if you’re still growing your law practice. Last week, we talked about evaluating your wealth gap in part one of our three part series on retirement strategies for law firm owners. Today, we’re talking about how to assess the value of your law practice as part of your portfolio. And we’re also going to talk about how you can potentially multiply that value so that one day you can harvest that value and create extraordinary wealth for yourself and for your family. All right, guys, so today we’re talking about retirement strategies for law firm owners. Today is part two of a three part series. And on the last episode, we talked about the first of these, of these three parts. And the first part was the wealth gap, understanding what your wealth gap is, why that’s important, and how exactly to calculate that wealth gap.

Darren Wurz [00:01:44]:
So we went through some different steps that you need to take. What is the wealth gap? Let’s recap just quickly to understand what the wealth gap is. The wealth gap is basically, it’s a very simple concept. It’s the distance between your current net worth as it stands today, and the net worth that you would need to have in order to be financially independent. And that could mean retirement. That could mean living a work optional lifestyle, whatever kind of lifestyle you want to lead, the net worth that you need to achieve in order to get there. And so on last week’s episode, we talked about how exactly to calculate that. And that is really step one.

Darren Wurz [00:02:27]:
That is step one in this process of retirement planning for law firm owners. And we finished last week’s episode talking about the very different thing for law firm owners, and that is the value of your law practice. We finished talking about one of the ways that you can close the wealth gap is through the potential sale of your law firm. So, you know, unlike someone who maybe works at a large company, where perhaps your only option is just to save and invest over time, you actually have another option. So what if, what if the sale of your law practice could be the key ingredient that closes that wealth gap for you? I want you to think about that. Think about that very closely, because not a lot of law firm owners who I encounter are often thinking about that. I think there’s a couple of reasons. Number one, they don’t really think that maybe their firm has a lot of value.

Darren Wurz [00:03:33]:
And secondly, perhaps like many business owners, you’re just so focused on driving profit and making sure that the bills are paid that you don’t take a moment to step back and think about your law practice. Well, there was a 2016 study that was done by the Federal Reserve, and what they discovered is that for business, there’s a key difference between business owners and non business owners when it comes to their financial assets. Non business owners, generally, their net worth is 65%, made up of financial assets like stocks, bonds, cash, etcetera. The other 35% is non financial assets, perhaps real estate. In many cases, that’s really the big thing. Okay, well, for business owners, those are completely flipped. 35% of your net worth is typically financial assets. The other 65% is non financial assets.

Darren Wurz [00:04:36]:
And the biggest piece of that is your business. And so, as a law firm owner, your law firm may represent perhaps the largest part of your financial portfolio. So it only makes sense for us to think about that as a key ingredient in closing your wealth gap. The challenge, of course, is figuring out, number one, what that value is. What is the value of your law practice, and more importantly, what can you do with that value? How could you perhaps expand that value or multiply that value? And what effect could that have on, on your net worth and your standard of living? So let’s talk about it. Step one was figure out what your wealth gap is. Step two is evaluate your law practices value. So the first question I always get is, can I really sell my law practice? And maybe you’re one of those folks out there who thinks that maybe this is not possible.

Darren Wurz [00:05:42]:
Well, I’m here to tell you folks that it really is possible to sell your law practice. And, you know, this is actually becoming more and more of a thing. You know, in years past, you haven’t really seen a lot of law firm sales, but I think in today’s day and age, you are seeing more and more law firms that are being sold, being purchased, and changing hands between owners. So it is becoming more common, actually. Well, it is a reality that law firms can be sold. There are some caveats. There are some things you need to think about, right? Because typically, in most jurisdictions, only lawyers can own law firms. That’s changing in some parts of the country.

Darren Wurz [00:06:31]:
But you can sell your law practice, but there are understand, there are some requirements, there are state rules that come into play. The most common rule is the ABA model rule 1.17, which describes some of the standard requirements in terms of how a law practice needs to be sold. And most states have modeled their rules after this model rule as well. One of those is that lawyers need to own law firms. The other one is that typically, you have to sell the entire practice. Right. You can’t just sell pieces of it. That is to protect the interests of small clients.

Darren Wurz [00:07:10]:
You can’t just sell the big clients and leave the other ones in the dust. That’s to protect the clients. Well, the real reason people typically ask this question, can I really sell my law practice? Is because they think it doesn’t have value. And the reason they think it doesn’t have value is because they think that my clients depend on me as the owner. They come to my firm to do business with me, for me to be their attorney. And so owner dependence is a really big problem for law firm owners to overcome in establishing the value of their practice. They also think, well, what value does my practice really have? It’s just the clients. The clients are free to come and go.

Darren Wurz [00:07:59]:
There isn’t a whole lot of real, tangible value here. Well, I’m here to tell you that you’re not alone as a business owner, because these problems, these issues are not just isolated to the legal community, they’re not only applicable to the legal community. These are the same issues that every business owner, regardless of your industry, has to deal with. Owner dependence is huge. Huge. Number one, for every business. For almost, maybe not every, but almost every business owner struggles with owner dependence, especially those who have started their own businesses. The other is the value.

Darren Wurz [00:08:44]:
Right. You know, most businesses, the majority of their value, 85%, on average, of a business’s value, is intangible. And there are four, we call them the four c’s. There are four key components of that intangible capital. Human, structural, social, and customer. Those are intangible things. Your human capital, the people that are a part of your firm, your structural capital, the systems that you have built, your social capital, the culture that you’ve developed, the relationships you have in the community, and your customer capital, those key customer client relationships. 85% of every business, you know, on average, is the value is in the intangibles.

Darren Wurz [00:09:40]:
So you’re not alone in worrying about whether or not your business actually has value. Let’s think of a key example. The company. Apple. Right? Apple’s the most valuable company in the world as of this recording, and it’s in the trillions of dollars. Well, Apple is not worth trillions of dollars because they have trillions of dollars worth of physical assets like real estate and iPhones and plants and equipment and things like that. No, they are worth that because of their brand value. And that, my friends, is intangible.

Darren Wurz [00:10:19]:
So it’s important to, of course, we talked about the legal and ethical considerations. It’s very important to think about those, you know, and those do make the sell. The sale of law practices maybe a bit more challenging, but understand that the same issues and problems that you feel you have as a law firm owner are experienced by business owners of every single industry. Let’s talk about some of the things in your law practice that have value. One of the biggest things is clients. You have something that all law firm owners want, and that’s clients. It doesn’t matter if they’re one time clients or repeat clients. You have clients.

Darren Wurz [00:11:02]:
Either you have a machine, you have a marketing system that’s bringing them in. You have a website that’s driving traffic. Guess what? That’s extremely valuable. Or you have really awesome client relationships who are bringing you consistent business. Those things are extremely valuable. And I’m here to tell you that, yes, all practice areas have value. Personal injury practices. I talk to personal injury law firm owners and they think that their businesses don’t have a whole lot of value because there’s not a lot of repeat customers.

Darren Wurz [00:11:36]:
But then I go over to a completely different type of practice, like estate planning, and that the estate planners think that their practices don’t have value for different reasons. We all have challenges to the value of our business, but the fact remains, all law firms, regardless of your practice area, have value. And the biggest component of that value is your client relationships. And there are other things, you know, physical assets, of course, financial assets. But when we think about intangibles, your marketing systems, your intellectual property, you know, and human capital. Let’s, let’s talk about that for a second. Your employees. Let me ask you a question.

Darren Wurz [00:12:20]:
How valuable is a really great paralegal or a really great administrative assistant? Those people are extremely valuable. Yes, you pay them, but they deliver so much more value to you, I guarantee you. I mean, I have a fantastic executive assistant, and that’s a very valuable component to my business because she knows the inner workings of my business. And that is something that would have value if she was to stay with the business. Right? If your people can stay with the business that has value to a new owner, I want you to think, now take this and flip the script and let’s go a little bit deeper, because another aspect to your, the value of your law practice is what a new set of eyes can do with your business, what synergies a new and fresh perspective could bring to your law firm. We all are stuck in our ways because we have certain ways. We do things in certain ways. We have always done things.

Darren Wurz [00:13:30]:
But when a new person comes into your team and brings a whole new level of experience and diverse perspectives, they are able to oftentimes uncover new ways of doing things that can potentially add more profit and drive the business’s growth forward. So you may look at your. You know, it’s the old saying, right? One man’s trash is another man’s treasure. Well, no law firm is trash, but your firm might not seem very valuable to you, but it might seem extremely valuable to somebody else. Okay, so let’s talk for a second about who might buy your law practice. Well, there are different ways you could structure the sale of a practice in. Two major categories of sales are internal and external. It could be somebody within the practice, like an associate or a partner, or somebody outside the practice.

Darren Wurz [00:14:31]:
It could be maybe a brand new lawyer, fresh out of law school, looking to jump their legal career. It could be a competitor who’s buying you for strategic reasons. It could be somebody, a law firm that’s looking to add a different practice area. Or it could be a big firm that’s looking to acquire a small practice and thereby grow their footprint. So these are some things to think about. Now, let’s ask a question. How exactly do you determine the value of a law firm? Well, there are a variety of ways that you could measure the value, calculate the value of a law practice. But the basic way that we use here at Wurtz Financial Services with our clients, we call it the simple math valuation.

Darren Wurz [00:15:23]:
And there’s three components. The first component is your earnings, your profit. When we actually do evaluation, we take that and we adjust it for certain add backs, things that might need to be added back to the equation, like maybe personal expenses that are running through the firm, or maybe one time expenses that are not usual expenses. But take your average profit. That’s your component number one. And that, by the way, is something that you control. The second component is a multiple, a multiple that the market assigns. Okay, so let me explain what this means.

Darren Wurz [00:16:04]:
It’s a price to earnings ratio, basically, and it’s a range. The market has a range for the value of law firms. And that multiple might be anywhere from one times to ten times. Right. Depending on what’s happening in the market, depending on your, your particular niche, whatever practice area. But there’s a range, right? Let’s say it’s on a low end one times and a high end ten times. And let’s say your earnings are a million dollars. So your practice could be worth anywhere from 1 million to $10 million.

Darren Wurz [00:16:38]:
How do you know where you fit in that range? Well, the range itself is determined by the market, but you control where you fit within that range based on how you have structured your law practice. So, you know, very, very best in class, most attractive, most well run law firms are going to be at the high end of the multiple range. Firms that are extremely risky, that are extremely owner dependent, that have nothing done a lot to develop their intangible capital, are going to be at the lower end of that range. But basically, the formula is your earnings times a multiple equals your value. That’s the formula. So the key is, number one, determine what your earnings are. Number two, figure out the range of multiples in the marketplace and then assess your business to figure out where you would fit on that range. By the way, that’s something that we help law firm owners do.

Darren Wurz [00:17:47]:
We have a very in depth, thorough assessment process that we take law practices through to help them figure out where they fit within that range. We can do market research to figure out what is the range that’s applicable to you and to your law practice. We will help you figure out your recasted or normalized earnings, or as we call it, EBITDA, if you’re a business person. But basically, those are the components. And if you need help figuring out what that, you know, those key ingredients are for you, we can help you with that. So there are some key factors that we’ve talked about that affect your value. And the good news here is that with this equation, you can very clearly see how you can drive the value of your practice higher. And there’s two ways.

Darren Wurz [00:18:49]:
Number one is the earnings. You can drive the earnings higher. That’s one way. The other way is you can drive yourself to a higher multiple to maximize the value of your law practice. Here’s what you need to do. Focus on improving, number one, your profit. It’s your earnings. Earnings, profit, same thing.

Darren Wurz [00:19:11]:
Profit. Number two, focus on improving your multiple. Let me give you an example. Let’s say your current EBITDA or your current profit is $1 million. But a law practice just like yours, that’s operating at maximum operational efficiency, that is operationally excellent, that is best in class, with the same amount of revenue, is generating an EBITDA or a profit of one and a half million dollars. So let’s say that’s a comparison. You’re at a million, but a law practice just like yours that is best in class, is sitting at 1.5 million in terms of profit. Okay, now let’s move to multiples.

Darren Wurz [00:19:57]:
Let’s say you’re at the low range. You’ve done nothing to really get your practice ready to go. That’s okay. A lot of people are there. You’ve just been working on your client matters and making sure the clients are happy and bills are paid. So let’s say you’re at one x. Your multiple range is one to three. You’re at the one x level, but the best in class law firm, the one that’s operationally excellent, that has strong intangible capital at three x.

Darren Wurz [00:20:26]:
Okay, so let’s do a comparison. Your value one is going to be your EBITDA, 1 million times your multiple, one x, to give you $1 million. Now, let’s talk about the best in class law firm that law firms EBITDA is one and a half million. And the multiple there they’re able to get is three x. So the value is $4.5 million. Without needing to add any revenue, without needing to grow, without needing to scale whatsoever, there’s a value gap of $3.5 million. You could generate three and a half million dollars of additional wealth for yourself as a law firm owner simply by focusing on getting to that best in class category, improving your profit to one and a half million, doing things to improve the operation and the intangible capital of your law practice to get you to a three x multiple. There’s an extra three and a half million dollars sitting there for you.

Darren Wurz [00:21:42]:
And would that be enough to close your wealth gap? Wow. I mean, that’s powerful, right? That’s exponential value that you could drive for yourself and for your law practice. And, you know, I’m a financial advisor. Most financial advisors are going to be biased towards investing in the market. And I get that. But it’s hard to generate that kind of ROI in the market. I mean, that’s an incredible Roi. And these are hypothetical numbers, but these are numbers that we see all the time.

Darren Wurz [00:22:13]:
It’s hard to generate that in the market, but that’s the kind of ROI you can generate by investing in your law practice smartly, by having a process that you go through to boost and push the value of your practice forward. Well, that’s some great information. So here’s step one was figure out what your wealth gap is stepper. Step two, evaluate the value of your law firm. Right? Assess the value of your law firm and the way that you do that. Just to recap, number one, your current earnings times a multiple, figure out what the range is. Where do you fit within that range, comparatively, that’s your value. And you can improve that value and really exponentially grow your wealth.

Darren Wurz [00:23:04]:
Powerful stuff. So, you know, the greatest takeaway that I get from this is that there is real power here. There’s real huge potential here. Don’t miss it. Don’t miss this potential. You, as a law firm owner, have an opportunity to drive serious wealth for yourself, for your family. And it’s not. We don’t have to be selfish about it.

Darren Wurz [00:23:33]:
By doing these things, you’re not just creating more wealth, you are creating more wealth, not just for yourself. You’re creating more wealth for the world. You are creating wealth for your community, for your family, for the legal sphere. Right? By doing these things, because, you know, creating a firm that is operationally excellent is going to make you happier. It’s going to make your clients happier. It’s going to make your staff happier. There are great outcomes for everyone. Well, how does this relate to what we do here at Wurtz Financial Services? Well, we are financial planners, but we integrate business planning and personal financial planning.

Darren Wurz [00:24:21]:
We bring the two of those worlds together because we recognize that your law firm could be your largest financial asset. And so it’s our mission to help law firm owners, number one, understand the value of their practice, and number two, drive the value of that practice higher, because we believe that is one of the best ways that you can grow your wealth. And that’s what we’re here, as we’re all about here at Wurtz Financial Services. So if you want to know what the value of your law practice is today, and this is something that everyone should want to know right now. Now, let’s say you just started your law practice. Maybe you’re not there right now. You could do a quick napkin math, right, one x and. And figure out what your earnings are.

Darren Wurz [00:25:10]:
Okay. Kind of like basic, but then figuring out where you need to go from there. If you need a law firm valuation, a law firm value assessment, as we call it. You know, it’s not a certified valuation, but we’ll give you a very specific understanding of what kind of value you could achieve in the marketplace. We can help you do that. Go down into the show notes, click the link to schedule some time with me, and I’ll show you exactly how we can do that for you and for your law firm. Well, this has been the lawyer millionaire podcast. I’m your host, Darren Wurz, here to help you grow your wealth, expand your business, maximize your profits, and create a practice that you love, enjoy.

Darren Wurz [00:25:59]:
And it’s going to create so much value for you and for your family. Thank you so much for joining me today. I can’t wait to see you next time.

Retirement for Law Firm Owners Pt 2: Valuing Your Law Firm (Ep. 70)

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