Ready Set Sell Your Law Firm - Building Value - Part II

Version published in Law Institute Journal March 2015 89 (3) p80

You have decided to sell your small or medium-sized legal practice.

PART I in this Blog covered valuing your legal practice, understanding the sales process, finding a buyer and using professional advisors. It set out ways that experts may make a valuation of your business, while each potential buyer will value your business differently according to their needs.

This PART II covers how to build and maintain value - financial and other - in your legal practice when getting ready and set for a sale. The more understanding you have of value and what buyers may value, the more likely it will be a rewarding experience.

Compared to other profitable and well managed businesses, law firms tend to attract lower valuations. This is often due to perceptions such as the personal nature of law and its conservative habits, and that much of a law firm’s value is intangible being “tied up in goodwill”. (LSNSW) Actively addressing these perceptions will build value in your law firm.

Financial factors

Profitability

A major factor is (net) profitability of the practice. Many law firms are good at managing revenue, however it is also important to manage direct costs and overheads not only by budget control but also through proactive process improvement, quality system implementation and options such as automation or outsourcing.

Financial valuations also use the stability and sustainability of net profitability over time. How can you better ensure these as change occurs?

Cash flow

The better your cash flow, that is your law firm’s ability to convert work in progress into debtors and debtors into cash, the higher most buyers value your firm. This requires you to have good people and systems across legal and office functions.

Payback

Buyers often work out “investment payback”, that is, how long would it take to pay back the total amount they paid for the business (LSNSW). The buyer balances risk/reward: a more risky business with higher cash flow and shorter payback period compared to a less risky business with lower cash flow and longer payback period. Even if a business is less profitable, the lower risk may make it more attractive. How can your business manage risk better?

Other factors

As well as financial payoffs, buyers often seek more intangible factors that fit their needs and that lower risk, align the culture or build the brand.

Transfer value into the firm

A major factor in building value is reducing or removing dependence on you as the owner and transferring it to your law firm with strong, fair and sustainable management, records and systems. Reduce the risk that when the owner leaves, the value leaves too.

Implement your business strategy

A well-managed law firm has a clear vision, business strategy and measures how it is performing in its implementation. Typically this is supported by marketing, operations and financial plans. Buyers can better assess the performance of the practice and its future, as well as fit with their needs.

Align your brand

Build your brand and marketing to align with and support your business strategy. Support your brand consistently throughout your legal practice as service firms are often assessed by local reputation, front line staff, website, offices and even legal documents.

Traditionally the name of the law firm promotes its partners. Instead have a descriptive name that signals your firm’s expertise or key clientele (own the domain name.) Ensure the location of your law firm and the condition of your premises aligns with your brand and marketing.

Build client and work IP

The personal nature of law often means that clients may identify with and be loyal to a lawyer yet a buyer will value a client base loyal to your firm. Invest in knowledge management and transfer systems that embed intellectual capital in your legal practice rather than individuals. Also in client contact, marketing and CRM systems that ensure client relationships belong to the firm.

Some buyers will value a firm with broader types of work to ensure diversification while others will value work that offers a repeat client base. How is your firm managing commoditisation, growing or declining areas? Who are your competitors?

Know what your firm offers and actively manage this.

Invest in quality people

Value your people and invest in them with good leadership, fair management, career development and training, equitable salaries and appropriate trust and autonomy. There is great value in demonstrating your staff are of good quality, motivated and productive, and that your firm retains good staff. Build your culture to value and support your business strategy.

Carefully consider policies that are often distinctively legal such as time billing, client engagement and financial responsibility. Consider alternatives rather than “the way we have always done it”.

Processes and Systems

Efficient and effective systems and clear, documented procedures across the firm, such as matter workflows, IT, financials, marketing, knowledge management, client relations, risk, etc –can demonstrate that costs are well managed and provide reliable information for a buyer. These days a law firm must have excellent IT management and systems savvy.

Use KPIs to support value

A broader range of performance measures, in addition to traditional legal standards of client billing and time recording, can demonstrate how well your business runs. Consider KPIs such as productivity, return on salary, cash flow, realisation ratios, file turnaround and also “softer” KPIs such as staff happiness, client and supplier satisfaction and stakeholder feedback.

Tips

Having decided to sell, some business owners make a conscious or sub-conscious mistake: they take their foot off the accelerator. While you need a vision for post-sale life, during the process, you also need to continue running the business as well as ever. Follow up the customers, make the extra effort to keep staff happy, finish those problem jobs (!) and so on.

Summary

Understand the factors that build value in your legal practice and prepare your business by addressing these. Your legal business will be ready and set for sale.

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