Five Common Misconceptions About Selling Your Law Practice
If you are thinking of walking away from your practice and want to get paid for it, you are not alone. More lawyers are looking to sell their practices. This is especially true in consumer-facing areas such as family law, immigration, and estate planning.
Too many lawyers harbor misconceptions that hinder their ability to take full advantage of their opportunities to monetize their practices.
Misconception #1: Lawyers Seek to Sell Their Practices Because They Are Struggling Financially.
In my experience as a consultant to law firms, lawyers who have small or financially struggling practices are more likely to just walk away and close their doors without trying to sell it. Some walk away because they didn’t fully realize that they even have the option of selling their practice.
Many of the calls I receive are from lawyers with more than 20 years of practice who want to sell because they are more business savvy than the average attorney and are looking to cash out. And while it’s not a scientific random sample, the small firm lawyers who call typically generate annual revenues in the range of $400k to $1.5 million in the calendar year before they seek to sell. Lawyers are less likely to pay for a financially struggling practice.
Misconception #2: It’s easier to sell than to find an internal successor.
Many attorneys who want to part with their practice mistakenly assume that they need to sell it. But it is often easier transition a practice as part of a succession planning scenario. This is especially true if the departing lawyer wants to make sure that members of the staff can continue in their present roles. An outside lawyer who buys a practice is more likely to want to clean house or take a selective approach to retaining staff members. This is not to say that succession planning is easy. It isn’t. And many law firms fail to groom lawyers to take over. But in many cases, more stars need to align to make an outright external sale work than to make an internal succession work.
Misconception #3: You have to advertise to sell.
This misconception is a corollary of Misconception # 2. Because succession planning is a more viable option than most lawyers realize, they mistakenly assume they will need to advertise their practice to strangers to cash out. While some business brokers do get involved in the advertising of a law practice, you are more likely to transition your practice to a lawyer or law firm that you already know or have heard about. It’s often easier to structure a deal with lawyers who already know and like you than to close a deal with a stranger.
Thus, one of the best ways to begin the process of transitioning out of a practice is to put together a list of people you know who might be interested in your practice or know someone who does.
Misconception #4: The best way to let people know you are interested in selling is to write a letter.
Anyone who will take over your practice and pay for it will need a lot of information. A brief letter isn’t likely to be useful. Before reaching out to potentially interested parties you need to collect a wide range of information. Typically, this involves financial information such as three years of profit and loss statements. Even when a law firm has a senior associate or non-equity partner in place, and that person has expressed an interest in taking over, they often have no idea about the firm’s finances. I have been retained more than once to help potential partners review and understand the finances of the firm for which they are working.
Misconception #5: The most important part of the sales transition is the sales price.
Selling a practice is often motivated by non-financial factors. Lawyers are more likely to want to sell because they feel burned out or because they want to ensure that their clients get taken care of once they leave the practice. And the succession planning process is even more likely to be motivated by factors other than money.
But if money is often not the driving force behind selling a practice or transitioning it to the next generation, what is?
The ability to sell a practice or complete the succession planning process often turns on the extent to which the departing lawyer can craft a compelling narrative about the identity of the lawyer or law firm that would most benefit from buying or otherwise taking over the existing practice. In essence, this requires the departing lawyer to create a business plan that helps identify which potential buyers should be contacted. For example, understanding that your practice might be most attractive to law firms who might be interested in expanding to your geographic area will help you craft a narrative that is appropriate for specific firms. Likewise, bringing in an outside partner to join your firm and eventually take it over may hinge on your ability to identify lawyers who need more than money. For example, they want an opportunity to control a firm and their destinies.
The financial terms are, of course, relevant to any sale or succession planning involving a law firm, but don’t underestimate the importance of crafting a narrative that focuses on emotionally impactful factors unrelated to money.