Small Law Firms

Every Lawyer Should Have An Exit Strategy

Selling a law practice can be more problematic than other professional practices.

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I recently had lunch with a friend. At one point we talked about what would happen to my solo practice if I were to accept a job offer elsewhere. I said that I would try to finish my existing cases as quickly as possible and hire a law clerk or a contract attorney to finish up any longer ones.

My friend was perplexed. He suggested that I sell my practice instead.

While I would love to have someone pay me a large lump sum to take over my cases, I don’t think my practice can be sold. My clients typically pay me in full up front which means I have no account receivables. After resolving their case, I usually never see them again although they refer me to people they know.

This means my client base or book of business cannot be sold to someone else because the buyer is very likely to get little to no money from them and their future value is speculative.

To make things worse, if my workload is large enough, I will have to pay someone a significant amount of money for them to take over my cases. If I cannot afford to do that, I will have to decline the job offer.

Self-employed lawyers will one day have to close their practice. Older lawyers want to retire and some may have to quit due to declining health. Younger lawyers might get a job offer or just want to do something else. Ideally, lawyers will want to close their practice by selling it to compensate them for the goodwill and sweat equity they have built over the years.

But selling a law practice can be more problematic than other professional practices. In addition to the issues I mentioned above, it is hard to predict a law practice’s income. This is because most of our clients have just one major problem and once it is solved, they do not come back. Also, comparable sale prices of other law practices are unreliable because law firms have different clients, different reputations and different practice areas. Also, comparable sale information is almost impossible to find.

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The second problem is that the client relationships and trust may not be transferable to the replacement. The retirement news may incentivize clients to work with someone new.

Finally, if pressed for time, the practice may be unfit for sale. Younger or mid-career lawyers who get a job offer will only have a month to close shop which may make it almost impossible to find a buyer.

While a proper exit strategy should be prepared in conjunction with professionals, here are two general things to think about.

First, have an exit plan. Older lawyers considering retirement should have a timeline lasting at least one year. This will give them time to think about and implement an exit strategy. Will they hire and train a successor who will gradually take over the firm’s management? Or do they plan to work with a broker to sell their practice to an outsider? Or will they sell their book of business to a competing firm?

Younger lawyers who may be more pressed for time may want to have full time or temporary staff available to help them finish up work or take over client cases.

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Second, if you plan to sell your practice, it must be attractive to potential buyers. While you should consult a valuation professional to appraise your practice, keep in mind that potential buyers expect a number of things. They are buying your practice because they want a return on their investment and do not want to go through the difficult start up phase of a business or developing relationships themselves. So they will want a minimum income stream, connections to referral sources, and marketing materials to name a few. They may also want you to be available as a consultant for some time.

Every self-employed lawyer should have an exit plan in place in case they want to retire or do something else. Because legal services are very personal in nature, lawyers might have difficulty selling their practice. But so long as they have a general exit strategy in place, they can ensure a smooth transition with no ethics violations and possibly a profit.

Steven Chung is a tax attorney in Los Angeles, California. He helps people with basic tax planning and resolve tax disputes. He is also sympathetic to people with large student loans. He can be reached via email at sachimalbe@excite.com. Or you can connect with him on Twitter (@stevenchung) and connect with him on LinkedIn.

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