How do I sell my professional service firm?
Buying a Business or Franchise mentor Tom West responds to the following question from an inc.com user:
I own a law firm, and I consider myself an entrepreneur. I want to sell my business so that I can free my time to buy and run other businesses. Traditionally, selling a legal firm is tough. You either sell it to your staff or give it away. Can you suggest other ways to maximize its sale value?
Also, if selling to the staff is the only way, what suggestions do you have for maximizing the firm's sale value? (These days, young lawyers seem cynical and less likely than in the past to pay for "goodwill.")
Tom West responds:
Many service businesses, like yours, are actually personal service businesses. The owner in a personal service type of business usually represents much of the "goodwill," or the intangible assets. The question, then, is how much of this goodwill can be transferred. The good news is that professional practices, including law firms, have value and do sell.
You're correct that members of the existing staff may represent the best buyer since they already have a feel for the client base, the nature of the practice, and the culture of the firm. These items are just part of the goodwill.
If you represent a good portion of the firm's goodwill, you could agree to remain until the clients are transferred successfully. Unfortunately, in many cases, the buyer, whether inside or outside the firm, will probably want an "earnout" -- an arrangement in which the seller receives additional payments based (usually) on future earnings. With an earnout, you most likely will not receive all cash for your business, thus reducing the amount of capital you'll immediately have on hand for other ventures. In your case, an earnout might be based on client retention over a period of time -- perhaps a year.
The sale value of the firm can be based on some of the following: the amount of repeat business, the number of clients, the transferability of the client base, the stability of the revenue flow, and the overall reputation of the firm. Improving any or all of these areas should enhance the sale value of your firm.
Existing staff members are probably already aware of the firm's problem areas, so it's difficult to make changes to maximize the price they're willing to pay. To an outside attorney or firm, good record keeping, computerization, up-to-date files, and well-maintained clients can all increase value.
Don't forget the cosmetics, either. An attractive office, a well-stocked library, and attentive and personable support staff can go a long way toward attracting an outside purchaser. Marketing is also important: One business broker I know has several law practices for sale and has had good response from an ad in the state bar association publication.
In addition to current staff members, possible purchasers may include a competing firm, a firm in a neighboring city that may want to expand, or simply an attorney who wants his or her own practice and doesn't want to start from scratch.
Over the years, we business brokers have developed some basic rules of thumb for valuing most kinds of businesses for sale. Keep in mind they're merely guidelines to help us develop a range of values for a given business. For a law practice, for example, it wouldn't be unreasonable for you to fetch somewhere between 40% and 100% of annual fee revenue. (We find that firms specializing in estate work fetch closer to 100%.) Goodwill could run anywhere from two to four times the amount of excess earnings after taxes. Good luck!
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