Strategies, Valuation, and Common Misconceptions in Selling a Law Practice

Law Firm Growth Podcast Episode 43: Can You Sell Your Law Practice? With Roy Ginsburg

Narrator: [00:00:00] Welcome to The Law Firm Growth podcast, where we share the latest tips, tactics and strategies for scaling your practice from the top experts in the world of growing law firms. Are you ready to take your practice to the next level? Let's get started.

Jan Roos: Hey everybody, welcome back to The Law Firm Growth podcast. I'm your host as always, Jan Roos, and I am here today with Roy Ginsberg. Roy is a coach and consultant that helps law firms exit their practice, which, I think is something that a lot of people might be thinking of with everything that's going on in the world.

Jan Roos: But I thought I'd have him on to talk about this and thanks again a lot for showing up, Roy. You're welcome. Glad to be here. All right. Awesome. We always like to start off with a bit of the background story. Pretty interesting place that you found yourself as far as helping law firms out.

Jan Roos: But would you mind telling us how you got here? I'll try to give the short version. 20 years of

Roy Ginsburg: being a practicing lawyer, both in a big firm, small firm, and then in house, mostly doing [00:01:00] employment law. Then 15 years ago is when I went out on my own to become a coaching consultant. And the last, so I work with law firms and lawyers on issues such as practice management, business development, career decisions.

Roy Ginsburg: But I've been spending more and more time helping senior lawyers, solo practitioners, as well as small firm owners, figure out their exit strategies as they are nearing retirement.

Jan Roos: Awesome. You speak to a lot of people that are doing this, I'm sure, in the kind of day to day. So I guess what's the main thing that happens when people, what leads people to consider selling their firm?

Jan Roos: And what usually happens if they don't end up taking any action to work with a professional on this?

Roy Ginsburg: If they don't do anything and they die at their desk typically they're going to leave a mess. More often than not for the spouse and or heirs. I've been involved in matters where you can just tell the once talked to a son who was a lawyer of the father who passed away unexpectedly and the firm was in a, it was left in a mess and he had to clean it up.

Roy Ginsburg: It was very, you can sense in the phone call [00:02:00] how angry he was at his father for leaving such a mess. And this guy was a lawyer. I can only imagine how the spouse who's grieving, who's not a lawyer deals. Clients are disappointed if there's no, transition. Put into place, especially if you are more proactive and go out and find the successor for the, as if you're a solo or a small firm owner you essentially vetting counsel for your clients and they've gotten your approval because a lot of lawyers, quite frankly, don't want to leave their clients high and dry.

Roy Ginsburg: So when they don't have a succession plan in place, that's what they do. They leave them high and dry.

Jan Roos: Okay. So it's definitely, aside from the fact that it's probably nice to get a check rather than just flip the sign over to to close at the end of the day. Yeah. I guess there's a moral obligation to making sure that you're transitioning out of the product as well.

Jan Roos: Yeah. I think you can look at the ethics rules in most

Roy Ginsburg: states and you can certainly figure out that there is some sort of even ethical obligation not to leave a mess. If you pass.

Jan Roos: Okay, gotcha. So yeah, I'm [00:03:00] trying to think about the kind of person who would be thinking about shutting things down.

Jan Roos: Basically, obviously you don't want to die at your desk, but for somebody who might be reaching, what they think is the twilight of their career. What are the first steps that something, somebody would want to take if they wanted to go down that path?

Roy Ginsburg: The first thing we got to think about is whether their firm is going to have value.

Roy Ginsburg: Got to think about how long you want to work. Do you have potential successors in mind via the internal or external? Lots of things. I recommend that lawyers seriously start thinking about it at age 65. I think the new 70 seems to be the new 65 from what I can tell anecdotally And so I think you should think about it.

Roy Ginsburg: I got a call, today, as a matter of fact, actually, I think this was the oldest lawyer who has asked about inquired about my services and he was 88. I actually he sounded like he was all there. Sometimes I've had lawyers call me and it's very obvious that they lost some of their mental capacity, but that's, this guy's not serious about anything if he's waiting till 88.

Roy Ginsburg: But those are the [00:04:00] things that people ought to be thinking about.

Jan Roos: Yeah, and what practices would you say have the most value? People definitely thinking about the dollar sign on a purchase, but what are the tendencies of, practices that are able to sell for a good multiple?

Roy Ginsburg: Okay, I think the simplest way to look at that is imagine you're a lawyer, it's Friday afternoon you decide to retire on a nice long holiday weekend, like we're talking now, and You write off into the retirement, and now it's Monday morning, or in this case, Tuesday morning, because you have a long holiday weekend.

Roy Ginsburg: And you're, the person you sold the firm to was sitting in your chair. And let's say you sold to me, you sold to Roy Ginsberg. So I answer the phone, and I say, Hi, this is Roy Ginsberg. No, let's say I bought your firm, Jan. This is I'm looking for Jan. Is Jan there? No, this is Roy. I bought Jan's practice.

Roy Ginsburg: Can I help you? And let's assume I have all the, various qualifications that of course you did. Then the 64, 000 question is, will that person work with me? And of course the answer that I always give and tell audiences is the, which is the answer lawyers give their clients [00:05:00] all the time, is it depends.

Roy Ginsburg: So what does it depend on? It depends on the nature of the practice. Will they work? For example, if I am a prominent litigator in town, or the best, one of the better criminal defense lawyers, typically that person is calling, and let's say that, that criminal defense lawyer is you, Jan, they call up and they hear, I'm Roy Ginsberg.

Roy Ginsburg: No. They wanted Jan. They're going to go to the next person on there. Referral list. They're not going to work with me, but there are some other businesses where, in fact, depending on the nature of the practice area, they will work with me. And then, so in other words, there's what I call predictable revenue.

Roy Ginsburg: So those firms that seem to have predictable revenue, and let me give you some examples now of some practice here. Estate planning is actually my poster child. Exhibit A for a firm that at least in theory should have considerable value. Now, why is that? If you buy a practice from an estate planning lawyer, presumably they have, maybe hundreds, perhaps even thousands of wills sitting there in, in file.

Roy Ginsburg: Now, you and I both know, and everybody knows who's tuning in and listening, that [00:06:00] out of those, let's say, thousand files, some of those people, if they're marketed to properly, will come back and get the wills revised. In other words, there should be continuum revenue. Also, some of those people may pass away and then, of course, there's some probate work to be done.

Roy Ginsburg: Now, will they work with the successor? I think in a lot of instances, yes, when the selling lawyer introduces the buying lawyer to the past clients. In other words, when the buying lawyer comes in and takes over the practice, there's a, the notice sent out, maybe they do some other marketing, and I think that's Since most, since there's this validation of the buyer by the seller, and most people the reality is they don't like, it's not a lot of fun hunting and shopping for a lawyer, they'll just trust and say, yeah, I might as well, I'll give Roy a try, at least for this lower vision, and if he seems like a nice guy, I'll stick with him.

Roy Ginsburg: It's almost like some of you have experienced when your dentist or any sort of doctor retired you usually give them a chance once or your CPA [00:07:00] retires or your my situation, my barber recently retired, so I, I'll give that person at least one shot, so I think the same thing holds true for lawyers.

Jan Roos: Yeah. And as far as like that transition process, it seems like there's probably a, a lot of variables involved. And I guess the person who's passing off the business, the person who's receiving the business, what kind of, have you seen any sort of best practices in terms of how that handoff is done?

Roy Ginsburg: Again, it can depend on the nature of the practice area. For example, talking about the estate planning, there's not much of a transition. That needs to be a occur. Now contrast that, let's say another kind of practice that should on paper have considerable value, let's say you represent a lot of small businesses, you have a dozen, each of them, provide, 10, 20, 30, 40 thousand dollars of revenue per year and you sell the firm.

Roy Ginsburg: And you have so you have 12, relationships that you need to transfer to the buyer. Now again, you can make some estimate about how many of them are going to want to work with the buyer with the proper introductions and things like that. So in other words, there's time and effort that [00:08:00] needs to go into the transition.

Roy Ginsburg: That could be months. Sometimes it takes even longer for a more sophisticated, kind of practice. But again, that so you ask, what needs to be done during the transition, that, that, and it's, and depending on the personalities involved, the industries involved, that could take a lot of time or it could take very little time.

Roy Ginsburg: Again, it's going to, depend.

Jan Roos: Yeah, and another kind of question that's related to that is, as far as valuing law firms and stuff like that there's obviously some very niche things that'll change that versus insert business that people are just Buying base on the cash flow or whatever.

Jan Roos: So another thing that's related to that. So with this transition period being challenging, one of the things you hear about in acquisitions and other markets is something related to a buyout. So sorry, not a buyout, but an earn out. So do you see earnouts or washout periods or something that's contingent on part of the sale being on how these things end up transitioning?

Jan Roos: What do you see usually for? Yeah,

Roy Ginsburg: the reality is that they're if you have to remember young There's the DNA of lawyers is they're [00:09:00] extraordinarily risk averse So it's rare to find a buyer that will just you know They'll agree to a fixed price and write a check and everybody goes their merry way They are willing what most buyers lawyer buyers that is are willing to do is, pay somewhat what, how a percentage of future revenue for a, a negotiated amount of time with the idea that, yeah, I'm more than happy to pay the seller, but only if the business does come.

Roy Ginsburg: In other words, if those wills get revised or people, some of those clients, pass away and need probate, it's like I say, and one thing I want to emphasize is that. The marketplace for law practices is a very immature one, unlike, let's say, dentists and CPAs, where those kind of practices are bought and sold all the time.

Roy Ginsburg: Law practices is still a relatively new phenomena, and when you think about, Law practices, they have more differences than anything in common. Sometimes comparing, two similarly sized firms with revenues, it's oftentimes comparing apples and oranges. Even within practice areas, let's [00:10:00] say you do estate planning slash elder law, and in elder law, The revenue is 90 percent versus 10 percent of just doing, let's say probing or what you vary the percentages of what an estate planning Emphasize whether it be a probate estate planning or elder law, you know The profitability and all that kind of stuff there can be fundamentally different

Jan Roos: kinds of businesses and the other thing too, is that we've talked a lot about the existing book of business, but what are the other like key assets in a firm that, that could boost up the value?

Roy Ginsburg: Sometimes we have the location, but rarely, most people are going to we just want to know who the who the clients are.

Roy Ginsburg: Actually in small towns, there can be some brand value to the name. I was once involved in a situation where it was a small town lawyer and this is a third generation law firm in a very, in a relatively small town. So when people hear that last name, they automatically assume, they think legal, but they think law firm.

Roy Ginsburg: So the buyer was, of course, was very interested to, one of the things that enhanced the value was attaching the buyer's name to, of [00:11:00] course, the seller's name. And if that's perfectly ethical to do now, so in other words, there's value there, but I'll be the first one to tell you it's hard to pinpoint, how much does that add to the value of the law firm?

Roy Ginsburg: I just know it makes it certainly it makes it certainly more attractive when you have a name like that. One thing that a lot of lawyers overestimate. As far, overestimate the impact on the value of a firm is the system. In other words, I've had lawyers, I have a system to do this, I have a system to do that, and they somehow think that it's going to enhance the value.

Roy Ginsburg: Lawyers being lawyers think their own system is good enough, and they'll, the last thing they want to do is pay someone for someone else's system. Of course, there are exceptions to that rule, but the vast majority. Is not the case a question that often comes up is you say as far as valuing and is the author mentioned Sometimes the office location and sometimes if you have a long term lease so that could detract from the value Or if you make the sale of the law firm contingent on purchase of the building that's going to [00:12:00] probably make the law firm less attractive because a lot of those buying lawyers already have their officing situation set up.

Roy Ginsburg: They're just looking for ways to improve the revenue, get in some new clients, then are looking for a new location.

Jan Roos: And I know we've talked a lot about the outright sale of the firm, but what other kind of situations could somebody find with in terms of, exiting the practice?

Roy Ginsburg: Of course, there are some that, will just slowly stop taking cases and, close up shop and I always tell people that you ought to certainly consider selling rather than going that way because if you close up the right way, it's a pain in the neck.

Roy Ginsburg: Because some people hear what you need to go through to sell a firm and they think, I don't want to, sounds like too much effort. If you close it down the way you're supposed to, and it's a lot of effort, particularly when it comes to old, Client files. One of the advantages of doing some sort of sale or transaction is the old files that people have sitting around.

Roy Ginsburg: Now that the buyer's problem, not, yeah,

Jan Roos: Not the seller's problem, that's interesting. And then [00:13:00] what about going internal with a larger firm or something like that? Do you ever have clients that do that? Yeah. Sometimes the most usually the best

Roy Ginsburg: buyers are going to be friendly competitors.

Roy Ginsburg: And on occasion, the friendly competitor is going to be a larger firm. And usually the biggest problem with joining a bigger firm is sometimes there's rate issues, but sometimes there aren't and that could be a good a good home. And typically what happens then is the smaller owner or the solo closes down his or her firm, but gradually, basically you become an employee of the buying, essentially the buying firm.

Roy Ginsburg: And you close down your existing firm basically just to collect the receivables. Then you join the other firm in an up council role. And essentially the deal is the the compensation arrangement that you make with the new firm. For your book of business, so that's so there is no formal sale transaction, but as a practical matter you're you know selling you selling your practice to the bigger firm and going up council and the up council role doesn't necessarily only have to be with a a bigger [00:14:00] You know a larger firm you can do an up council role with you know You can sell your firm to a solo and be enough counsel to the new solo buying or small firm So it's not as in a title exclusively

Jan Roos: used with bigger firms, right?

Jan Roos: You And then just talk about a little bit more about those potential exits. We've talked about buyers a lot as well, but what about internal successors? So I can think of a couple of conversations I've had with people who have come through just for marketing services, but no two different, very contrasting situations.

Jan Roos: So one was a gentleman I spoke with from California and he was freaking out because basically he had a partner that was younger than him. He was, I think in the seventies. Part of it wasn't like, approaching retirement age as well, but they had been trying to hire somebody for years to eventually, you know Take over the firm but just weren't able to find something to sell and then another Firm owner I actually spoke to this morning this guy was outside of north carolina But he had actually found that great associate and who's she was he was grooming to to eventually take over the practice So what do you see as far as transitioning things internally?

Jan Roos: If you're that person who's maybe 65 [00:15:00] and not really having a person in mind for internal is that too late? Or what would you recommend to that person? It depends. Everything is,

Roy Ginsburg: Oftentimes I'm hired by lawyers that they, have one or two people have identified, they do have good business sense, they have a marketing sense and they hire me basically to give them an idea of what the firm is worth, how much is the internal people, should it be costing them to buy them out?

Roy Ginsburg: And just to basically give a green light to their, You know, their impression that someone is going will be good to take it over. Oftentimes I get owners, they have good worker beats, but they'll also come to me and say, Oh, these people are going to run it into the ground, the last thing you want to do is a buyout to someone who's going to run it into the ground, because ultimately it's going to be often these deals are structured with, is there'll be future earnings going to the selling owner.

Roy Ginsburg: So you don't want to sell to someone who may be a good working lawyer, but not. Very confident. So in those situations, you have to go, external. You briefly mentioned, Jan, about this idea of going out and finding the successor. That is, and the [00:16:00] idea there is you go out, you find somebody, probably on the younger end you, you date for two, three years, and then then gradually they buy you out.

Roy Ginsburg: Done maybe at over five or seven. The strategy is one that a lot of lawyers hear about, a lot of lawyers try. And those that try oftentimes fail. And if you dig down a little bit deeper, it shouldn't be all that surprising why they fail. First of all, it's hard to find a good person, number one to, to take over.

Roy Ginsburg: Then number two, oftentimes if they're that young, you have to train. If you're a senior lawyer, you want to spend the last few years of your career training somebody in. That's going to take a lot of extra time. Do you really want to spend that extra time doing that? And then finally, they could, given the ethics rules that lawyers have, they could, turn around, stab you in the back and compete against you, say, nevermind, I don't think this is working out quite all right.

Roy Ginsburg: And oftentimes it's tried then, the final nail in the coffin if you're a solo and you try to find it and you're making a nice living in the solo doing all the work, [00:17:00] all of a sudden you're adding payroll. So you have, you're hiring someone at 50, 75, a hundred thousand dollars, whatever it is to do this work.

Roy Ginsburg: That is going to impact your profitability for the few years. So you're paying, essentially, then that person buys you out. Essentially, you're funding your own retirement by paying this person when you really don't need that. So it's a fundamentally flawed strategy. It rarely works. And when you hear about it, what typically happens is the lawyer needed somebody 10, 15, 20 years ago hired and it just worked out that the person, had the right stuff to take over the firm, but it's, it's rarely that they hire that person with in mind that this person is going to be the successor, maybe in the back of the mind, but the primary reason to hire was yeah, I needed help, legal help.

Roy Ginsburg: And not, is this person going to be a good successor or not?

Jan Roos: Yeah, it seems like a lot of weight to put on one person. I can now that, when you say it out like that so you understand like a lot of that's a almost crushing weight of expectations for that. But I'm along those lines.

Jan Roos: If this [00:18:00] is something that's considered to be a good strategy generally what other are the big misconceptions do you see in how people are thinking about exiting their law practice?

Roy Ginsburg: Misconception. It's like I say, it's an immature market. I'm learning. It's hard to find, buyers than one would think.

Roy Ginsburg: So I think, lawyers should start thinking even in, even when they're five to ten years out of who they are. Like I say, usually the best buyers are going to be friendly competitors. So think about that, whether who you may want to approach when the time is right. Not necessarily doing earlier than you want to.

Roy Ginsburg: And strategically, I just, I'm working with a younger lawyer now. He's not looking I'm, working on practice management issues with him. But one of the ways to build his practice is, we're trying to devise a strategy of identifying senior lawyers in his market area that are ripe for purchase.

Roy Ginsburg: So in other words he'll approach them and say, Hey, what's your retirement plans? And oftentimes a lot of lawyers don't even think they can get anything. [00:19:00] So oftentimes if you proactively go out, out looking for firms as a younger lawyer, you can get them very much

Jan Roos: on the cheap. And it's a good way to build a practice.

Jan Roos: Yeah, that's really interesting. And then as long as I'm also along those lines things that people might be shooting themselves in the foot and you ever get to a situation where you've, if you realize that they've done something in the last couple of years that might've absolutely tanked the valuation of what they're expecting to get when they exit.

Roy Ginsburg: I'm going to take your question and. Flip it on its head because the question I often get asked is all right, Roy, I think I'm three or four or five I'm, two three four years away from retirement What do I do now to get it, get it ready for sale And I don't know if you remember president obama had a slogan for his diplomacy Theory and his theory was don't do stupid and that's what I tell and what is you know, stupid And you know signing i've had people come to me.

Roy Ginsburg: They're 75 and they sign a five year lease You And they come to me when they're 76 and I'm thinking to myself, what were these people thinking? What, you don't want to, put it, do something like that. And my theory [00:20:00] about, yeah, it'd be great if you put in this kind of system and improved your marketing, improve this and improve that.

Roy Ginsburg: I'm a very much of a realist. These lawyers, in the back of their minds, have known for 30, 40 years that they should be doing this. What makes me think that I'm a consultant and I say these are the things you should do they're all of a sudden going to do it now that they're ready to retire. The time to do all that stuff is when you're actively practicing and to make the money.

Roy Ginsburg: The reality is there's money to be made, the money that a lawyer makes is while he's working. Don't, it's not like a lot of other businesses where you can build the equity and you can hopefully get it to work out. I always tell lawyers that, yeah, if you can get, depending on the practice area, you can get a nice chunk of change and it will be worth it to, to try to exit by selling and finding a successor, but it's not going to be, millions and millions of dollars.

Roy Ginsburg: What I tell people who call me up and they say, this is, selling your law firm is not going to be your Hail Mary test if you haven't saved for retirement. Now, will it pay for a lot of extra vacations and a nice little [00:21:00] addition maybe perhaps a second home, maybe. Maybe, but if you haven't saved for retirement, this is not going to, save it.

Jan Roos: And I don't know if this is this kind of gets into the thing, but if you ever run into a situation where somebody may have thought that it would have been nice to explore this, but, ultimately the retirement is, something that they end up being scared of, what would you say to somebody like who's questioning whether they're ready for the, for this step right now as in ready for retirement?

Roy Ginsburg: One of the, one of the things I'm learning, people never really know when they're ready for retirement. They think they do, and then they retire. They are, uh, they get, obviously many of them get restless. What I tell a lot of my more traditional coaching clients is, practice retirement.

Roy Ginsburg: See how you do on long weekends. Have you ever been away for two or three weeks? If you get antsy then, you're not well suited for retirement. I, when I'm working with a selling client, I do, go, I make sure they have an idea of what they want to do with it, not just go on cold turkey.

Roy Ginsburg: Cold turkey rarely works for anybody, let alone lawyers who are typically type, double A or triple A. So it's important to think about [00:22:00] those those matters. When you are considering

Jan Roos: yeah, absolutely all right So basically if somebody's get to the point and this is resonating with them Like what does the process really look like?

Jan Roos: I mean if somebody wanted to get started like what would be the next step? The first thing you got to do is get an idea of if it's something worth selling

Roy Ginsburg: You know, I got off the phone with someone actually this morning that grosses, 75 to 100 thousand dollars a year In a practice area that most of the clients have gotten off the web Practice is worth virtually nothing.

Roy Ginsburg: So you got to get a sense, first thing of that contrast that of course with the state planning firm with hundreds of thousands of revenue you got something there Then you so you had to have an idea of what if the practice first has value and then you got to start thinking about Who that potential successor could be how to find the buyers I'll be the first to tell you, can you, at a certain level, you can do it yourself, but oftentimes it helps, to have some assistance by a consultant.

Roy Ginsburg: I will give you a heads up warning to on the listeners be wary of [00:23:00] traditional business brokers. They oftentimes don't understand the nuances of the legal market. Some do, most don't. You may want to talk to them, but be very, be leery. And then once you identify the buyer, you gotta structure the deal.

Roy Ginsburg: How, what's your up counsel arrangement gonna be? Is it gonna be an outright sale? What's your transition going to be? I tell people as far as from start to finish, if all the stars are in a line, it could take as long, it takes about a year. And that's with everything going your way. And most of the time, something, something happens that you didn't anticipate.

Roy Ginsburg: So it moves it out to as long as 18 months to two years. So I'd say one to two years is a good, time frame. If you think now, now, someone calls me now, it's in May and they want to get it done by the end of this year. I say it's virtually impossible. You can try, but very unlikely.

Jan Roos: Yeah, awesome. So and as far as I know we've I probably missed a lot of really awesome questions Potentially ask you right but I mean you have a lot of [00:24:00] fantastic content on your website So if somebody's looking to get some more information about you or what you do, what's the best way to get in touch?

Roy Ginsburg: Yeah, my law the website is sell your law practice dot com And if any of the listeners email me at Roy, at RoyGinsberg.com, I will send you a complimentary copy of my e book, Exit Strategies for Lawyers, that pretty much explains some of the things I talked about here this afternoon, but a lot of other topics that we didn't get a chance to talk about are contained in the e book.

Roy Ginsburg: I'd be more than happy to send you a complimentary copy.

Jan Roos: All right. Awesome. Thank you so much for that offer. It's super generous. Oh yeah. And it's been a really interesting conversation. Yeah, for anyone just thinking about it, I feel like people are either too optimistic or not optimistic enough about how it's going to go, it's just like anything else.

Jan Roos: It's a process that people can go to. And, just I'm sure you guys are used to dealing with your particular part of the law. Expertise counts, this isn't the exact kind of thing that you could just do for our Johnny, the broker down the street. There's a lot more than [00:25:00] cashflow that's stake for valuing these things.

Jan Roos: So if the expertise is something that's important, absolutely get into Roy's content and see what he's up to. And if it makes sense, go ahead and reach out. But yeah, thank you so much for taking the time today, Roy. My pleasure. Yeah, and for the rest of you guys, we'll be back next week with another episode of Law Firm Growth Podcast.

Narrator: Thank you for listening to The Law Firm Growth Podcast. For show notes, free resources and more head on over to casefuel.com/podcast Looking forward to catching up on the next episode.