Celebrating 10 years! 2007-2017

Buying a Practice

I'm interested in the idea of purchasing a practice from a s mrtor01/27/17
you "anticipate she will be looking at succession planning d dingbat01/27/17
My background: I worked for a small rural firm doing almost legaleagle01/27/17
I'm in municipal now. Curious how you transitioned in-house sjlawyer01/29/17
Sjlawyer - My reference is to being in-house at a municipali legaleagle01/30/17
Buying a solo practice is generally a bad idea. Clients have guyingorillasuit01/27/17
This guy gets it. You should not pay anything up front for skepticmadenotborn01/28/17
I've never bought a practice but I agree with these concerns anothernjlawyer01/28/17
Unless there are some long-term contractual agreements in pl tigers152601/28/17
mrtor (Jan 27, 2017 - 3:45 pm)

I'm interested in the idea of purchasing a practice from a solo practitioner in a very small town in my immediate area. The owner is an acquaintance of my fiance's family, all of whom are from that small town, and she is arguably the dominant lawyer across several small rural counties. She has a thriving transactional and municipal practice. She originally purchased the practice, which dates back to the mid-1800's, and I anticipate she will be looking at succession planning during the next couple of years. The sale would presumably include the historic office, various furnishings and other hardware, and the existing client base.

I wanted to get more information from people who have bought practices or know others who have. Specifically, how do you value the practice? Should you try to work for the attorney before considering a purchase? How do you best retain the client base, specifically the municipal clients? What are the upsides and what are the pitfalls to a purchase?

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dingbat (Jan 27, 2017 - 4:17 pm)

you "anticipate she will be looking at succession planning during the next couple of years". some may say you're jumping the gun, I'm gonna say it's the perfect time to approach her.

That way, you can work with her for a few years, she can groom you to take over, help you out, introduce you to the client base, etc. It's much smoother than buying a practice, which is usually a pretty quick transition (six months tops) and with less chance of alienating clients.

As for valuation, there are two questions: (1) how much revenue does the practice generate (and how much shrinkage will occur during a transfer), and (2) what is the related property worth.

For (1), check the books. get as many years as you can, and look for trends/anomalies. If it's consistent, then you know what the practice should generate in the future. Attach a reasonable multiplier.
For (2) you need an appraisal, or at least an estimate, of what everything is worth. Add anything of interest, depreciate as applicable, make adjustments as necessary.

Add 1+2, and you've got a fair price. In an ideal world, you can make payments over time

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legaleagle (Jan 27, 2017 - 5:20 pm)

My background: I worked for a small rural firm doing almost exclusively municipal work for about four years before transitioning in-house.

My experience indicates it would be tremendously difficult to keep the municipal clients without having worked for the firm for the previous few years. The various stakeholders in these organizations need to know you are competent, but more importantly, you need to build up some goodwill with them. A few years working with the solo will generate some loyalty from those folks as well.

Without those benefits, the retirement of the practitioner makes it really easy for them to decide it is a good time to send out an RFP and explore other options.

Her expectation of the value of the firm based in part on these clients (who are likely steady and easily collectible cash-flow) may differ significantly from your value if you expect to lose a portion of that client base.

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sjlawyer (Jan 29, 2017 - 6:41 pm)

I'm in municipal now. Curious how you transitioned in-house, where and what skills you found transferable.

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legaleagle (Jan 30, 2017 - 10:42 am)

Sjlawyer - My reference is to being in-house at a municipality, rather than a corporation. Not sure I was clear in my post. From a skills standpoint, everything is generally the same.

As far as getting the job, I pitched them on my interest in not only practicing law but in helping to craft policy. Prior to my arrival, there was no in-house legal department, so I characterized my experience in a small law firm as being similar to creating the department.

If you have other questions, post a throwaway e-mail and I'll follow up.

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guyingorillasuit (Jan 27, 2017 - 6:33 pm)

Buying a solo practice is generally a bad idea. Clients have relationships with their lawyers, not with the building that the lawyer is in, and certainly not with the armchairs and cabinets in that building. When the principal leaves, the clients will leave also. If her practice depends on a few large clients, if even one of them leaves, you might be in trouble.

If you are new, you are likely to be taken for a ride on this deal - family friend or not. You are likely to overpay for non-existent "good will", equipment whose value is less than zero (quiet possible just old hardware which will have to be hauled to the dump), furniture of zero value, etc. You will be stuck in a lease, and may be saddled with "legacy" employees, who will be sold to you as experienced and trustworthy.

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skepticmadenotborn (Jan 28, 2017 - 6:56 am)

This guy gets it. You should not pay anything up front for the practice. The furniture and equipment are probably of minimal value. Get a short term lease on the building to start out (ideally month to month). Do not, under any circumstances, pay cash up front for the client list. Work for the lawyer for some period, maybe even a couple of years, and when she retires, pay her a percentage of the revenue that her clients bring in. She will work like crazy to make sure you stay in these clients' good graces.

It may be difficult to get the lawyer to agree to all this. But if she won't accept these terms, you are better off just walking away and starting your own practice. You can get her clients when she retires in a few years anyway.

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anothernjlawyer (Jan 28, 2017 - 9:33 am)

I've never bought a practice but I agree with these concerns.

Here's another one: is the solo practitioner retiring? Handing in her law license? Moving out of state?

If not, what happens in 6 months when she's "tired of retirement" and decides she wants her 2 or three most lucrative municipal clients back? She knows them: you don't. If the work doesn't entail heavy paper litigation, she can probably service them out of a home office. They won't stay with you because you "bought the practice." She'll get paid twice-once from you and once from them- and you'll be SOL.

If anything, work out an agreement with her where you come to work for her, and agree to pay her a percentage on the clients that you retain from the practice after she retires (or in a set number of years so she can't collect all the money forever) This way, your interests are more in line, and there's less chance of you getting screwed.

Good luck.

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tigers1526 (Jan 28, 2017 - 9:55 am)

Unless there are some long-term contractual agreements in place with the firm and clients, I do not see why anyone would buy another attorney's practice.

The true value to the practice is the lawyer and his/her knowledge and experience. That is not for sale, and also cannot be valued.

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