How to Increase the Value of a Small Law Firm
If you are looking to increase the value of a small law firm, because you wish to sell it at some stage in the future, there are a number of things that you can do.
The most obvious one is to increase “quantity” of the income of the practice, which for many small law firms is relatively easy to do. I have talked on this blog about various strategies to do that, but what I wanted to talk about today is improving the “quality” of the income.
You are probably aware that accounting practices and financial planning practices sell for much higher multiples of their income than law firms. For example a typical accounting practice in Australia would sell for around 80 cents in the dollar of gross fee in a regional area and even more in a metro area, possibly up to $1 or even $1.20 in the dollar of gross fees. That means if the practice has fees of say $1,000,000, then it potentially is worth between $800,000 and $1,200,000 depending where it is located**.
With Australian financial planning practices, while the FOFA legislation is confusing things currently, they have typically sold for somewhere around $3 in the dollar of recurring fees or more. That means if a practice had $1,000,000 in recurring revenue, it potentially may be worth $3,000,000 or more**.
When I look in the media at small law firms for sale, I see practices with $1,000,000 in fees for sale for around $200,000, which of course represents 20c in the dollar of gross fees**.
In other words, the typical accounting and financial planning practices are selling for many times the value of small law firms.
Why is this?
One major reason is the “quality” of the income. For many accounting and financial planning practices, their clients come back year after year, in boringly predictable fashion.
A buyer of one of these practices therefore knows with some degree of certainty, that if they buy for example $1,000,000 in fees, that they will generate around that next year.
If you compare this to a typical law firm, much of their work is transactional, rather than repetitive. The client needs to buy or sell a property, get divorced etc, before the law firm generates any work.
It stands to reason though that if a law firm can get their clients to come back in the same boringly predictable fashion as an accounting or financial planning practice that the quality of their income will be substantially higher and on sale, that practice could potentially command a higher premium in the market place.
While I say this, I can’t find any evidence of law firms actually doing this.
With accounting practices, the tax return or BAS is generally seen as the reason for the client having to come back, so even poor accountants will get their fair share of their clients returning year after year. This is great for accountants.
This of course doesn’t apply to the financial planning practice, so what are they doing to command such a premium?
Most importantly, what could you do to get your clients coming back more regularly?
When you look at the differences in valuation, I think it is worth you spending at least a little bit of time thinking about, don’t you?
The information presented in this article is of a general nature only and does not represent specific advice tailored for your circumstances and should not be relied upon as an indication of the value of a specific accounting, financial planning or law practice.