Asked and Answered 

By John W. Olmstead, MBA, Ph.D, CMC

Q. I am the owner of a three-attorney personal injury practice in Columbia, South Carolina, and I am contemplating retiring in seven years. I have an associate on board to whom I would like to sell my practice during the next seven years. How do I go about valuing my practice and determining how much I should ask for?

A. A few of the various methods used solely or in combination with other methods for valuing a law firm include:

• Asset Based – ignores the importance of a firm’s earnings and cash flow (goodwill value)
  • Book value – adjusted to accrual-based financials
  • Replacement cost
  • Appraised value
  • Market value
• Comparable firm transactions
• Discounted cash flow – based on projected future financial performance of the firm
• Rule of thumb using multiples
  • Multiple of gross revenue
  • Multiple of net profit or earnings
  • Multiple of EBITDA (Earnings before interest, income tax, depreciation, and amortization. EBITDA is a measure of a firm’s operating performance.)
  • Multiple of SDE – Seller discretionary earnings after owner compensation adjustments (expensing appropriate salary)
• Rule of thumb variables
  • How much repeat business is expected
  • Number and type of clients
  • The transferability of client and referral source relationships
  • Dependence on only a few large clients
  • Whether the firm has been institutionalized or is a personal practice and uniquely the firm owner
  • Other attorneys and staff
  • Firm infrastructure and systems
  • Historical reputation of the firm
  • Contingency fee practices

Personal injury firms are difficult to value due to the variability in cash flows that are often the case with many firms. Some personal injury firms have relatively predictable cash flows and others have very large swings. When this is the case, the typical solution is cash-based book value plus a percentage of case fees as they are concluded with a percentage of completion factor applied.

Click here for our blog on practice sale
Click here for our blog on succession
Click here for out articles on various management topics

John W. Olmstead, MBA, Ph.D, CMC, (www.olmsteadassoc.com) is a past chair and member of the ISBA Standing Committee on Law Office Management and Economics and author of The Lawyers Guide to Succession Planning published by the ABA. For more information on law office management please direct questions to the ISBA listserver, which John and other committee members review, or view archived copies of The Bottom Line Newsletters. Contact John at jolmstead@olmsteadassoc.com.