Most entrepreneurs build businesses with the idea that they will eventually sell them. Whole books have been written about the concept — “Built to Sell” by John Warrillow is a great example. The concept of a built-to-sell law firm, however, is unusual. At least until recently.
Law firm owners in small to midsize practices have historically viewed their practices as something they will build, milk for all the cash possible, and then pass on to another generation for a nominal buy-in. Unless they simply close the doors.
That is changing.
Building to Sell a Law Firm Business
Lawyers are starting to realize that they are not just building law practices; they are building businesses. And businesses have value. And if a business has value, it can be sold. And if you want to sell it someday, you need to build it to sell — starting now.
I had you until that last sentence, right?
Selling your firm seems so far in the future. Why worry about it now?
But here’s the thing, the same law firm somebody wants to buy is the law firm you have been dreaming about owning.
What Makes a Law Firm Attractive to Buyers?
A well-run firm that is profitable and takes very little effort from the owner to operate is an attractive acquisition target. When you are ready to sell, it will get you top dollar.
Isn’t this exactly the type of firm you want to own?
Are you starting to understand the allure of “build to sell”?
Prepping a Business to Sell Is Not a Fast Task
For starters, buyers want at least three years of tax returns. So, you need to have filed taxes for three consecutive profitable years. When we start working with law firm owners, it typically takes two to three years to improve their profitability numbers, and another three years to get them running at peak efficiency. That’s five to six years to prep your law firm to sell. (I’ll talk about calculating your firm’s value in a future column.)
Then you have to actually put the firm on the market, find a buyer, go through due diligence, and close the sale. All of that takes time.
Somebody waking up on their 64th birthday who wants to be out in 12 months is in for a nasty dose of reality.
Perfectly Positioned: A Timeline for Lawyers Who Build to Sell
Contrast that 64-year-old with a 35-year-old attorney who is looking ahead, positioning themselves to sell when they are ready.
This lawyer knows it will take at least three years to become profitable.
But by the time they are 38, a nice chunk of change starts rolling into their retirement account.
They run the firm for another 10 years at fair margins, saving some cash for retirement, but are really focused on growing their top-line revenue. Growing is expensive, but they are willing to sacrifice a little of the bottom line to grow.
Now they are 48. Retirement is getting closer. So are college tuition and weddings — and given these major expenses, maybe the time for funding growth is over. Retirement is mostly funded, so they throttle back on marketing, and the firm’s growth slows. But that’s OK because they have learned how to operate their firm well, and profits are high. The firm is a cash cow.
The next 10 years pass in a blur.
Then the first grandbaby appears, and all they want to do is spend time with their family, travel and enjoy life. Maybe it’s time to get out. At 58, they are perfectly positioned to do that.
Or …
They are perfectly positioned to keep working for a while longer, play with that grandbaby and travel because they built a profitable law firm that doesn’t take much effort from them to run.
Either way, because they planned ahead and built to sell, they are a winner.
Plan to ‘Exit on Top’
The idea that law firms are not merely practices but valuable businesses with market value is gaining traction. I’ve been working on a new book that challenges traditional notions and guides attorneys on the path to building a profitable and effortlessly operable business with the intention of selling. “Exit on Top” is slated for release in March, so stay tuned!
More Law Firm Financial Tips from Brooke Lively
For more tips on building a more profitable law firm, read:
- What Should Be on Your Law Firm’s Dashboard
- Are Your Law Firm’s Financial Systems Ready to Scale?
- Law Firm Profits: 5 Ways You May Be Sabotaging Your Firm’s Growth
- The Best Compensation Plans Use the Law of Thirds
- Law Firm Overhead: What It Is — and What It Isn’t
- Building a Law Firm That Pays You First
- Understanding Law Firm Profits — And What to Do With Them
- How Are Law Firm Owners Paid? Total Compensation vs. Salary
- Funding Growth: Are You Starving Your Law Firm?
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