Thinking about selling your practice?
If so, the next question may help you make up your mind. How much is it worth?
It’s hard to say, kind of like explaining to clients the value of their case or the reason for your hourly rate. It’s a complicated question but boils down to this: How likely is it that your clients will actually continue with the potential buyer?
Goodwill
Like many things, a practice is worth only what someone will pay for it. But nobody will pay for a practice unless the clients come with it.
“Goodwill — that is the intangible asset that you’re really looking at because that is what a lawyer or professional services firm is transferring,” said Dale Lash, partner-in-charge of RubinBrown’s Business Valuation Services Group.
He told the ABA Journal that goodwill is the combination of the lawyer’s knowledge, skill, judgment, and reputation. Goodwill is unique to the individual or firm, he said. “Goodwill, if there is value in it, flows from the ability of the seller to successfully transfer a book of business to the buyer.”
Doing the Math
While goodwill is intangible, receivables are concrete. They are the most important number in the calculus of selling a practice.
Atticus, a practice advisory group, says the formula for valuing a practice should include:
- Average your firm’s gross receipts over the last five years
- Count the number of clients and estimate how many are transferable
- Identify the firm’s practice areas and potential for repeat business
- Multiply the average receipts by .5 to 3.0
The results will give a range for a sale price. Of course, a savvy buyer will require an objective valuation by an accountant or other professional.
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