Happy New Year and best wishes for both a personal and professional 2015.
Here are a few ideas to help you jump start your practice in 2015:
Good luck in 2015!
https://www.olmsteadassoc.com/blog/category/strategy/
Click here for our law firm management articles
John W. Olmstead, MBA, Ph.D, CMC
Question:
John, where do you begin to get a value on a family law practice? It seems that one times gross revenue is unfair since it is usually one time business. I saw you speak at an ISBA event and this question was not addressed.
Response:
Regarding your question – it sort of depends on whether you are buying or selling and where you want to start. In general I agree with you that a multiple of one times gross for a family law practice is probably high. It depends on whether the practice has built up more of a firm brand vs. an individual brand. In other words institutionalized the practice. Also on where and how the firm gets business – advertising, referral sources, etc. A firm that has practice (institutional) goodwill might very well start at a multiple of one whereas a practice where the goodwill is personal goodwill the multiple might be .75 or less – in some cases even zero. I know of a few family law practices in the Chicago area that have been sold for .33 of gross revenue.
Often the initial asking price has little to do with regard to where you end up. Often, due to the concern that the clients and business might not materialize for the new buyer many firms are sold on various forms of an "earn-out" or a small payment at closing with the remainder paid and based on a percentage of revenues collected over a period of time – 3 to 5 years.
I have seen PI and other one shot matter firms sell for one times gross revenues but this is a best case scenario. CPA firms fare much better.
If you are the seller and your practice is a personal practice you probably will have to start with an asking price around .75 or less – if you have branded the practice and have others besides yourself – you might ask for more.
If you are the buyer I would balk at 1 times gross and would want to discuss provisions for reduction in purchase price if revenues fall below a certain level over a certain time period. Better yet – no payment at closing with the payout totally based and paid as revenues are collected in the future.
Getting to "the number" will involve balancing the seller's concern that the buyer will let the practice die on the vine versus the buyer's concern that the clients and referrals with not materialize.
Click here for our blog on succession
Click here for out articles on various management topics
John W. Olmstead, MBA, Ph.D, CMC
Question:
I am the managing partner in a eight attorney firm in Nashville, Tennessee. We are exclusively a family law practice and while we charge a few client on a flat fee basis – most clients are time billed. We ask for a $5000.00 security retainer up front. After the retainer is used we invoice clients for additional time spent on a monthly basis. We are having problems getting paid and are having to write off a large amount of accounts receivable. I would appreciate your thoughts.
Response:
This is a common problem that I hear from family law as well as other firms representing individuals. The law firm collects the initial retainer, the retainer is used up, additional work is done, – often to the conclusion of the matter – the client is invoiced for the remainder of the time expended, and the bill either does not get paid or is paid partially. The law firm ends up writing off the balance.
The best solution is to require the retainer be replenished at a certain point and, within your state's ethical parameters, not perform additional work until the additional retainer is received. Recently a client told me that his office manager's number one responsibility is a daily review of unbilled time compared to unused retainer. When the unbilled time get to 90% used the client is invoiced for additional retainer. When 100% is reach work is stopped until the additional retainer is received.
With today's client billing systems that have integrated trust accounting, assuming that timesheets are entered directly and daily, an office manager or bookkeeper can simply print or review on screen a summary work in process report that shows for each matter the unbilled values for fees and costs, unpaid receivable, and retainer balances in the trust account. Matters with unbilled fees and costs approaching the retainer balance can then be invoiced for additional retainer. The key to making this work:
Click here for our blog on financial management
Click here for articles on other topics
John W. Olmstead, MBA, Ph.D, CMC