Many lawyers have a personal attachment to their practices, having spent years developing and nurturing a book of business. But for some, there comes a time when a practice becomes an asset to be dispensed of – or for others, something that can be purchased to enhanced an existing practice.
Practices are bought and sold fairly frequently, sometimes from one solo to another, other times from a small firm to a larger one.
“It happens a lot more often than you might think,” said Minneapolis attorney Randall Ryder, who purchased part of another practice to benefit his consumer law practice.
“A lot of them are under the radar, and a lot are sort of insider transactions, said attorney consultant/coach Roy S. Ginsburg. “The ‘open-market’ transactions are pretty rare, and even those are often between parties who know each other. A lot of practices are bought and sold over coffee.”
Ginsburg points out that a few decades ago, it was considered unethical to sell one’s law practice; often, retiring attorneys would just give their files to colleagues who wanted them. But as the Baby Boomer era of attorneys reaches retirement age, it’s becoming more and more of a mainstream idea to sell off all or part of a practice.
And often the ideal suitor for a practice purchase is an eager young lawyer. Minneapolis attorney Rasheen Tillman was colleagues with a family law attorney, Jim Gerharter, who was winding down a 27-year family law practice. Tillman, not long out of law school, saw an opportunity to jump start her own practice – even though she’d had her eye on criminal defense, not family law.
She agreed to buy Gerharter’s phone number and the opportunity to market herself to his clients. After contacting and interviewing with many of them, she’s brought in between 10 and 15 of his old cases. Along with some instant businesses came some intangible benefits as well.
“He would come in quite a bit before he completely retired and help me strategize on cases,” Tillman said. “Part of what I bought was the experience he had to offer. That was a big part of it, because some of the cases that came to me were pretty complicated.”
From December 2010 to the end of December 2011, 27 percent of the cases she received can be directly attributed to the purchase of Gerharter’s practice and from December 2011 to the end of August 2012, 25 percent of the cases she received can be directly attributed to the purchase, said Tillman.
What the buyer gets when a practice is sold can vary greatly. Sometimes, as in Tillman’s case, it’s a long-held phone number and the potential for incoming business that comes with it. Other times, an attorney will sell an entire book of business, along with files, website, computers and even office furniture.
Naturally, a book of active clients is the most sought-after asset in the sale of a practice. A prime example of a practice that has value is an estate planning practice, according to Ginsburg. There, in theory, a retiring lawyer will have 1,000 or 2,000 wills that he or she has drafted.
“A savvy buyer will recognize opportunity in those files,” Ginsburg said. “If those clients are marketed to, some might want their wills revised. And, some of those people will die, and their estates will have to go through probate. Having those files amounts to an endorsement of the buyer by the seller.”
Even though the sale of a practice is often an informally arranged transaction between longtime colleagues, it’s still subject to Minnesota’s Rules of Professional Conduct. For instance, once one attorney has bought the practice of another, he can’t raise fees for the clients who come with it for at least a year.
“It’s more restrictive than you might think,” said Ryder.
No going rate
How much can you expect to pay for an existing practice? There is no going rate, insists Ginsburg.
“Who knows how much money I’m going to make from your book? There are no guarantees of what will come over,” he said. “That makes it difficult to come up with a fixed price.”
So naturally, the oldest advice of buying – caveat emptor – also applies in these cases. Ryder advises requesting at least two years’ worth of the selling attorney’s financial records before pulling the trigger.
“If someone won’t turn over anything from the previous two years or so, don’t go near it, because that’s where you find what the practice is really worth,” he said.
Another point of advice that, though obvious, can easily be overlooked: Make sure you can afford it. Arrangements can be made to buy a practice on an “earn-out” basis – paying back over time a percentage of future business that comes in. But even if you don’t pay a lump-sum amount, do a realistic projection of your income first.
“It’s common for people to buy a practice and say they’ll pay 30 percent of profit this year, 20 years, 10 the third year,” said Ryder. “Make sure you know you can do that.”
And if you’re like Tillman, keep in mind that with new clients might come the need to develop aptitude in a new practice area.
“I probably do about 20 percent criminal law now and 80 percent family law,” Tillman said. “So it’s a good idea to be ready to make that shift.”
Contact Dan Heilman at email@example.com.