Exit strategies: What is your practice worth?

Getting out of your practice is a reality sole and small practioners will one day face. The greying of the bar has made this a topical issue, especially in rural areas.

Many lawyers know about having a will, and a power of attorney for their practice, but few have a succession planning strategy. Despite helpful guides provided by the various law societies and insurers — including Ontario, British Columbia, Alberta, and Nova Scotia — the actual mechanics of transitioning out of the practice can be daunting.

Succession planning may be voluntary or involuntary. Sudden incapacity may mean you have no say. It is preferable that you wind down or sell your practice (whether to an internal or external buyer) voluntarily. A voluntary sale will maximize profits more so than involuntary selling or winding down.

The first step in your planning is valuing your practice. The problem most people face when valuing something of significance is overvaluing. Emotional factors play a role in this. Lawyers certainly face this issue when putting a price tag on their practice, and this can derail a sale.

One option is to have your practice professionally assessed. However, a professional valuation may not accurately reflect the actual worth of the practice. An assessor’s geographic experience may impact the assessment, especially for lawyers in rural areas, as will any subjective component. Regardless of any assessment you obtain, there is no guarantee you will find a buyer willing to pay that price.

If you decide to assess the value of your practice yourself, start by categorizing assets. There will be some that are easier to value (such as real estate or office furniture). Some will be harder to put a price on, such as work in progress, disbursements, and accounts receivable. A discount factor will likely be required for these, depending on the age of the accounts receivable and likelihood of collection.

Lastly, there will be assets that are very difficult to value, such as goodwill, reputation, contacts, and relationships.

You also need to evaluate debts of your practice (such as unpaid wages, accrued holiday, severance obligation, unexpired portion of leases, and ongoing vendor contracts for office equipment, advertisements, and research and database services). You may need to negotiate a termination of contracts, make subleasing arrangements, or have the purchaser agree to assume contracts.

The challenge with lawyers is that we are trained to want to negotiate the best deal. The buyer wants the lowest price and the seller wants top dollar, but selling a practice is not cut and dried. There may be non-monetary factors involved.

What your practice is worth to you and what it could be worth to a potential buyer will rarely be the same. For many lawyers, the practice of law is not only what they do but who they are, adding an emotional component to the formula.

Despite best efforts, there will always be unforeseen items that require give and take to see the transaction through. Just remember that a good deal needs to work both ways to survive.

Successful sales usually involve a transition period, which allows the selling lawyer to mentor and transfer the practice. A benefit to the seller is that it will ease the lawyer into retirement. However, a transition period will only work if the selling lawyer understands he or she is no longer in charge.

With more lawyers reaching retirement age, an increasing number of practices require exit strategies. Fortuitously, opportunities abound as there are more law school grads than ever before, and many may consider purchasing a law practice.

Careful planning of what to do with your practice is crucial for a successful transition into retirement. Take steps to fairly value your practice, and know that you can only sell if your price is attractive to a buyer.

Parting tip: Check your Legal Assistance Professional Plan. Some, like Ontario, offer pre-retirement assistance.

Written in collaboration with Kevin Cheung