If you started your own law firm, it is highly unlikely that you began with the idea that you might one day aim to have it acquired. After all, law firms are owned more or less exclusively by lawyers, and people who want to acquire businesses don’t usually look into purchasing law firms.
However, recent changes to laws in some states may prompt law firm owners to consider the potential of acquisition. For example, the Supreme Court of Arizona recently eliminated a rule barring non-lawyers from being owners of law firms. This opens the door to a much larger pool of potential acquirers for your firm.
You may not currently be planning to sell your firm. However, if you work as though you were aiming to make it acquirable, you will be creating a healthy business. What’s more, you’ll be prepared to sell if the opportunity arises.
Be Prepared
One reason it is important to start thinking early on about the prospect of acquisition is that they can be notoriously difficult. In many cases, business owners do not end up getting as much money as they expect for the sale of the business they’ve developed. In other cases, they are unable to find a buyer at all.
Having the option to sell your firm at the price you are hoping for will involve a great deal of preparation and planning, which needs to start now. Here are the steps you can take to make your business acquirable.
Create an Opportunity for Return on Investment
The main thing a buyer is interested in is the potential for return on investment (ROI). In this way, business acquisitions are similar to the kinds of purchases we all make in our day-to-day lives. We are willing to pay a premium for a product or a service that will give us something that is worth more than we paid for it.
The same is true for anyone who might want to acquire your firm. This is why it is important to conduct your business in a way that will give your potential buyers an opportunity for a strong ROI. In general, this means that your firm needs to have the potential to turn a substantial financial profit.
Simply being profitable is often not enough to make your business attractive to potential buyers. It also needs to have a competitive advantage in some way beyond just making a financial return on investment.
Product Market Fit for Law Firms
One way of highlighting what makes your firm unique is to focus on a niche in the legal market or a specific practice area. Being a general-purpose law firm that takes cases in a wide variety of practice areas may have some advantages, however, a firm that dedicates its energy and resources to developing excellence in a particular area of the law will be much more attractive to someone who is considering an acquisition. Fine-tuning your firm’s knowledge and skill in one practice area over several years can make the firm a trusted brand in the field. Being a trusted brand can improve the opportunity for an acquisition.
Whether you are starting up a brand-new firm or restructuring one that you have already established, choosing a particular legal niche on which to focus is an important decision. In general, it is probably best to choose a practice area that is not already covered by multiple other legal firms in your geographic region. Being the only firm in your town that concentrates on elder law, for example, will give you a much greater market share than being one of twenty firms that focus on personal injury cases.
Systems and Processes
Profitable businesses often fail to find a buyer because they are unable to function without their founder being actively involved in the day to day of the firm. While being irreplaceable might be good for your ego, it signifies a key person risk for potential buyers.
For example, the branding of many law firms is built around their namesake founders. When clients associate a law firm with the person that they always see in television commercials, on billboards, and on the home page of the website, much of the value of the firm will quickly dissolve as soon as that person is no longer with the firm.
In other cases, a less high-profile figure might be responsible for managing the firm’s operations. If that person is the only one who knows how to handle the complexities of the firm’s business dealings, potential acquirers will have no idea how they might be able to run the business without keeping that person on board in perpetuity.
The solution to this problem is to put a set of systems and processes in place that will ensure that there is no person in any role or job at your firm that is not replaceable. Doing this will help you avoid a situation that puts off potential acquirers. This will involve creating documentation and standard operating procedures (SOPs) that serve as a guide to your firm’s business processes. We would recommend the E-Myth by Michael Gerber for a clear framework and real life use cases as to how this can work for your law firm.
For most law firm owners, the idea of creating an SOP is probably not exciting. Sometimes the firm will be involved in big cases or growing at such a rate that creating an SOP is the last thing on anybody’s mind. The problem is that the more your firm grows, the more complex your systems become. As a result, creating proper documentation becomes more and more difficult the longer you wait. The best way to keep your firm easily transferable is to start systematizing as much of your business as you can right now and continue to do so while you grow.
Selling Your Firm Starts on Day One
Whether your law firm is brand new or you’ve been at it for years, the decisions you are making now will affect your potential to sell it at some point in the future. It is never too early to start planning for a potential acquisition, but there will certainly come a time when it is too late.
