Legal practice valuation
A key component in preparing a legal practice valuation is determining a market salary for the owner practitioner(s). This is particularly relevant when valuing a smaller legal practice, where adjusting for a market salary may eliminate any profits available to an investor. Owner compensation is a key issue in court cases, see Corbon & Klousner (2015) and Scott & Scott (2006).
A key issue can be determining the extent that the client relationships reside with the practitioner. Does the goodwill reside with the legal practice or with the practitioner?
Another key issue is assessing the size and repeat nature of the client base, for example, an international intellectual property law practice like is likely to have a more stable and secure revenue stream compared to a personal injury firm operating on a no win no fee basis. See more details.
Legal practice valuations can also vary based on location, margins and the stability and availability of staff. According to the Legal Benchmarks high achieving small legal firms have average profit margins of 46.0% and profit growth of 21.6%, compared to 12.0% and 12.8% for low performing firms. Key overhead expenses include rental costs, professional fees, HR, and marketing.
Other factors to consider include the cash flows of the practice, considering debtor and WIP days.
Another valuation factor to consider is who the hypothetical purchaser maybe, this could be a listed company. There are listed entities that “roll up” practices with the aim of reducing back-office costs. Listed companies typically have a lower cost of capital and offer cost savings, so the value to a listed acquirer could be more worth more than to an individual practitioner.
Legal practice valuation engagements have included the preparation of a valuation report of a legal practice to assist in valuing the shares of exiting partners and assistance in the preparation of submissions and other ad hoc advice in relation to a share-holder dispute for a conveyancing practice.