Though sales of medical and dental practices are fairly common, as are buy-ins (such as a biglaw attorney purchasing a partnership stake in a firm), many state regulators prohibited lawyers from selling a law practice. In 1990, the quick-moving (ha!) ABA finally moved itself to action , with the adoption of Model Rule 1.17 that permits lawyers to sell their practice and describes the ethical requirements for doing so (notice to clients of the sale and their right to retain another firm and no rate increases).
But how does sale of a practice actually work in practice? This month’s issue of the Illinois State Bar Journal gives the lowdown on purchase and sale of a law practice from both the seller’s and buyer’s perspective.
The buyer, Peter Olson was a Chicago based solo (who also ran the blog at soloinchicago.com) who’d initially located the firm on Craigslist (not as unusual as you might imagine). Turned out, Olson actually knew the seller and according to the article, the two
reached a simple buyout agreement through which Olson effectively worked for the firm for a few months as the seller transitioned out, then took it over – not only the client files but the office, staff, computer systems, and other property.
The buyout took place over a number of years which presumably minimized the financial impact on Olson, and the seller had almost no involvement after the sale date as he’d been transitioning out anyway – though Olson inherited his colleague’s staff as well.
Naturally, the article doesn’t say how much Olson paid for the practice – though he acquired between 75-100 clients which has considerable value, provided that the matters come with paying clients. The price paid will depend on the longevity of the client and their likelihood to bring in future business.
Of course, in theory clients can change lawyers if the firm is sold (and indeed, as mentioned above, the seller is obligated to advise clients of that right). Nevertheless, Olson didn’t find that factor to be a cause for concern. Observes Olson:
“But the danger of clients departing en masse is probably overstated […] “It’s a pretty vested relationship. If you introduce yourself, and you’ve been in the business for awhile, and you keep the seller in the business for awhile [after you begin], there are lots of ways to bridge that.” Related to that, he adds, is the reputation of the seller, which you can determine somewhat by perusing online reviews. “I dealt with that a little bit,” he says. “There were a few sour grapes with the firm I was purchasing. But once they saw the work we were doing,” those clients stayed.
Olson compares the “stickiness” of law clients with that of bank customers when a purchase occurs. “I have bank accounts at Chase Bank,” he says. “The only reason is because they bought banks where I had had accounts. How hard would it be for me to move my checking and savings accounts?” Not very, yet he hasn’t, he says.
“Your attorney relationship is a lot closer,” he adds. “The loyalty and stickiness is pretty strong, as long as you come in and do good work. If you come in and don’t do that well in the first three to six months, you might undermine what you just bought. You want to do great work always, but especially in the first three to six months.”
So what are some tips that Olson and others quoted in the article have for law firm sellers?
First, it’s imperative that a lawyer planning to sell a practice — whether imminently or down the road — must have checklists and procedures in place thus enabling the purchasing attorney to simply walk into the office, pick up the files and get started. And while the article suggests that your files needn’t be digital so long as they’re organized, frankly, I don’t see a 30-something lawyer agreeing to buy a paper-based practice- at least, not without a substantial discount to reflect the cost of modernizing the practice.
Second, a lawyer – even a solo – needs to establish a law firm brand that can survive independent of the principal attorney. For Olson, that means branding his firm as Chicago Family Attorneys rather than a practice under his name.
Finally, depending upon the jurisdiction, lawyers who seek to sell a practice down the line may need to think about changing bar rules today. First, some states may have ethics rules that complicate sale of a practice as was the case in Illinois when Olson first broached the concept. Other states like New York and Texas prohibit lawyers from practicing under a trade name which could limit their opportunities to sell a practice down the road. And some lawyers for whatever reason still fear or hate the cloud with irrational intensity and won’t use to manage files. Fair enough – but that may reduce the price they can expect when selling their firm.
Last – Craigslist isn’t the only game in town these days to find a practice. Ed Poll – a pioneer in the matter of selling a law firm, created a website listing practices for sale and offers advice to buyers and sellers on getting the best value.
Have you considered buying – or selling a law practice? What’s your experience been? The comments are open.