7+ Steps for Buying a Law Practice
Introduction
Hanging up your own shingle to start and grow your law practice is a huge investment. You’ll need to invest a lot of time and effort to get clients and build your reputation. One alternative to starting from scratch is to buy an already existing law practice.
In this article, we will present and explain how to buy a law practice and other things you should consider before making this important investment.
What Makes a Law Practice Different from a Law Firm
Although these terms are often used interchangeably, law practices and law firms are different in significant ways.
Law practice — an individual lawyer provides legal services to clients who are usually billed when such services are rendered. A law practice is usually more focused on the individual providing the services.
Law firm — a business entity formed by one or more lawyers to collectively engage in the practice of law. A law firm is more focused on the services provided.
When you purchase a law practice, you are purchasing a lawyer’s individual business, paying clients, and accounts receivable. When buying a law firm, on the other hand, you are purchasing an entire business entity.
How Much Does It Cost To Buy a Law Practice?
The price of a law practice can range from a few hundred thousand to millions. The cost determination depends on various factors, including the size and profitability of the practice, the number of existing clients, accounts receivable, debts, and more.
Small law practice: If you're considering buying a small law practice, including solo practitioners, the cost can range from $50,000 — $200,000. At this level, the most valuable aspect of the firm is often the client list.
Medium law practice: Medium-sized law practices can range from a few hundred thousand dollars to a couple million dollars. These practices typically have a few lawyers and possibly some support staff.
Large law practice: An extensive law practice could cost several million dollars, as these typically have numerous lawyers, extensive clientele, and cases often involving millions of dollars.
Keep in mind these are approximate figures, and the costs can vary widely, especially when considering the geographic location and area of practice.
It’s a good idea to check existing documentation like bank statements and records, federal income tax returns, financial statements, titles to assets, debt agreements, leases and subscription agreements, business and payroll tax returns, insurance policies and applications, and compensation records.
Where To Find Law Practices for Sale?
One of the best places to find leads on law practices for sale is through your close networks. These contacts can give more information on a law practice’s reputation and trustworthiness. The state bar association is another good place to start. They provide leads on attorneys who are planning to retire and are selling their law practices.
You can also cast a wider net by checking out online marketplaces like LawBiz, BizBuySell, The Law Practice Exchange, LoopNet, DealStream, or even Craigslist.
How To Finance the Purchase of a Practice?
If you already have the funding you need to purchase a law practice, then you are off to a great start! If not, you can secure a bank loan or a Small Business Administration (SBA) loan. Though ill-advised, you can also use credit cards, but make sure to get a good estimate of your prospective law practice’s profitability to avoid getting buried in high-interest debt.
How To Buy a Law Practice in 8 Steps
Buying a law practice is an intricate process that requires careful planning, strategic thinking, and important decision-making. The process not only involves understanding the financial and legal aspects but also ethically and efficiently transferring clients, operations, and assets. Here are eight comprehensive steps to guide you through the process.
Set clear objectives
Any business plan, including a law practice purchase, requires a decision about your vision for your new law practice. What practice areas would you prefer? What’s your target client base? How profitable do you expect your practice to be? By defining your long-term goals, you can easily narrow down your choices to law practices that align with your objectives.
Look for law practices for sale
Once you’ve set your goals and objectives, start looking for a law practice that aligns with them. Remember that your goals need not be set in stone, so you might want to make room for a bit of flexibility. It may not be possible to find a law practice that is aligned 100% with your vision, so keep an open mind. You can start looking for leads by asking your close network contacts or law communities. You can also find leads from your state bar association and online marketplaces.
Research existing regulations on buying a law practice
Aside from looking for a law practice to purchase, it’s also important to look into any regulations your state might have on buying legal practices. For instance, most states require that lawyers inform their existing clients about the sale of the practice.
Figure out your finances
Build a reliable, trustworthy team that can help you decide which law practice to purchase and seal the deal. For instance, an accountant or a finance expert can help to make sure that you get the best value out of your purchase and that your purchase will align with your long-term financial goals.
Get expert legal advice
You can also seek the help of a legal advisor who has experience with purchasing law practices. A legal advisor can guide you through every step of the process, including structuring the purchase agreement.
Map your transition plan
Start planning your transition before finalizing the purchase. It's essential to prepare for potential disruptions to clients and employees. Consider keeping the previous owner as a consultant post-purchase to ensure a smooth transition. Be ready with your transition plan before negotiation, demonstrating to the seller that the business and its clients will be well cared for.
Negotiate and execute the purchase agreement
Once you’ve found a law practice to purchase and experts to help you finalize the deal, acquaint yourself with the seller’s law practice before signing any agreements. What you will learn can help you negotiate better terms. In accordance with current state rules and regulations, you can sign a final contract of sale with the seller once all the conditions have been agreed upon.
Implement your transition plan
Now that you’ve finalized buying a law practice, it’s time to implement your transition plan to make sure that the transfer of ownership goes as smoothly as possible. This process may involve turning over client files and handling pending cases. If you wish to implement any changes to existing processes or upgrade existing technologies, make sure to introduce these changes to employees and clients gradually.
Investment Agreement
In addition to the considerations mentioned above, another important aspect of buying a law practice is the investment agreement. It is a legal contract that outlines the terms and conditions of the investment made by the buyer in purchasing the law practice. It establishes the rights and obligations of both parties involved in the transaction.
Such a document typically includes details about the buying a law practice: purchase price, payment terms, allocation of assets and liabilities, representations and warranties, non-compete clauses, and any other specific agreements between the buyer and the seller.
Bonus Point: Asset Purchase Agreement
Buying a law practice is an exciting venture that can propel your legal career to new heights. However, the process of acquiring a law practice can be complex and time-consuming, involving extensive research, financial considerations, and legal obligations. To streamline the entire process and ensure a smooth transition, try using the asset purchase agreement template.
An asset purchase agreement simplifies negotiations, covering the transfer of assets, financial considerations, warranties, and representations. It also maps out a transition plan, detailing the timeline for transferring files, handling cases, and integrating new processes. It saves time, reduces ambiguity, and protects your interests, making it a wise addition to any acquisition strategy.
Conclusion
Aside from the obvious financial costs, buying a law practice involves extensive planning, due diligence, and paperwork. While it isn't always a straightforward process, the right resources, like Lawrina, can be invaluable in guiding you through the complexities. By following these steps, you can help ensure your newly purchased practice is not only rewarding but also profitable.