Plan Your Exit Strategy Now, Rather Than Later

A successful law firm owner in his late-’60s asked me if I could ­prepare a formal valuation of his small personal injury law firm because he intended to retire and sell his firm. His law firm enjoyed an excellent reputation due to his 35 years of hard work in the community, combined with a continuous branding campaign via radio, highway billboards and church bulletin advertisements. He made a high six-figure profit every year. He was proud of his firm’s accomplishments and considered himself financially successful. Unfortunately, he had just been diagnosed with inoperable cancer. He was the sole owner of the law firm and had no exit ­strategy in place. He asked for a proposal to provide the services he described. A few days later he was rushed to the hospital in an ambulance because his health ­deteriorated suddenly. He called me from his hospital bed to change the timing of the consulting project and our first meeting was held in the hospital. This was a difficult ­assignment because every meeting and phone conversation was overshadowed by his impending death. As you might expect, it was a highly emotional engagement.

During our first meeting I explained to him the subtle, but important, difference between a business valuation project and the sale of his practice. The objective of a law firm valuation is to determine the ­hypothetical fair market value of the law firm using standard business valuation methodologies. A formal business valuation requires a formal written report that is comprehensive and covers all risks to which the business is subject. This type of project answers the question: “What is my law firm worth?” Projects of this nature are complicated and take considerable time to ­complete. Law firms involved in litigation with departed partners, or partners involved in a marital divorce, may need a formal business valuation report. It is common in those instances to have the business ­valuator testify at trial as a law firm valuation expert. In contrast, a consulting engagement focused on selling a law firm is intended to find a qualified buyer and to negotiate a fair price and terms of sale that both parties are willing to accept. That is, a valuation engagement determines the hypothetical fair market value of a business whereas an engagement to sell the firm is focused on identifying a specific interested buyer and agreeing upon a specific price and deal structure acceptable to both ­parties. Clearly, this particular lawyer needed the latter, not the former—and fast.