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Selling Your Practice Checklist
- Review open files and determine whether any can be completed and closed.
- Review closed files and determine whether any should be destroyed, stored at an alternative location, or will be transferred to a prospective buyer.
- Consider a timeline for your exit from the practice. Do you intend to gradually step out, see this as a five-year plan, or need to exit quickly at any price?
- Where possible, plan ahead and critically review your practice. Ensure files are well organized and well documented, that your limitations and reminder systems are comprehensive and up to date, that you have an effective system for screening for conflicts, that you have an effective trust accounting system.
Consider what you have to sell. Will you sell your hard assets such as equipment, furniture, leaseholds, or books? Generally, used books carry little to no value – online reference services have largely replaced law libraries. Used furniture, filing cabinets, computers and peripherals, are not worth very much but you can get an appraisal done to assist you in determining the value of these items. Leasehold interests may have value particularly if there is a reasonable amount of time left on the lease.
What about the immediate practice sources of revenue (receivables and work in progress)? Receivables are often best left to the seller to collect, but if included in the purchase price should be examined carefully, discounted for age, and the sellers cooperation in terms of information, taxation, and other collection steps should be provided for in the agreement. Consider selling these receivables to a collection agency (subject to an agreement restricting strong-arm tactics). The transfer of any current files to a successor is obviously subject to client consent.
- What is your practice’s potential for generating future income (goodwill)? It is hard to place a value on the “goodwill” of a practice – the location of the practice, nature and size of the practice, terms of payment, and stability of client base among other factors can influence value. Consider whether the selling lawyer will remain during a period of transition, whether existing staff are likely to remain with the practice, whether efficient, effective business systems are already in place. Practices that have a high degree of personal goodwill – where the practice is dependent upon the personal characteristics of the individual lawyer have little value. You need to be evaluating your practice in terms of factors that generate a profit and are transferable to a buyer. What a prospective buyer is looking for is some degree of confidence that they will be able to achieve the same results going forward.
- Review your financial records and ensure they are up to date. A prospective buyer will likely want to review items such as financial reports for the past 3 to 5 years, title to any assets to be included, debt agreements, equipment and office leases, maintenance contracts and subscription agreements for library services, filed business and payroll returns and any policies for excess insurance coverage.
- Establish a value for your practice and terms that you would be willing to consider. A professional business valuator can assist in determining a figure. Factors that will influence value include:
a. Terms of payment
c. Nature of the practice
d. Size of practice
e. Stability of the client base
f. Earn-out or pay-out based on collections can give buyer comfort in only paying for revenues received, and may provide incentive for seller to encourage clients to remain.
- Describe what you are selling. Prepare a confidential information memorandum which will provide key information about your practices financial picture.
a. Include a short history of your firm and your practice areas;
b. Provide a general description of open files and the billable workload (without divulging any confidential client information)
c. Create a current financial picture of your firms operations
d. Consider having all potential buyers agree to protect the confidential information relating to you practice by signing a confidentiality and non-disclosure agreement.
e. At this stage in the sale process you should not be disclosing any confidential or privileged information relating to clients including their identities.
- Advertise the sale of your practice in local bar circulations or other sites as desired. Consider hiring an agent to assist you in marketing. Talk to other lawyers in your area. Internet bulletin boards and email listservs may be affordable alternatives for communicating the opportunities associated with your practice.
- In arriving at a mutually acceptable sale price, other considerations may include how clients will be advised of the sale and their options regarding the transfer of files; whether the firm name will be transferred, what role the selling lawyer will retain and for how long.