What Is Your Firm Worth?
Kal Shiner, CPA
Law firms generally do not pay as much attention to their value as technology companies or public corporations, but a variety of circumstances can trigger the need for a firm valuation. Although attorneys may often deal with business valuations in the course of their work for clients, they might be surprised to learn how law firm valuations can differ.
When Do You Need a Valuation?
A firm valuation may be in order for:
- A partner buyout;
- Tax purposes;
- Partnership disputes;
- Divorces involving partners;
- Life insurance purposes;
- Buy-sell agreements;
- Financial reporting; or
- Bankruptcy proceedings.
One of the most common scenarios for a law firm valuation is the sale of the firm, even when the sale is not imminent. For solo practitioners or partners in smaller firms, for example, the sales price, as based on a valuation, could be an important part of retirement planning.
What Factors Affect Value?
Your firm’s value will likely be based on its historical gross receipts which are used to project future income and its assets. The valuation will consider both tangible assets, such as real estate, furniture and equipment and intangible assets.
A law firm’s most significant intangible asset is typically its goodwill, the value of which could even exceed the value of its tangible assets. Goodwill represents factors such as the practice’s location, name, reputation, client base, staff, policies and procedures and other characteristics that are separate from the attributes of the firm’s individual attorneys. This “practice goodwill” assumes clients would stay at the firm even if individual partners were to leave.
Which Valuation Method Applies?
Businesses are usually valued using one of three methods:
- Market Value
The market-based approach is less useful for law firms, as it can be difficult to find comparable guideline transactions.
- Asset Value
The asset approach computes the fair market value of a business based on its balance sheet assets and liabilities. Because law firms often use cash basis financial reporting, goodwill probably will not appear on the balance sheet, meaning the asset approach will not give any value to a firm’s goodwill without additional calculations.
- Income Value
The income approach may prove most suitable for law firms. The valuator estimates the firm’s future earnings and applies a risk-based multiplier, generally, between 0.5 and 3.0. Calculation of the multiplier considers factors like the current book of business, geographic location, number of clients, practice areas and potential for repeat business.
Turn to qualified valuators for accurate and reliable valuations or call us. Training, experience and familiarity with the industry, as well as the applicable standards and methods, are critical.
How Paralegals Affect Your Bottom Line
Thomas R. Vance, JD, LLM
Although the roles and responsibilities of paralegals or legal assistants can differ widely by firm, these employees ideally should spend minimal time performing clerical or other work suited to legal secretaries and administrative staff. By the same token, paralegals should not do work that is best handled by lawyers. This article explains why this matters and how it can affect a law firm’s profitability.
Just about every law firm employs paralegal staff. But are you using them too much or too little? Are they overpaid administrative staff or underpaid legal staff? By finding the right balance, both you and your paralegals will benefit.
Defining the Job
The National Association of Legal Assistants states that paralegals “have knowledge and expertise regarding the legal system and substantive and procedural law which qualify them to do work of a legal nature under the supervision of an attorney.” According to the American Bar Association, approximately 85% of paralegals spend some time performing clerical work on a weekly basis, and almost all of them (95%) regularly communicate directly with clients via email and written letters. And, while drafting basic court filings and contracts is a traditional paralegal duty, paralegals increasingly manage their firms’ technology applications and engage in marketing and business development activities.
Although the roles and responsibilities of paralegals or legal assistants can differ widely by firm, these employees ideally should spend minimal time performing clerical or other work suited to legal secretaries and administrative staff. By the same token, paralegals should not do work that is best handled by lawyers. As a reminder: Although paralegals can perform many substantive legal tasks, they must be careful not to overstep their bounds. Only attorneys can provide legal advice to clients, represent them in court, plan legal strategies, take depositions, set fees or accept engagements.
How your firm uses paralegals may depend on the type of individuals that you hire. Although some firms require paralegals to have formal legal assistant education or certification, others hire college graduates with little or no previous experience and train them on the job. Some of these recent graduates are considering law school themselves.
Comparing Revenue and Costs
Consider performing a profitability analysis that allocates expenses, such as salary and benefits, to partners, associates and paralegals. Then, calculate revenues for each of these groups. When you compare revenues with costs, incorporating such factors as utilization and realization, you may be surprised to find that paralegals are your firm’s profit center. Setting paralegals’ billing rates based on experience often means that senior paralegals offer the best profit margins.
Although paralegals can be profitable if your firm charges hourly rates, the greatest financial potential of paralegal work typically comes in fixed and contingency cases. By enlarging paralegals’ roles in such engagements, you reduce your firm’s investment in them and free up associates to work on other matters.
Retaining the Best
Because senior paralegals often are the most profitable staff members, look for ways to retain them. Ways to do this include:
- Providing career path and professional development opportunities, such as continuing education and management roles,
- Treating paralegals as knowledgeable team members by allowing them to contribute to practice group decisions and participate in client meetings, and
- Providing a mechanism for paralegals to provide feedback or voice concerns about the attorneys with whom they work and how cases are managed.
Consider designating a paralegal coordinator, such as a senior paralegal or partner who understands the value that paralegals bring to the firm and its clients. The coordinator can be responsible for hiring and training and for optimizing paralegal resources, by, for example, making sure that individuals are assigned to matters that make the best use of their experience and skills.
Appropriate assignments make for improved workflows and fulfilled staff. Your bottom line improves when attorneys are not doing work that your paralegals can handle. It may be time to review your paralegal assignments to improve your profitability.