Selling a Law Practice – Buyer’s Ability to Pay

Selling a law practice pursuant to Rule 1.17 can be a joyous event for a lawyer retiring from the practice of law but requires an analysis of the buyer’s ability to pay. Decades of demanding work building a practice is rewarded with a large payout for a seller and increased market share for a buyer. A law practice sale is like other major transactions – a willing buyer agrees to pay a willing seller an agreed upon price. But selling a law practice differs from other transactions become of the magnitude of the sale price. The price of a law practice can be $100,000 to $500,000 plus.

Selling a law practice used to be difficult before the advent of online classified ad forums. A law practice for sale can be advertised on sites like https://lawpracticesale.com/. A centralized marketplace can draw more buyers. Law practices for sale identify the practice area, secondary practice area, tertiary practice area, number of clients, number of clients, average revenues, firm structure, and other information. Best of all, the attorney selling a law practice can remain confidential until the attorney wants to reveal his or her identify.

Consider Buyer’s Ability to Pay When Selling

Selling a law practice pursuant to Rule 1.17 would be easy if every sale would be a cash deal in which the buyer pays 100% of the purchase price at closing with certified funds. Mid-career buyers may have the ready capital to pay cash on the barrel from past profits. Other mid-career buyers cold have strong relationships with banks and other lenders that could use as collateral the assets of the buyer’s current law practice and targeted law practice. Early-career lawyers are less likely to offer a 100% cash deal, unless the cash is generated from salary savings while working at Big Law or from the bank of mom and dad.

Who Assumes the Risk?

Selling a law practice can be risky when a buyer needs to pay from future revenues generated by the buyer post-closing. A selling lawyer takes on significant credit risk when selling a law practice to a buyer who pays over time. But if a non-cash offer is the only offer on the table, then a seller has to make a decision: take it or wait for a better offer. The seller may have to capitulate and accept a payout over an extended period of time. A payment schedule must be established in that event.

A buyer, on the other hand, would rather make base payments contingent on future revenues generated from seller’s clients because the payment obligation to the seller would be directly related to revenues generated from serving the seller’s former clients. A buyer’s cash flow problems would evaporate because the buyer would only pay the seller after receiving the cash from the seller’s former client. No client revenue, then no payment obligation.

Forces of supply and demand dictate the final financing terms. There are many law practices for sale in multiple substantive areas. The greater the demand to buy a particular law practice, the more demanding the seller can be. Weaker demand makes it a buyers’ market.

Law practices for sale are governed by ABA Rule 1.17 or the ethical rules of the state in which the practice is located. Every lawyer selling a law practice should become familiar with ABA Rule 1.17. Visit the ABA’s website to study the rule’s text, https://www.americanbar.org/. Lawyers selling a law practice should review other law practices for sale to get a clear idea of the market availability, firm valuation pricing, and information disclosures. Lawyer Robert Schaller of the Schaller Law Firm believes selling a law firm starts with a review of law practices for sale at www.LawPracticeSale.com.