Rules of the road for selling or buying a law practice

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Selling a law practice, or an area of the practice, to another qualified lawyer no longer violates the code of professional ethics in most states. Some lawyers still believe they have little or nothing of value to sell, irrespective of the size or profitability of their practice. However, it is my experience that most lawyers would find selling their practices far preferable to just closing the doors.

Think about it: After investing years of hard work and financial resources in growing the practice and building goodwill, why would a lawyer forego the opportunity to reap the benefits of that years-long investment? Even in the event of a lawyer’s death or disability, the lawyer’s family can benefit from the sale of the law practice. So, to my mind, the most beneficial choice for all those involved is to sell the law practice to another qualified lawyer (or lawyers). Not only do the buying and selling lawyers benefit, but the clients also benefit when they are smoothly transitioned to receive competent representation from a qualified buyer.

Ethical Considerations for Lawyers

Selling or buying a law practice is particularly complex because of the ethical considerations involved. The model rules of professional conduct set forth requirements for transferring one’s interest in a law firm. Here are a few examples:

1. Fees charged to clients cannot be increased solely because a practice is sold – even if the purchaser is a larger firm that may charge higher rates than sole or small firm practitioners.

2. The selling attorney must give written notice to clients no less than 60-90 days before the transfer that clients have the right to their files.

3. The selling attorney must also inform clients of their right to retain other counsel.

4. The selling attorney must close out all client trust accounts, and some jurisdictions require keeping trust account records for a period of years.

There are other ethical issues in a practice sale that can be answered only by reference to the Rules in specific situations. If the practice sold is just a portion of a firm’s total practice, some jurisdictions prohibit splitting off a single practice area for purchase or sale. Another possible concern again relates to the sensitive nature of client files.

Does client confidentiality prevent the selling attorney from discussing specific clients or their matters? If so, how can a buyer know the nature of the practice without some disclosures? Would a buyer be willing to purchase something, sight unseen? What if the selling attorney has made an error in a client’s matter, and the problem doesn’t surface until after the sale – what is the malpractice insurance coverage? Issues like these must be negotiated and resolved before the sale.

Practical Considerations for a Sale

Is every practice saleable? Maybe not.

Some practices are so small and so personal in nature that without a continuing involvement of the first attorney, a second attorney would not succeed in keeping the clients. However, even the smallest and most personal practices might be saleable for the right price and under the right terms.

If the buying attorney were assured that he/she would receive that which was negotiated … a law practice of a certain volume of revenue or a certain client base that remained with the buying attorney for a designated period of time … a sale would be highly likely even for the smallest firm.

How do you let it be known you want to buy or sell your practice? Business opportunities brokers, law firm management consultants, accountants, valuation firms and appraisers are excellent resources to spread the word that you are looking to buy a law firm practice or that you are looking to sell a practice.

I recommend that sellers retain a law practice management consultant or broker for representation when selling a law practice. Try to identify someone with previous experience in a practice purchase or sale.

A professional consultant, involved in selling law practices, knows how to sort through the many non-qualified potential buyers to get to the few who actually do have the means and motivation to buy the law practice. Once the unqualified potential buyers have been culled out, still only somewhere around 50 percent of these folks eventually buy a law practice.

Valuing a Practice for Buyer and Seller

A business is worth only what someone is willing to pay for it, and time is an important consideration. The value may be different at different points in time.

Today, for example, the global emphasis on technology creates an especially strong demand for intellectual property law services. Of course, valuation and price may not be the same thing. But, in the context of buying a business, even a law practice, one must look at the future.

When valuing a law practice, one should also look to the expected future earnings of the practice. Many people believe that the price to be paid must be based only on this figure generated by the existing practice, but you can also include future earnings that may be based on the buyer’s talents brought to bear on the purchased practice in some cases.
However, I prefer, and I counsel my clients, to sell (and buy) on a fixed, set sum. There can be bonuses and payment terms that take into account the buyer’s legitimate concerns.

I prefer to take advantage of my own efforts to increase the revenue and reap the rewards, usually with an appropriate involvement of the selling attorney during a transition period. While many lawyers believe there should be a percentage of revenues paid and not a fixed fee, this approach locks both sides into an agreement that allows no upside for a buying lawyer. Both parties’ concerns can be addressed with a fixed sum. And this also moves away from ethical concerns about selling files, which is illegal.

Some lawyers want to make their practice more attractive to a potential buyer by “enhancing” its name or apparent performance. Caveat emptor does apply to law firm buyers, but ethical rules apply to sellers. If you are John Doe, solo practitioner, you should not call your firm “John Doe & Associates” to make it inaccurately appear bigger. If you do not have established relationships with counsel at other firms who focus on areas you do not, be wary of over-emphasizing the full service aspects of your practice. By contrast, every small law firm involves creative accounting.

It’s the buyer’s obligation to separate real income and expenses from the creative tax accounting normally performed by sellers.

The Ramifications of Your Decision

You shouldn’t venture into selling a practice until you’re serious about getting out. It is possible to sell your practice and move to another city or a different firm to start a new one absent a covenant not-to-compete (which would lead to a violation of contract law).
However, if you sell your current practice and then, 10 days later, decide to start back in your own practice, and solicit previous clients, I believe this would be violation of both contract law and the rules of professional conduct.

Once you do have a buyer, realize that you can’t have a change of heart and decide to resume practice. A number of state bar associations require that after selling a practice you either resign from the Bar or adopt inac
tive status. Choosing to remain an active member continues your obligations to pay dues, comply with mandatory continuing education requirements and remain subject to the bar’s other requirements.

Also, if you remain attorney of record in any matter, you remain in active practice so far as most state bar associations are concerned. Your intent in selling, or in transitioning your practice by any other means, should be to retire from the practice of law, head into the sunset, and begin the next chapter of your life.

Ed Poll is the principal of LawBiz® Management, a national law firm practice management consultancy based in Venice, California. Poll coaches lawyers, consults with law firms on strategy and profitability, and speaks at bar associations and law firm retreats. For more information, visit his Web site www.LawBiz.com or email him at [email protected].