Article


Valuing Professional Service Firms
The case of law firms: An adventure
By Donald Feldman
Date Published: 7/1/2015

 

Valuation of closely-held businesses is deceptively straight forward. It requires the discounting of future cash flows at an appropriate discount rate. Estimating future cash flows and selecting an appropriate discount rate are not easy, but they can usually be done. This process results in an estimate of what the valuation profession calls “fair market value”, i.e., the price a willing buyer would pay a willing seller, both being fully informed about the relevant facts of the case.

 

The big picture

Because of special regulatory circumstances, law firms are never valued the way other businesses (and other professional practices) are valued. Apart from the fact that a controlling interest in a law firm can only be owned by lawyers, law firms cannot be sold, except in certain special circumstances. PA Code Rule 1.17 Sale of Law Practice specifies that a law practice can only be sold if the selling lawyer retires at the moment of sale. The sale must be of the entire practice of the selling lawyer. Therefore, a lawyer cannot do what other professionals commonly do—sell their practices and continue working for several years for the new owner. 

Also, it is considered unethical for a lawyer to sign a non-compete/non-solicitation agreement with the firm he or she is a partner in or employed by. Therefore, any lawyer can leave her employer and take all of her clients with her. So, even if it were permitted to purchase law firms like any other businesses, no one would want to buy one because there is nothing to prevent the law firms’ attorneys and clients from leaving the next day.

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