How Much Is My Practice Worth?

With my continuing focus on building my law firm’s value, I think it’s important to know how that value will be calculated.

During our January 23 CLE program entitled MASTERING PRACTICE TRANSITIONS:BUYING, SELLING OR MERGING FIRMS we addressed that very question.

Panelist Steven M. Kaplan, CPA/ABV, MBA shared that a rule of thumb for practice valuations is to start at 1x gross revenue.  In other words, if your practice grosses $1,000,000 per year its value would be $1,000,000.

He noted, however, that valuations require a much deeper analysis than just that simple rule of thumb.  An appraiser should look at three (3) years of a firm’s financial information, to start.  In that review, Steven said that a focus will be on the “quality of earnings,” with particular note of what is recurring revenue and what is not.  In a sale of a practice, recurring revenue, e.g., subscription or retainer clients, is a much more valuable source of revenue than episodic income; recurring revenue is, by nature, predictable and therefore very important to a buyer.

To that point, fellow panelist, Donalee Berard, CPA, Berard & Associates, CPA's, P.C. explained that in an acquisition, one might price certain streams of revenue, e.g., recurring revenue, at 1.2x gross revenue, and other streams, e.g., non-recurring revenue, at .8x gross revenue.

Mr. Kaplan added that beyond a multiple of gross revenue and consideration of the “quality of earnings,” a valuation would also require an examination of EBITA - earnings before interest, taxes, and amortization.  He said that EBITA is a helpful tool to assess the true profitability of a firm.  Once an appraiser finds the EBITA of a firm, the value may be 6-8x EBITA.

Regardless of the methodology used in appraising a practice, Mr. Kaplan emphasized that looking at the value should be done early in the process for a potential seller.  With enough lead time, the appraisal can give a succession planning attorney areas to focus on to build the value before exit (my aim throughout all the installments of these articles).

So, for all of you thinking about your eventual exit, focusing on valuation as soon as possible is important.  Whether that requires retaining an appraiser or just consulting with the longstanding firm accountant add that to your checklist of steps in succession planning.