Spring 2012 #3. Succession Planning: Valuing Ownership Shares Of A First Generation Law Firm.

• Author: by Arthur G. Greene and William E. Howell

Maine Bar Journal

2012.

Spring 2012 #3.

Succession Planning: Valuing Ownership Shares Of A First Generation Law Firm

Maine Bar JournalVOLUME 27 , NUMBER 2 , Spring 2012Succession Planning: Valuing Ownership Shares Of A First Generation Law Firmby Arthur G. Greene and William E. HowellThis article addresses the factors involved in valuing a law firm for purposes of admitting new partners and retiring senior partners. Regardless of the entity structure (Partnership, Professional Association or Professional Limited Liability Company), law firms face issues of how to value interests in the firm for purposes of internal transfers. For the purposes of this article, we'll assume the interests are Partnership interests. While general business valuation techniques are relevant, the personal service aspect of a law business presents complicating factors. Valuing ownership interests in a law firm is unique and far different than valuing interests in a manufacturing company or a retail operation.

Some firms do not require payment for acquiring an ownership interest and are referred to as "free in, free out." In other words, new partners are not required to pay for the purchase of an ownership interest and retiring partners do not receive payment for selling their share of the equity. In those cases, retiring partners receive a return of capital and any other retirement-type benefits are usually limited to funded pension plans.

However, most law firms require new partners to pay for shares and retiring partners receive value for selling their ownership interest in the firm. Many firms are motivated by the desire to reward the founders and/or the current partners for the sweat equity involved in developing, growing or maintaining a successful firm. In other cases, the firms simply want the new partners to feel invested in the firm and may set a modest price that is more symbolic than actually representing a valuation.

In attempting to create a realistic valuation, it is important to start with an understanding of what is being sold. Likely to be included are hard assets, work-in-progress, receivables and goodwill (value of clients retained going forward), with a reduction for any debt. The value of the firm's client base is both the most important aspect and the most difficult to evaluate. The client retention possibility will depend on...