Preparing to Close, Sell or Buy a Law Practice?

At MCBA’s January General Membership Meeting, MCBA Past President Wanden P. Treanor, Esq., and James L. Cunningham, Jr., Esq., founder and president of CunninghamLegal, held an engaging and insightful discussion regarding the ins and outs of preparing to close, sell or buy a law practice. Over the course of the one-hour program, they offered helpful advice regarding voluntary versus involuntary retirement; what the law says we must do to close a law practice; the advance planning required to make the decision to retire; the practice areas that are most marketable; if you practice what is marketable, what not to do; what an acquiring firm looks for in a practice; and how to value a practice.

Ms. Treanor and Mr. Cunningham began their presentation with a discussion of the right time to close or sell a law practice. In addition to practical considerations, including deciding if you will in fact be able to sell your practice and for what value, they stressed the importance of preparing psychologically for what is undoubtedly a major event in one’s professional career.

A consistent theme throughout the hour was the importance of understanding and adhering to the relevant ethical rules pertaining to the closing, selling or buying of a law practice, and ensuring that we, as lawyers, preserve all applicable duties to our client and former clients as we navigate these processes. As an example, the treatment of client files is a major part of buying or selling a law practice, as the files are owned by the client, not the practice, and there are thus specific ethical rules detailing what must be done to properly dispose of a client file. (See State Bar FORMAL OPINION NO. 2001-157.) The presenters highlighted Rule of Professional Conduct 1.17 (re: Sale or Purchase of a Law Practice) and the Duty of Confidentiality under Business & Professions Code section 6068(e)(1) and Evidence Code section 952, preserving inviolate confidential communications between a lawyer and client.

Mr. Cunningham has coined terms for four approaches to selling a law practice:

  1. The “Passer” approach involves transferring your practice to another lawyer in your firm free of consideration.
  2. The “Innie” approach involves transferring your practice to another lawyer in your firm for consideration. Mr. Cunningham notes that, to the extent the attorney selling the practice hires an associate for the purpose of eventually selling the practice to that associate, this should be made known to the associate up front.
  3. The “Outtie” approach involves transferring your practice to an outside purchaser for consideration. The “Innie” and “Outtie” approaches are the most similar, but constitute different types of transactions, given the nature of the sale.
  4. The “Squeezer” approach involves wringing out every last drop of economic value of your practice and then closing it.

Ms. Treanor and Mr. Cunningham transitioned into a discussion regarding whether a practice has value and, if so, how to value it. In determining whether a practice has value, they identified a number of considerations, including the sources of the clients (do they come from referrals from a specific lawyer? because of the firm’s expertise or the expertise of a specific lawyer in a particular area of law?); whether it adds value for the existing attorney to remain for an agreed-upon period; whether the support staff with knowledge of the clients and matters will remain; and the net income after expenses.

While there are several ways to value a practice, common approaches include averaging the fee income over the previous five years by category of fees; expected fees over a number of years from the existing clients; engaging a business broker, or a business appraiser; reaching out to someone with experience purchasing practices (such as our very knowledgeable presenter, Mr. Cunningham!); and asking other lawyers about how they valued their practices and what works in the real world.

The presenters identified as a useful resource attorneys might consider when endeavoring to value and/or sell their practice, as well as 2002 State Bar publication, “Guidelines for Selling or Closing a Law Practice” (though the presenters noted this resource mostly deals with what happens if a lawyer dies or becomes incapacitated).

Ms. Treanor and Mr. Cunningham concluded their presentation with the following take-aways:

  1. In deciding whether to sell a law practice, it is important to look at what it is that is going to transfer to a buyer, including the value of the phone number, domain name and client list.
  2. While it is important to consider whether the practice is saleable financially, it is equally important to think about the psychological aspect of closing and/or selling one’s practice.
  3. It will likely take somewhere in the realm of at least six months to get everything squared away to position oneself to close and/or sell a law practice, so it is important to allow sufficient time to complete all necessary steps. Consider, if not already doing so, digitizing files and procedures moving forward, as this will make closing and/or selling a practice much more streamlined.

NOTE: You may view a replay of our February General Membership Program: The Technical and Legal “Underpinnings” of the Millennium Tower Project here.