Lawyers have before them today a lucrative opportunity not available to other business owners.
And I’m certain this opportunity won’t last long . . .
The opportunity is buying a law practice.
A properly run law practice will generate between 25% and 40% of gross fee revenue in owner benefit. A firm grossing $1MM should generate between $250,000 and $400,000 for the owner (including the owner’s salary).
And the value is between 1.8 and 2.3 times that owner’s benefit.
This means that, if you paid cash for a firm, your return on investment would be between 55% and 43%! Nice.
But, say you didn’t pay cash. Rather, you put down 30% and borrowed the balance at today’s (high) SBA guaranteed loan interest rate of 11.5% for ten years.
If that firm only generated an owner benefit of 25% of gross fee revenue, that owner benefit would pay the loan and you’d still get a more than 38% return on your invested cash.
Where else can you get that kind of ROI and control your risk through your management, marketing, and legal skills?
Plus, rather than having to locate space, open a new office, fit it out with equipment, hire a team, and begin marketing, you’d have an instant firm with an existing client base, in place team, and furniture, fixtures, and equipment and revenue and net income from day one.
But, there’s more!
There are underperforming firms that sell for less. For some of them a portion of the purchase price will be contingent on future performance.
If you have the skills to fix their problems, these firms can be an even better goldmine.
You buy the firm’s revenue at a low or contingent purchase price and correct the problems to bring back proper performance (i.e., turn the firm around), thereby achieving even higher returns on your invested capital and simultaneously creating a salable asset. (Similar to buying real estate with owner financing and improving it, only with much greater profit potential.)
Why do I think the opportunity won’t last long?
Because private equity firms are salivating at the cash flow generated by law firms. And they know very well how to improve business performance to increase value.
Non-lawyer (i.e., private equity) ownership of law firms is coming. Arizona already permits non-lawyers to own law firms and it appears Texas is not far behind. Once that happens, money will be chasing firms and this opportunity will be gone.
