“Acquiring a law firm is more than a growth strategy—it’s a way to accelerate your firm’s value by bringing in established revenue streams and client relationships.” — Jonathan Hawkins
“In today’s market, law firm acquisitions offer an unprecedented opportunity to gain both clients and skilled staff, allowing firms to scale with less risk than organic growth.” — Ed Alexander
HERO Mastermind members Jonathan Hawkins and Ed Alexander delivered a powerful breakout session on leveraging law firm acquisitions as a strategic growth pathway. This discussion highlighted the unique opportunities available in the current market, where a generational shift among attorneys creates valuable prospects for practice acquisitions. Jonathan and Ed shared their expertise on how to evaluate firms for acquisition, identify the right strategic fit, and avoid common pitfalls—all with an eye toward maximizing the firm’s long-term value.
Key Takeaways:
1. Opportunities for Growth and Expansion
- Revenue Acquisition vs. Organic Growth: Acquiring a practice offers immediate revenue without the extended costs of organic growth. Rather than building from scratch, a law firm acquisition can provide an established client base, revenue flow, and potential for operational efficiencies.
- Talent Acquisition: By purchasing a practice, law firms often acquire experienced staff, addressing one of the most challenging aspects of firm growth.
- Generational Wealth Transfer: As many senior attorneys near retirement, the legal sector is poised for an unprecedented transfer of wealth and client goodwill, making it an ideal time for growth-focused acquisitions.
2. Key Factors in Law Firm Valuation
- Evaluating Cash Flow and Adjusted Earnings: A firm’s value is rooted in its cash flow history and projected earnings. Adjustments to account for owner-specific expenses, non-operational costs, and other variables are critical to arriving at a true valuation.
- Risk and Multipliers: Law firms typically have market multipliers ranging from 1.7 to 2.5, with more robust, systematized firms receiving higher valuations. Firms that can operate independently of the owner’s involvement are particularly appealing to buyers.
- Process, Relationship, and Brain Surgery Firms: Ed and Jonathan classified law firms into three types based on operational structure, with process-driven firms typically being the easiest to sell and brain surgery firms (those highly dependent on the owner’s expertise) requiring specific succession strategies.
3. Strategic Reasons to Acquire a Firm
- Expansion of Practice Areas and Geography: Acquiring a firm can help broaden a firm’s practice areas or establish a presence in new locations.
- Capitalizing on Client Relationships: Acquisitions allow firms to add value by capitalizing on existing client goodwill, which, when combined with advanced business management skills, can significantly increase profitability.
4. Transaction and Financing Structures
- Internal vs. External Sales: Internal sales, where senior associates or partners purchase the firm, have higher success rates than external sales, where new buyers face additional due diligence challenges.
- Earn-Outs and Guardrails: Structuring an earn-out, where the seller stays involved for a transition period, can help with client retention and the transfer of intangible assets.
- SBA Loans and Financing: SBA loans are common for law firm acquisitions, though the SBA requires sellers to fully exit the firm within a year, impacting transition strategies.
5. Preparing Your Firm for a Future Sale
- Systems and Documentation: Clean, organized financial records and comprehensive client databases are essential in making a firm attractive to buyers.
- Reducing Dependency on the Owner: The more a firm can operate independently, the higher its value will be—whether for acquisition or daily operations.
6. Keys to a Successful Transition
- Building Strong Internal Relationships: For internal sales, selecting well-aligned successors is essential for a seamless transition.
- Structured Transition Plans: A clear transition plan, outlining responsibilities and key milestones, is vital for firms reliant on established client relationships.
- Financial and Legal Planning: Both buyers and sellers should be proactive in consulting legal and financial experts to address potential challenges.
Jonathan Hawkins and Ed Alexander emphasized that preparing a firm for sale or acquisition doesn’t only make it a valuable asset—it also enhances the firm’s operations and profitability for the long term. With today’s unique market conditions, this session provided the GLM attendees with essential strategies to achieve both immediate growth and future opportunities in law firm acquisitions.
