What is your practice worth if you were to sell it?

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Asking what your practice is worth might seem to have little connection to legal technology, but starting with such a large and important question can be the best way to understand how and where technology can help.

Having headed up the IT function for law firms, consulted to many, and now as a provider of technology to law firms, I have seen many sides of the legal technology equation. I have seen firms that adopt technology just for technology’s sake, firms that reject technology without even understanding it, and many (in fact, most) that are simply not sure what to make of it all. In order to best help firms understand where technology can help, it is critical to understand what it is supposed to be helping with.

Many mid-tier and large firms have teams of technologists and project managers, all working to automate legal and procedural processes, with a goal to improve profitability and reduce risk. Doing these things is critical in order to compete in a changing legal services market. If marketed correctly to staff, these process improvements can not only increase profit, but they can also improve staff satisfaction and help in recruiting and retaining the right people.

The challenge for many small firms though is that they simply don’t have the same resources available to identify and execute on projects. Smaller firms often do not have the volume of work to offset the investment in automation.

I meet many practice owners in my work with the law societies. Many of these owners have run a successful practice for many years. Often, these owners have for the most part avoided needing to fully understand or heavily invest in technology. They are typically surrounded by people who just ‘make things happen’ and clients who trust their advice and value the relationship they hold. This can make for a good business to own and operate, but the problem is there is little attraction to anyone looking to invest or buy into that business.

Often a reason not to invest in technology is that the firm owners, who are in the later years of their career, have little incentive or reason to invest into something that is likely to have little return on investment for them personally. This may be a reasonable approach if the strategy is to simply turn the lights off permanently and lock the front doors on their last day, but I would argue that most firms have a much higher value than they are otherwise considered to hold.

If you have not heard the term ‘data is the new oil’, then turn your mind to the most valuable companies in the world, what they actually own and what they sell. In most cases they own a client base and use data to monetise it. Consider that Facebook does not create content, AirBnB does not own property, Spotify does not create songs, Google does not own website content, Uber does not own vehicles and does not own hotels. While a law firm may not have millions or billions of ‘customers’, it does have clients, and those clients spend a lot more on average than Facebook, Google or others may hope to make from each customer on an annual basis.

Even without any technology automation, if a firm was to seek a reasonable sale price, what should be considered is the hundreds or thousands of relationships that are held and maintained. The sale of a firm typically incorporates a review of financials so that the buyer can understand revenue figures, but few firms factor in the value of the relationships they are selling. Consider dormant clients, referrers or contacts that your firm may have and how they would (or would not) represent themselves accurately on a profit and loss statement.

Placing value on the relationships (that is, the client-base) that a firm holds has traditionally been difficult to articulate. Having an old database full of out of-date contacts is of little value to a buyer.

Having worked with many firms over many years, our team has developed a technology solution specifically designed to capture and demonstrate the breadth of communication a firm has across its client, contact and referrer networks. This work has brought us to understand that the value of a firm is far greater than just its annual fees, and all firms (even smaller or micro firms) are made up of very well-connected individuals.

Without needing to change the way you practice and without introducing any additional effort at all, using the communication data your firm automatically produces is what can prove your value and maximise the value of that ‘golden handshake’.

Should you be interested in selling your firm (to someone either within or external to the practice) then you can at least use technology to maximise that sale value and ensure that the many years spent building your practice and forging relationships do not fade into nothing.

Steve Tyndall is the CEO and director of Client Sense and NextLegal

This story was originally published in Proctor September 2019.

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