May 2, 2006
Law Firm Value as a Going Concern
Ed Wesemann’s recent post on the Value of a Partnership illustrates the absurdity of the notion that a law practice has no “goodwill value” The failure of the profession to recognize goodwill arises from the professional notion of “paramount concern for the client". Under that standard, the client must always have the right to choose their attorney. The official view is that the client's business doesn't follow the law firm; thus, there is no value as a going concern.
The fact that clients have a right of choice doesn’t keep law firms from estimating how that choice will be exercised when they are recruiting laterally. I might note that law firms almost always overestimate the number of clients that will follow an attorney rather than stay with their existing law firm. What would those numbers be like if the law firm were more aggressive in competing to retain those clients?
Wesemann points out that law firms do have significant intangible value as a going concern, officially recognized or not. Using a simplified calculation, a mature firm is likely to have an accumulated intangible value in the area of a half million dollars per attorney. The value of a law firm is further understated by the profession's “cash view” of a firm’s tangible assets, which excludes the value of uncollected services.
This failure of the profession to support the rights of law firm “owners” to recognize (and benefit from) the value of their equity position leaves the rest of the business world shaking their heads. It gives rise to the prevailing practice by the vast majority of firms who, as Wesemann noted, take pride in telling new partners, “You enter naked and you leave naked,” meaning you don’t pay anything to become a partner, and you don’t get anything when you leave the firm. Likewise, it gives rise to operating environments where the “sale” of a law firm as a business is prohibited or restricted.
Law firms cannot make the final step from a collective to a commercial enterprise engaged in the business of providing legal services until the attributes of “ownership” are accepted. Meanwhile across of ocean, the U.K. is moving to a notion of ownership that may lead to publicly owned legal service businesses. What then?
Perhaps it is time for the ABA to increase its advocacy on behalf of the owners of multi-attorney businesses engaged in legal services.
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Filed under Blog by Tom Collins