"ATTORNEYS FACING RETIREMENT"

A CONTINUING LEGAL EDUCATION

SEMINAR OF THE

CONNECTICUT BAR ASSOCIATION

NORTH HAVEN, CT

THE VALUATION OF THE LAW PRACTICE

FOR RETIREMENT PLANNING PURPOSES

April 9, 1999

J.L. Pierson & Co. LLC

BUSINESS VALUATION

P.O. Box 2392

Darien, CT 06820-0392

203-325-2703

http://www.jlpierson.com

jlp@jlpierson.com

INTRODUCTION

ONE . CHARACTERISTICS OF PROFESSIONAL PRACTICES

• Service business with few tangible assets,
• Relationship of trust between client and professional,
• Practice or professional(s) rely on referrals,
• License required by governmental authority as well as bar association.

TWO . PROFESSIONAL PRACTICES VS. SMALL BUSINESS

• Larger reliance on intangible assets; thus valuation methods generally used are based on earnings capability as opposed to assets.
• Dependance on the professional: somewhat akin to key man issue. What's the difference between professional and practice goodwill?
• Limitations on license transfer, effect on the market.
• Supply and demand of specialty; supply and demand in trade area.
• Cash basis accounting.
• Value drivers. See Chart A.

CHART A

Checklist of factors affecting

the values of professional practices

Factor	More Desirable	Less Desirable
Location + demographics	Urban High growth Affluent Stable population	Rural Mature or declining market Poor Transient population
Client persistence	Very stable	High turnover
Dependence on referrals vs. direct client contact	Large direct client base	One or few referral sources
Contractual relationships	Strong relationships	Relationships threatened by termination
Supply/Demand	High demand, low supply	High supply, low demand
Reputation	Stellar, far and wide	Non-existent or tarnished
Facilities + technology	State of the art	Antiquated
Employees	Adequate and dedicated	Inadequate or departing
Practitioner's work habits	Light work load	Workaholic
Potential synergies	high propensity to be revenue source for potential acquirer.	No such potential

Source: Shannon P. Pratt, Robert F. Reilly, Robert P. Schweihs Op. cit. p.566.

THREE . ADJUSTING THE BALANCE SHEET OF A PROFESSIONAL PRACTICE

• Cash
• Accounts Receivables: collectible or not.
• Work-In-Process Inventory: adjust for % unbilled, % uncollected.
• Supplies
• Prepaid Expenses
• Equipment
• Leasehold improvements
• Intangible assets -see Chart B



• Accounts Payable
• Accruals
• Deferred Liabilities
• Contingent Liabilities

Source: Shannon P. Pratt, Robert F. Reilly, Robert P. Schweihs Op. cit. p.576.

FOUR . METHODS COMMONLY USED

TO VALUE PRACTICES

• Discounting of economic income: see Exhibit A.



• Capitalization of economic income: see Exhibit D.



• Multiples of revenues: no serious one for law firms.



• Comparative transactions/buy-ins: difficult to find for law firms.



• Punitive and retirement formulas.



• Capitalized excess earnings: see Exhibits B and C.



• Asset accumulation or adjusted book value method: see THREE above.

SELECTED BIBLIOGRAPHY

Articles:

Madeleine Pelner Cosman, Esq., Thomas Russell Land & Marin C. Goodheart, "How to Value and Sell Your Law Practice" Trial Lawyer, March 1992.

Carl K. Reinman, CPA, CVA "The Valuation of a Law Firm" The Compleat Lawyer, Fall 1997 issue.

Mark Shayne, CPA, ASA "Valuing Your Law Practice" NYS Bar Journal, July/August 1992 pp. 54-56.

Leonard Florescue "Business Value of a Law License", New York Law Journal, August 21, 1990 page 3.

Leonard Florescue "Law Firm Partnership" New York Law Journal, September 9, 1996 pp. 3-5.

Reference Books:

Ronald L. Brown, Editor Valuing Professional Practices and Licenses: A Guide for the Matrimonial Practitioner. 3^rd Edition. Frederick, MD: Aspen Law and Business, 1998.

Jay E. Fishman, Shannon P. Pratt, J. Clifford Griffith, D. Keith Wilson, Guide To Business Valuation. Eighth Edition (March 1998) Fort Worth, TX: Practitioners Publishing Company. See in particular Chapter 11.

Shannon P. Pratt, Robert F. Reilly, Robert P. Schweihs Valuing Small Business & Professional Practices. 3^rd Edition. New York, NY: McGraw-Hill Irwin Library of Investment & Finance. See in particular Chapters 32 through 37.

Data Sources:

Small Law Firm Economic Survey Newtown Square, PA: Altman Weil Pensa. ($295/yr.)

The 1998 Survey of Law Firm Economics Newtown Square, PA: Altman Weil Pensa