How To Sell or Close a Law Practice: Plan Carefully Before Taking Either Step

06/13/2006
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To Sell or To Close?

Selling a law practice to another qualified lawyer (or lawyers, for portions of the practice) no longer violates the code of professional ethics in most provinces. That doesn't mean it's a universal fact of professional life. There remain a number of situations in which law practices are simply closed rather than sold, even when ethical rules permit a sale. Chief among them:

  • a lawyer's unexpected death or disability can leave a practice with no viable future;
  • some lawyers still believe they have little or nothing of value to sell, irrespective of the size or profitability of their practice; and,
  • some lawyers simply prefer to exercise a business owner's prerogative and conclude their practice on their own terms.
  • It is my experience that most lawyers would find selling their practices far preferable to just closing the doors. Think about it: after investing years of hard work and financial resources in growing the practice and building goodwill, why would a lawyer forego the opportunity to reap the benefits of that years-long investment?

Even in the event of a lawyer's death or disability, the lawyer's family can benefit from the sale of the law practice.

So, to my mind, the most beneficial choice for all those involved is to sell the law practice to another qualified lawyer (or lawyers). Not only do the buying and selling lawyers benefit, but the clients also benefit when they are smoothly transitioned to receive competent representation from a qualified buyer.

Questions for the Serious Seller

You shouldn't venture into selling a practice until you're serious about getting out. Remember that 99 per cent of potential business buyers invariably get cold feet and back out before closing. And sellers too, especially lawyers facing life without the law, can have second thoughts. The best way to get ready for this is to anticipate questions that can come up, then deal logically and unemotionally with them. For example:

       Question: Can you sell your City #1 law practice, move to City #2, approximately 150 miles away, and then work for a third party in City #2?
Answer: Yes, providing you don't directly compete with the purchaser.

Question: Can you sell your City #1 practice and go to work for somebody else in the same city with the same kind of practice that you're selling?
Answer: Absent a covenant not to compete (which would lead to a violation of contract law), this should be acceptable since you're selling substantially all your practice. The issue might come up under the guise of retiring from the practice.

Question: Can you sell your current practice and then, 10 days later, decide to start back in your own practice, soliciting previous clients?
Answer: This would likely be violation of both contract law and the rules of professional conduct. It is clear that your intent should be to retire from the practice of law.

Question: Can you make your practice more attractive to a potential buyer by "enhancing" its name or apparent performance?
Answer: Caveat emptor does apply to law firm buyers, but ethical rules apply to sellers. If you are John Doe, solo practitioner, you should not call your firm "John Doe & Associates" to make it inaccurately appear bigger. By contrast, every small law firm involves creative accounting. It's the buyer's obligation to separate real income and expenses from the creative tax accounting normally performed by sellers.

What Price Should You Ask?

A business is worth only what someone is willing to pay for it, and time is an important consideration. The value may be different at different points in time. Valuation and price may not be the same thing.

But, in the context of buying a business, even a law practice, one must look at the future. When valuing a law practice, one should also look to the expected future earnings of the practice. Many people believe that the price to be paid must be based only on this figure generated by the existing practice, but you can also include future earnings that may be based on the buyer's talents brought to bear on the purchased practice in some cases.

Such issues are why I recommend sellers should retain a professional business consultant or broker for representation when selling a law practice. A professional consultant, involved in selling law practices, knows how to sort through the many non-qualified potential buyers to get to the few who actually do have the means and motivation to buy the law practice.

Once the unqualified potential buyers have been culled out, still only somewhere around 50 per cent of those remaining will eventually buy a law practice.

When It's Time to Walk Away

Closing a practice, whatever the reason, involves a different set of issues, including skills that all lawyers should have but that not enough exercise.

Lawyers frequently emphasize the importance of planning to their clients, but may be unprepared to devote the time and patience required for the details in a successful closing. Closing a practice is such a complicated process that you should, ideally, allow six months to one year to accomplish the many tasks involved. Lawyers accustomed to the rush of meeting a 5:00 p.m. filing deadline at the courthouse tend to take for granted the weeks or months of effort required to reach that point.

The same thing is true of the time it takes to clean things up, tie up loose ends, and perform all actions necessary to close your own law practice.

Questions of Who and What

Take, for instance, just two key questions: As a lawyer, who do you have to involve? As a business owner, what steps should you take to wind up operations?

"Who" obviously involves your employees and your clients. But it also involves financial institutions, insurance carriers, bar associations and courts, vendors, utilities, landlords, taxing authorities, the local legal media, and the postal service.

"What" involves your responsibility to these people (severance packages, return of records, final bills, fulfillment of policies and leases, mail forwarding), up through and including the move of any office furniture and equipment you want to keep.

Make a Timeline

If all of this sounds complicated, that's because it is. Making sure you get everything done right requires creation of a timeline that includes descriptions of and completion dates for everything you need to do, in the order you need to do them.

Ethical considerations relating to people, and practical considerations relating to business, should be the focus. Your timeline must, at a minimum, include the date that you decide to close the practice, the date that your current lease runs out, and the date that you would like to have all steps in the process completed.

Establishing a timeline at the beginning of the process and keeping it up to date as events unfold give you a tool to help you focus your efforts and track the various elements of the closing, up to the moment that you walk into the sunset and begin a smooth and happy transition to the next phase of your life beyond the law.

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