FM12 Valuing an Ownership Interest in a Law Firm

Transcription

The handouts and presentations attached are copyright and trademark
protected and provided for individual use only.
Valuing an Ownership Interest in a Law Firm
ALA National Educational Conference
Nashville, TN  May 18, 2015
2015 ALA Nashville
Valuing an Ownership
Interest in a Law Firm
Presented by – Ronald L. Seigneur
May 18, 2015
© 2014 Ronald L. Seigneur All rights reserved.
Ronald L. Seigneur,
CPA/ABV/CFF, ASA, CVA, CGMA
Ron is a partner in Seigneur Gustafson LLP, a CPA and consulting firm located in
Lakewood, Colorado. He holds the AICPA specialty designations of Accredited in
Business Valuation (ABV), Certified in Financial Forensics (CFF), and is a Certified
Valuation Analyst (CVA) with the National Association of Certified Valuation Analysts.
Ron is also a Senior Appraiser in Business Valuation from the American Society of
Appraisers (ASA). Ron has opined on the value of over 80 law firm equity interests.
He has published over 100 articles on business valuation, economic damages,
leadership, compensation systems and related practice management subjects. Ron
has taught a number of intermediate and advanced seminars and courses for state
Bar Associations and law firms; and has successfully facilitated over 100 law firm
retreats and planning meetings. Ron is a past Chair of the Colorado Society of CPAs
and currently chairs their 2020 strategic planning committee.
Ron has been qualified and provided testimony as an expert witness in several jurisdictions on a wide range of
issues ranging from complex business valuations, forensic investigations, and various forms of economic
damages. Ron has served appointments as trustee, mediator, arbitrator, special master of the court, as well as
serving as an expert for the Colorado State Board of Accountancy and Colorado Attorney General. Ron was
inducted into the AICPA Business Valuation Hall of Fame in 2006 and is a Fellow in the College of Law Practice
Management. He has helped more than 400 law firms to be more profitable, collegial and productive.
[email protected]
303-980-1111
Ronald L. Seigneur, CPA/ABV/CFF ASA CGMA
Seigneur Gustafson LLP / www.cpavalue.com / 303.980.1111
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Housekeeping
 PowerPoint Slides
 Additional resources
 Questions & Answers
3
Stated Session Objectives
• Identify the importance of assessing the proper standard
of value (fair market value, fair value and investment
value) prior to engaging an appraiser
• Determine how the intangible value (e.g., goodwill or
'blue sky') of a practice is often the cornerstone issue in
an appraisal of a law practice
• Examine firm organizational documents for applicable
buy-sell language before a triggering event requires an
appraisal to be undertaken
• Explain how to screen candidates, budget for and
engage a qualified appraiser when needed
4
2
Added Objectives Along
the Way
•
•
•
•
General Trends within the Professions
Goodwill Related Issues for Professional Practices
Highlight a Few Landmark Cases
A Few (Hopefully!)Thought Provoking Valuation
Concepts Related to Professional Practices
5
Dynamics of a
Professional Practice
6
3
Changing industry dynamics
within the professional sectors
Personal services are defined by the Internal
Revenue Code as services performed in the fields
of:
•
•
•
•
Health
Law
Engineering
Architecture
•
•
•
•
Accounting
Actuarial Science
Performing Arts
Consulting
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Hey, I’m a professional too!
• pharmacists, private security investigators, securities
brokers/dealers, real estate agents/brokers, interior
designers, court reporters, patent agents, educational
diagnosticians, registered lobbyists, social workers,
enrolled agents, veterinarians, occupational therapists,
land surveyors, landscape architects, clinical social
workers, geologists, foresters, land surveyors...and,
any other type of service rendered pursuant to a
license issued under the laws of the jurisdiction
regulating the profession.....
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4
Differences between a
professional practice and other
service businesses
•
•
•
•
•
•
Price sensitivity
Professional reputation and skill
Reliance on referrals
High intangible asset base
Licenses and protected market
Client relationships and practice transition
alternatives
9
More trends in the
professions
Connectivity…..Now, Now, Now!
• The Internet and Social Media is impacting many
aspects of how professional services are selected,
delivered and marketed. Connectivity between
practitioners, their clients and other advisors, as well
as between the various members and staff of the
firm itself are driving many of the decisions on how a
successful professional practice operates.
• Added stress due to the underlying issues of time
compression.
10
5
More trends in the
professions
Diversity and Women
• A view of the future can be gained by looking at the
current enrollment in professional degree
educational programs around the country, where the
majority of the students today are females and
minorities, including many foreign students.
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More trends in the
professions
Global Marketplace
• Partly driven by the power of the Internet, the world
stage is expanding in terms of choices consumers
have for professional services. The needs of the
customers served by many professional service firms
is stretching out to require the service providers to
understand how and where to turn to be best
positioned as the optimal choice for the customer.
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6
Common attitude
13
More trends in the
professions
Corrosive Influence of Greed
• Arthur Andersen and Myerson Kuhn are only
examples of how critical decisions can be influenced
by apparent greed and self interest. Most
professional service firms are not immune from
having to address the delicate balance between the
pursuit of projects and clients that yield superior
economic returns where such choices might
ultimately impact the integrity of the firm’s reputation
in a negative fashion.
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7
More trends in the
professions
End of the Practice Monopoly
• In the context of law firms, NoLo and Direct Law are
becoming analogous with what Open Table is to
Restaurants. Ever more portions of what
professionals once had to themselves are already
being handled by others, often through the power of
technology.
15
Invasive Species:
Part of the New Normal
axiom
law redefined
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8
More trends in the
professions
Free Agency
• More than ever, practitioners with a solid reputation
and/or book of business, are able to command
special dispensation upon their movement between
firms. Gone are the days of working for one firm for
a career as the transient nature of the professions
accelerates.
• Add to that that the average associate entering the
workplace will have 5 to 8 different “careers”!
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Median ages
Source: U.S. Census, ABA
?
© 2015 Maxfield Peterson. Used with permission
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9
Standard and
Premise of Value
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What does the word Value
mean?
“All values are anticipations of the future” 
Justice Oliver Wendell Holmes, 1904.
Without consensus as to the standard of value, the
resulting valuation conclusion is without meaning.
20
10
Fair Market Value
–defined as the price in terms of
cash at which a property would
change hands between a willing
buyer and a willing seller, both with
full knowledge of the relevant facts
and neither being under compulsion
to buy or sell.
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Fair Market Value - Other
Considerations
• A reasonable time is allowed for exposure in the
open market
• Price represents normal consideration for the
property sold, unaffected by special or creative
financing or sales concessions.
• Fair market value is specific to a particular valuation
date and not to any other date.
• Most probable price versus highest value.
• The willing buyer and willing seller are
hypothetical persons dealing at arm’s length rather
than any ‘particular’ buyer or seller.
22
11
Fair Value
Fair value is employed under the laws of most states
as the statutory standard of value applicable in
valuing dissenting stockholders’ appraisal rights.
– In those states, if a corporation merges, sells out, or
takes certain other major actions and the owner of a
minority interest believes that he or she is being forced
to accept inadequate consideration for the stock, the
owner has the right to have the shares appraised and to
receive fair value in cash.
23
Investment Value
Investment value is the specific value to a particular
investor for individual investment reasons.
– Unlike the fair market value buyer, the investment value
buyer is not a hypothetical investor dealing at arm’s
length, but rather is a specific investor with specific
investment motivations. Specific buyers have
numerous considerations that may influence the price
they might be willing to pay for a property and cause it
to be different from fair market value.
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12
Investment Value - Investor
Attributes/Perceptions
•
•
•
•
Differences in estimates of future earning power.
Differences in perception of degree of risk.
Differences in tax status.
Synergies with other operations owned or controlled.
– Investment value is usually the appropriate standard of
value in merger and acquisition analysis.
25
Going Concern Premise
– Going concern is not a standard of value. The term
going concern refers to a business being valued as
an ongoing operation, as opposed to being valued
under a premise of liquidation. Going concern
value provides a basis for valuing an entity under
the premise of fair market value, fair value or
investment value.
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13
Liquidation Premise
A Liquidation premise refers to the assumption that the
business is going to be closed and the assets sold off.
– Assemblage of assets looks at value of the mass asset
assemblage, although not in current use.
– Orderly liquidation provides liquidation values
assuming a reasonable time to sell, trying to obtain the
best price for each asset.
– Forced liquidation provides liquidation values
assuming the assets are sold as quickly as possible,
frequently all at one time at an auction sale.
27
Overview of BV
Fundamentals
28
14
Understanding Value
‘Value” as a mathematical formula:
Value =
I = Income
I
R-G
R = Risk
G = Growth
Or
Value =
Free cash flow (FCF)
Cost of capital (CofC) – Growth in FCF
The Art versus the Science of Valuation
29
Valuation Methods
• Asset based methods
– Rarely used for operating business enterprises
and professional practices
– Useful for patents, trademarks, license rights
– Real estate holding companies, etc.
– Often requires specialized expertise to augment
the business appraisal process
30
15
Valuation Methods
• Market based methods
– Rev Rule 59-60 advocates market based methods
– Guideline company method
• Often with reference to the public markets
– Comparable transactions method
• Availability of database transactions
– Rules of Thumb, dangerous but used a lot with
small enterprises and in certain industries
31
Valuation Methods
• Income based methods
– Capitalization of earnings
• Useful when dealing with a steady economic benefits
stream
– Discounted future earnings
• Becoming more accepted by IRS
• Allows for measurement of varying growth patterns
• Allows flexibility for start up losses and hyper growth
opportunities
32
16
Valuation Methods
• Excess Earnings method (Treasury Method)
– Hybrid of an asset/income method
• Widely used in divorce courts
• Initially advocated in 1920 with ARM 34,
subsequently restated with Revenue Ruling 68609
• Fundamental problems in application
– FMV and rate of return on tangible assets
– Rate of return on “excess earnings”
33
Rules of Thumb
Not a valuation method, per se
• Can be industry benchmark indicators of value
• Often used as a test for reasonableness
That said, the rule of thumb for a CPA tax practice or a
general dental practice are worth noting in relation to law
firms:
• Tax planning and compliance: 20% down of TTM
collected revenues, 20% per year for 4 years
• General Dental: 65-70% of TTM revenues
34
17
Levels of Value
$12 per share
Synergistic value
Synergistic
Premium
$10 per share
Value of control shares
Control
Premium
Total of minority
interest and lack
of marketability
discount equals a
total discount of
58% from value of
control shares.
30%
Minority
or Lack of
Control
Discount
Value of marketable minority shares
$7 per share
40%
Lack of
Marketability
Discount
$4.20 per share
Value of non-marketable minority
shares
35
Discounts & Premiums
Minority Interest/Lack of Control Discount
– Applicability of this discount is dependent on the
standard and premise of value
– Availability of empirical evidence, such as
Mergerstat and Houlihan Lokey studies, suggest
median discounts around 25 to 40%
36
18
Lack of Marketability Discount
– All other things being equal, an interest in a
business in worth more if it is readily marketable
or, conversely, worth less if it is not.
– Lots of empirical evidence to support the discount
for securities in a closely held enterprise, with
median discounts in the 20 to 40% range
37
• Control Premium
– Not quite the inverse of a minority interest
discount
– Almost all the difference in control versus minority
value in the income approach is found in the
numerator - the expected economic income rather than in the denominator - the discount or
capitalization rate
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19
Levels of Value
$12 per share
Synergistic value
Synergistic
Premium
$10 per share
Value of control shares
Control
Premium
Total of minority
interest and lack
of marketability
discount equals a
total discount of
58% from value of
control shares.
30%
Minority
or Lack of
Control
Discount
Value of marketable minority shares
$7 per share
40%
Lack of
Marketability
Discount
$4.20 per share
Value of non-marketable minority
shares
39
Profession Specific
Attributes
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20
Law Firm Specific Appraisal
Nuances
• Full Service vs. Boutique Practices
• Three Distinct Approaches to Service Delivery:
– Procedural – Foreclosure, Collection, Probate
– Expertise – Patent Law, Oil & Gas
– Experience Driven – Complex Litigation
•
•
•
•
•
Large vs. Small Firm Considerations
Origination Credit Concepts
Hourly, Contingency or Value Billing
Regulatory Influences – e.g. Tort Reform
ABA Model Rule 1.17
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Qualitative Factors
Here are the common factors considered to adjust the
multiple:
• market demographics and location,
• stability and quality of the client base,
• source of clients and referral sources,
• nature of relationships (institutional or
transactional),
• ability of remaining lawyers to perpetuate the
business,
• name recognition and reputations
21
Qualitative Factors
• Stature of the firm and lawyers in the community
served,
• type of practice and pricing/billing/payment
norms,
• concentration of revenues, profitability of practice
relative to comparatives,
• size of firm, stability of partner group,
• profits reinvested into the firm to fund growth,
• level of risk undertaken, and quality of
infrastructure.
Quick Comments on Recent
Case Law
• Hartley v. Hartley, 2010 WL 2071444 (Ala. Civ.
App.)(May 21, 2010)
• Weinberg v. Dickson-Weinberg, 2009 WL
3294784 (Hawai’i App.)(Oct. 14, 2009)
• Dixon v. Crawford, McGilliard, Peterson &
Yelish, 2011 WL 4348058 (Wash. App. Div.
1)(Sept. 19, 2011)
• Walsh v. Walsh, 2012 Ariz. App. LEXIS 162 (Ariz.
Ct. App.)(Oct. 2, 2012)
22
ABA Rule 1.17
A lawyer may sell or purchase a law practice,
including the associated goodwill, if the following
conditions are satisfied:
a.
Seller ceases to engage in the private practice
of law in the jurisdiction in which the practice
has been conducted.
b.
The practice is sold as an entirety to another
lawyer or law firm in good standing.
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ABA Rule 1.17
c. Written notice is given to each of the seller’s client’s
regarding:
i)
ii)
the proposed sale;
the terms of any proposed change in the fee
arrangement;
iii) the client’s right to retain other counsel or to
take possession of the file; and
iv) the fact that the client’s consent will be
presumed if no action or objection within 90
days (requires court order in some
circumstances).
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ABA Rule 1.17
d. The fees charged to the client may not be
increased by reason of the sale. The
purchaser may, however, refuse to undertake
representation unless the client consents to
pay the purchaser fees at a rate not exceeding
the fees charged by the practitioner for
rendering substantially similar services.
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Other Issues
•
•
•
•
•
•
•
Preserving Client Confidentiality
The Question of a Referral Fee
Clearing Conflicts of Interest
Coordinating Transfer of Client Files and Records
Continuing E&O Insurance
Breaking the News to Employees
Don’t forget the Intellectual Property, including
phone numbers, websites and standardized forms
24
Dealing with Contingent Fees
• Develop a look-back framework and assign
percentages based on the status of each matter
as of a particular point in time:
–
–
–
–
–
10% earned
20% earned
30% earned
10% earned
30% earned
Stage
upon matter intake
upon filing of a claim
upon completion of discovery
upon completion of depositions
at date of trial
Event
Percent of Fee Earned
1
Intake/Client signes contingent fee
contract
10-25% (depending on nature of
the case and liability issues
2
Demand/Negotiations before suit is
filed
10%
3
Filing of Complaint
5%
4
Discovery started and is on-going
10-20%
5
Discovery is completed
10-15%
6
Trial
25-35%
7
Appellate and/or post-settlement
services
Case-by-case analysis
25
Source: Michael E. Porter
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Sample Law Practice
Business Appraisal
Information Request
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Sample Request for
Production of Documents
• Access to all available management reports
detailing practitioner, practice unit and firm-wide
utilization and realization statistics for the periods
to be covered in the analysis
• Details of all compensation plans and formulas
used for professional staff and members of
ownership, including any special deals or
arrangements with specific individuals
• Details of the firm’s client fee arrangements,
including details on contingency fee work, and the
use of success fees & hybrid fees
53
Sample Request for
• Minutes and supporting documentation for any
business planning retreats and related meetings,
including any strategic planning initiatives and the
status thereof
• Detail of employee fringe benefit programs and
allowances, including automobile, computer, cell
phone and travel costs, continuing education
allowances, and business development
allowances.
• Details on any soft costs incurred by the firm
related to owner activities outside the business,
such as sports tickets, vacation homes and the
like should be disclosed
54
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Sample Request for
• Details of prior ownership redemptions and
related commitments for future stock redemptions
for retirement, disability, death, and withdrawal for
competitive and non competitive reasons
• Copies of all buy-sell agreements, including:
– Current agreements
– Agreements in force during the last five years
• Copies of any employment contracts, including:
– Of Counsel and Special Counsel relationships
– Details on any terminated or withdrawing practitioners
within the last five years
55
Sample Request for
• Information on any pending or threatened lawsuits
or malpractice claims
• List of any affiliated entities and related party
business relationships, including investments in
outside activities
• Detail on any honorariums, teaching stipends,
directorship compensation, or related subsidies
received by the practice or individual lawyers
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Sample Request for
Production of Documents for
a Law Firm
• Details on all bartering transactions, including
stock in lieu of fee arrangements and direct or
indirect investments third party entities
• Access to all available departmental, branch office
and client grouping performance data
57
Sample Request for
Production of Documents for
a Law Firm
• Accounts receivable and work in process schedules, with
aging to 180 days or more, as of valuation date.
• Details on all contingent fee work in process as of the
valuation date and the methods used to evaluate the
potential success of cases
• Copies of firm brochures and other promotional sales
literature
• Copies of deferred compensation plans and commitments
• List of major clients and client groups, including the top 5
and top 20 clients in terms of annual revenues for each of
the past 2 years
• Martindale Hubbell information on the firm and all
members of ownership
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Practice and
Professional Goodwill
aka Blue Sky
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Defining Goodwill
• That intangible asset arising as a result of name,
reputation, customer loyalty, location, products,
and similar factors not separately identified.
• International Glossary of Business Valuation
Terms, June 2001
60
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Three Parts Of Goodwill
Entity
Goodwill
Transferable
Personal
Goodwill
“Pure”
Personal
Goodwill
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Personal Goodwill is…
“Personal goodwill also referred to as professional
goodwill is associated with the individual practitioner.
This type of goodwill is based on revenues being
generated because of the practitioner’s skills,
knowledge, and reputation.”
(Yoon v. Yoon, 711 N.E.2d 1265 (Ind. 1999))
Personal goodwill, also known as professional
goodwill, is the value of earnings or cash flow directly
attributable to the individual’s characteristics or
attributes.
(Goodwill Attributes: Assessing Utility, The Value Examiner at 22 (Jan/Feb 2007))
63
A Simple Example of the
Excess Earnings Method to
Derive the Value of Goodwill
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Let’s value a law practice
An simple excess earnings example:
•
•
•
•
•
Attorney A compensation
$400,000
Comparable compensation * ( 280,000)
Attorney A excess earnings
120,000
Cap rate
.25
Value of excess earnings
$480,000
* taken from ALM (formerly Altman Weil) economic
survey based on practice area, size of firm,
geographic area, size of city practice is located
within and years out of law school
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Attorney A has averaged 2,000 charge hours per year
compared to 1,600 hours for the peer group based
on previously mentioned criteria
• 2,000/1,600 = 1.25
• 1.25 * 280,000 = 350,000 effort adjusted comparable
compensation
66
33
An simple excess earnings example:
•
•
•
•
•
Attorney A compensation
$400,000
Comparable compensation (i)( 350,000)
Attorney A excess earnings
50,000
Cap rate
.25
Value of excess earnings
$200,000
(i) as adjusted for productivity
67
Business Appraisal
Organizations and
Credentials
68
34
Professional
Organizations
• American Society of Appraisers (“ASA”)
• American Institute of Certified Public Accountants
(“ABV”)
• National Association of Certified Valuation Analysts
(“CVA”)
• Institute of Business Appraisers (“CBA”)
• Other
–
–
–
–
Appraisal Foundation/USPAP
IRS
CFA Institute
International Organizations
The Harris Law Firm - Lunch & Learn Series
69
Valuation Credentials
– American Institute of Certified Public Accountants
• Accredited in Business Valuation (~3,400/~90)
– National Association of Certified Valuation Analysts
• Certified Valuation Analyst (~6,500/~280)
– American Society of Appraisers
• ASA BV discipline (~850/40)
– Institute of Business Appraisers
• Certified Business Appraiser (~400/5)
The Harris Law Firm - Lunch & Learn Series
70
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Costs and Logistics
• Conclusion of Value
– Comprehensive Report - $6,000 to $15,000
– Summary Report - $5,000 to $10,000
– Oral Report
• Calculation of Value
– Summary Report - $3,000 to $6,000
The primary drivers of cost and time are the complexity of
the enterprise and the condition and completeness of the
required documentation:
– Are site visits and management interviews
necessary?
– Are records up to date and complete?
– Are third party appraisals necessary (e.g. real estate,
specialized equipment, patents/trarks, etc.)
71
AICPA Statement on
Standards of Valuation
Services No. 1
72
36
AICPA Statement on Standards
for Valuation Services No. 1 (SSVS1)
• Six+ years for the process
• Discussed with 11 AICPA groups, IRS, SEC,
FASB and others
• Broad perspectives representing 330,000 AICPA
members
• Listened to how valuation services integrate with
other CPA services (e.g., tax, PFP)
• Learned from others experienced in writing
professional standards
73
Applicability of SSVS1
• Covers any service that estimates the value a:
–
–
–
–
business,
a business ownership interest,
security or
intangible asset
• Required by CPAs doing business appraisal in
most jurisdictions
74
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SSVS1 Valuation Analysis
• Engagement calls for the valuation analyst to
estimate the value of the subject interest
• The valuation analyst is free to apply the
valuation approaches and methods he/she
deems appropriate in the circumstances
• Valuation analysis results in a conclusion of
value, either a single amount or a range of value
75
SSVS1 Calculation Analysis
• The valuation analyst and the client agree on the
specific valuation approaches or methods to be
used or the extent of the valuation procedures the
analyst will perform and
• The valuation analyst estimates the value in
compliance with the agreement
• The results are expressed as a calculated value,
either as a single amount or as a range
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38
Ancillary Information –
Provided for Participant Reference
77
More Info on Goodwill on
Professional Services
Enterprises
78
39
The Value Spectrum
Value in Exchange
Value to the Holder
79
The Fledge Factors
(WA State)
• Goodwill is the intangible expectation of continued
public patronage of an enterprise. In a professional
practice capable of being sold, goodwill may exist
even though it is not on the market or readily saleable.
Value of goodwill in such a practice depends upon the
practitioner's age, health, past earning power,
reputation in the community, and professional
success.
• - 91 Wn.2d 324, 588 P.2d 1136
80
40
In re Marriage of Lopez – 113 Cal, Rapt.
58 (38 Cal. App. 3d 1044 (1974)
Factors listed in this case to be considered when valuing
professional goodwill:
• The age and health of the practitioner
• The professional’s demonstrated earning power.
• The professional’s reputation in the community for
judgment, skill, and knowledge.
• The professional’s comparative professional success.
• The nature and duration of the professional’s practice,
either as a sole proprietor or as a contributing member
of a partnership or professional corporation.
81
Contrary to popular thinking, it is
not just a concept for divorce
litigation.
82
41
Martin’s Ice Cream
US Tax Court
•
In Martin Ice Cream Co. v. Commissioner, 110 T.C. 189 (1998), the issue
was over the split-off of a subsidiary, Strassberg Ice Cream Distributors, Inc.
(“SIC”). Arnold Strassberg developed personal relationships with customers
over the previous 25 years, and was instrumental in the design of new ice
cream packaging and marketing techniques. Strassberg was responsible
for the introduction of Häagen-Dazs products into high volume retail stores
in New Jersey.
Norwalk v. Commissioner
US Tax Court
• In Norwalk v. Commissioner (TCM 1998-279), an
accounting firm had liquidated. The IRS
attempted to tax a distribution of Goodwill from
the corporation upon liquidation. The court
decided there was no Goodwill to be distributed
from the corporation because there was no
covenant-not-to-compete and the clients (forming
most if not all of the Goodwill value) belonged to
the individual partners of the accounting firms.
(We will cover covenants later in the presentation)
84
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Factors identifying personal
goodwill in case law include:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Earning power of the
professional/business owner;
Reputation in the community for
judgment, skill and knowledge of
professional business owner;
Professional/business success of
Age and health of
Nature and direction of the professional
practice/business;
Work habits of the
Importance and closeness of contact of
Duration of professional
practice/business;
Referrals diversity to
Name of professional/business owner;
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
Location of professional/business
owner;
Size of professional
practice/business;
Marketability of professional business
owner;
Types of clients/customers for
professional practice/business;
Source of new clients/customers;
Compensation to
Size of workforce;
Professional/business competition;
Billing methodologies; and
Demographics
85
A Changing
Landscape
86
43
General trends in the
professions
• Out: “ A general practice is best because it
appeals to a wide variety of clients.”
• In:
Most firms must continually invest in the
attributes, skills & services that increase value to their
clients in specific targeted niches.
• Out: “Technical partners and marketing partners.”
• In:
All owners must create professional plans
that outline their specific contributions to the firm,
often with professional support.
87
professions
• Out: “What works for me will work for others.”
• In:
The individual must relinquish autonomy to the
power of a directed firm leadership. There’s a balance
between too much freedom and too little.
• Out: ”Partners are entitled to work less than staff.”
• In:
A professional practice is no different than
many other traditional businesses, and most corporate
business owners work very hard too. Everyone is in
search of better balance to their work and personal
lives.
88
44
professions
• Out: “Working hard will bring success.”
• In:
Working smarter, especially with technology
and limited resources, should be the underlying
driver. This includes loosening the grip on the
billable hour regimen and charging more for the
value of the services delivered.
89
45
46
47
48
Recommended Resources
– Selling Your Law Practice, Edward Poll, LawBiz
Publishing, 2005.
– ALM 2014 Survey of Law Firm Economics
– Exit Planning Considerations for Attorneys
– Law Firm Valuation Checklist, BV Update, July 2011
– Succession Planning for Attorneys and Law Firms
– Partner’s Capital: How much is enough?
– What is my Practice Worth to my Spouse, My
Partners or to Another Attorney?
97
Recommended Resources
–Financial Valuations: Applications and Models,
James Hitchner and Ronald Seigneur, 3rd Edition, 2011, John Wiley
& Sons.
–Valuing a Business: The Analysis and Appraisal of Closely Held
Companies, 5th Edition, Shannon P. Pratt, Robert R. Reilly & Robert
P. Schweihs, Irwin.
–Understanding Business Valuation, 2nd Edition, Gary Trugman,
AICPA.
–Valuing Professional Practices and Licenses, Ron Brown,
Editor Aspen Publishing
98
49
Ronald L. Seigneur,
ASA CPA•ABV•CFF CVA CGMA
Seigneur Gustafson LLP CPAs
Colorado Front Range:
– 300 Union Blvd., Suite 600
Lakewood, Colorado 80228-1535
– 15950 Main Street, Suite 201
Parker, Colorado 80365
Washington State:
–
87 Calder Road
Elma, WA 98541
 303.980.1111 voice
 303.308.6969 fax
[email protected]
www.cpavalue.com
99
Kevin R. Yeanoplos, CPA/ABV/CFF, ASA
[email protected]
Ronald L. Seigneur, ASA CPA•ABV•CFF CVA CGMA
[email protected]
www.YSAdvisory.com
www,CannaValuation.com
50
Questions?
Comments?
Please take a moment
now to evaluate this
session.
Your opinion matters!
101
51
LawFirmPracticeManagement
Aquila, A., & Rice, C. (2007). Compensation as a strategic asset: The new paradigm. New
York, New York: American Institute Of Certified Public Accountants.
Broderick, M. (2011). The art of managing professional services: Insights from leaders of the
world's top firms. Upper Saddle River, New Jersey: Maureen Broderick Publishing as Prentice
Hall.
Cain, G. (2002). Law partnership revisited. Chicago, Illinois: Senior Lawyers Division,
American Bar Association.
Cain, G. (1994). Turning points: New paths and second careers for lawyers. Chicago, Illinois:
Senior Lawyers Division, American Bar Association.
Foonberg, J. (1976). How to start and build a law practice. Chicago, Illinois: Law Student
Division and the Section of Economics of Law Practice of the American Bar Association.
Greene, A. (2005). The lawyer's guide to increasing revenue: Unlocking the profit potential in
your firm. Chicago, Illinois: American Bar Association, Law Practice Management Section.
Hams, B. (2012). Ownership thinking: How to end entitlement and create a culture of
accountability, purpose, and profit. New York, New York: McGraw-Hill.
Henning, J. (1986). Improving lawyer productivity: How to train, manage, and supervise your
lawyers. Chicago, Illinois: LawLetters.
Hillman, R. (1990). Law firm breakups: The law and ethics of grabbing and leaving. Boston,
Massachusetts: Little, Brown and Company.
Kaufman, G. (1999). The lawyer's guide to balancing life and work: Taking the stress out of
success. Chicago, Illinois: Law Practice Management Section, American Bar Association.
Maister, D. (1993). Managing the professional service firm. New York, New York: Free Press
Paperbacks.
Maister, D. (2001). Practice what you preach!: What managers must do to create a high
achievement culture. New York, New York: Free Press.
Manch, S., & Shannon, M. (2009). Maximizing law firm profitability: Hiring, training and
developing productive lawyers (2nd ed.). New York, New York: Law Journal Press.
McKenna, P., & Maister, D. (2002). First among equals: How to manage a group of
professionals. New York, New York: Free Press.
Mendlowitz, E. (2014). 101 questions and answers for managing an accounting practice. East
Hampton, New York: CPA Trendlines.
Selected resources bibliography Page 1 Prepared by: Seigneur Gustafson LLP www.cpavalue.com 303.980.1111 LawFirmPracticeManagement
Poll, E. (1994). Attorney and law firm guide to the business of law: Planning and operating for
survival and growth. Chicago, Illinois: General Practice, Solo, and Small Firm Section,
American Bar Association.
Poll, E. (2006). More Secrets of the business of law: Ways to be more effective, efficient and
profitable. Venice, California: LawBiz Management Company.
Reeb, W. (2010). Securing the future: Succession planning basics. New York, New York:
American Institute of Certified Public Accountants.
Stinnett, C. (2007). The extraordinary law firm: Making your firm a great place to work.
Foundation of the Association of Legal Administrators.
Various. (2002). Inside the minds--leading lawyers: The art & science of being a successful
lawyer. Boston, Massachusetts: Aspatore.
Wesemann, H. (2004). The first great myth of legal management is that it exists: Tough issues
for law firm managing partners and administrators. Place of publication not identified: Author
House.
Wren, H., & Glascock, B. (1998). The of counsel agreement: A guide for law firm and
practitioner (2nd ed.). Chicago, Illinois: Senior Lawyers Division, American Bar Association.
Yegge, R. (2004). Principles of law office management. Denver, Colorado: Bradford Publishing
Company.
Selected resources bibliography Page 2 Prepared by: Seigneur Gustafson LLP www.cpavalue.com 303.980.1111 THE NEWSLETTER FOR LEGAL OFFICE ADMINISTRATORS
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EDITORIAL ADVISORY BOARD
Excerpt from Volume XXIX / Number 3
March 2015
WORKING WITH LAWYERS
Succession Planning:
Turning the dream of retirement into an
action plan
Many of us daydream of how we’ll spend our retirement years; it’s the
dream we’ve chased all of our careers.
However, when faced with the reality of this life-changing phase of life,
retirement suddenly switches from a dream to a touchy subject—and
it’s a subject every law office administrator must address and properly
plan for, because at some point in the life of your firm, a partner is going
to retire and you need to ensure that their departure doesn’t adversely
affect your clients, your employees, and your bank account.
Not concerned? Well, consider this: How many of your firm’s partners
would you guess are nearing the age of retirement or are contemplating
retirement? Now roughly estimate their total client revenues. Are you
prepared for the upheaval?
Betsi Roach
Executive Director
Legal Marketing Association
Chicago, IL
Why think about it now?
According to valuation expert Ronald L. Seigneur, MBA CPA of Seigneur
Gustafson LLP, based in Lakewood, CO, the topic of retirement dropped
off noticeably during the great recession. Now that the economy is
recovering, more people are starting to reconsider how they’re going
to pull it off. What’s interesting is that while people are thinking about
retirement, very few are actually talking about it.“Many professional
service firms have been doing a slow dance with the topic of
retirement,” says Seigneur, “and nobody wants to deal with it. For those
contemplating retirement, it’s a huge life change issue. One phase of
your life is ending and it’s tough to deal with it. At the same time, the
younger people in these firms are watching closely for what it all means
to them.”
Ronald L. Seigneur
CPA/ABV/CFF, ASA, CVA, CGMA
Seigneur Gustafson, LLP
Denver, CO
But it must be dealt with. You need to take steps now to ensure that,
when the topic of retirement does come up, the retiring partner doesn’t
just leave when it’s right for him/her and on his/her terms only.“
Law Office Manager (ISSN 1071-7242) is published monthly
by Plain Language Media, LLC, 15 Shaw Street, New London,
CT, 06320.
Subscription rate: $297/year; back issues are available at $10
each. Periodicals postage paid at New London, CT 06320.
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Opinions expressed are not necessarily those of Law Office
Manager. Mention of products and services does not
constitute endorsement. Advice given is general, and readers
should consult professional counsel for specific legal, ethical,
or clinical questions. Law Office Manager is a 2015 copyright
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translation, or reproduction in any form is forbidden without
written permission.
Law Office Manager is a trademark of Plain Language Media, LLC
Given the massive transfer of management and leadership that will
occur when senior lawyers begin to retire, together with the shortage
of workers many are predicting in the years ahead,” says Seigneur, “law
firms should consider it a call to action to be proactive in addressing the
succession planning needs within your enterprise. A properly articulated
and implemented succession plan can serve to strengthen your firm’s
core values and increase the value of the practice itself.”
Mark E. Estes
Law Library Director
Alameda County Law Library
Oakland, CA
Steve M. Cohen
Ed.D., CMC
President, Labor Management Advisory Group
Lee’s Summit, MO
David C. Fortosis
Senior Vice-President Consulting
Aon Hewitt
Chicago, IL
LAW OFFICE MANAGER / March 2015 / lawofﬁcemgr.com
Page 1
To properly prepare for the exit of a partner, a firm needs to consider:
•
•
•
•
Transition of client responsibilities
Transition of client relationships
Replacement of intellectual capital, skills and expertise
Replacement of leadership
How to start the conversation
Many people don’t want to have the discussion; many haven’t even articulated what they want from
retirement. But if you have a small practice of, say, 5 to 15 owners, you need to talk about who is going first
and what will follow after that.
If you have an aging law firm and there’s
Years to retirement
been no discussion yet about retirement
or exiting the firm, Seigneur recommends
1
2
3
4
5
6
7
8
9 10
this quick way to get everyone to visualize
Lawyer A
what’s going to happen and how it will
Lawyer B
affect the firm: Create a grid, placing each
lawyer’s name for those that are 50 and
Lawyer C
older down the left side, then create and
number columns across the top from 1 to 10. Next, complete the grid by asking each lawyer how many more
years they expect to practice before retiring and mark that column opposite their name accordingly. As the
grid is filled, a picture will emerge of what the firm will be facing over the next 10 years. And now you’re
ready to start discussing what resources you’ll need to ensure continuity of the firm.
You’ll also want to review your buy-sell agreements. “The firm’s ownership agreement that contains the
operative buy-sell language provides the initial roadmap necessary to optimize the continuation of the
practice upon a triggering event, such as death, disability, retirement, departure for competitive practice,
and involuntary termination,” says Seigneur. “And align this assessment with the expectations of those who
will be impacted by the terms of it to identify any divergent views early on. Just pulling this agreement out,
dusting it off and reviewing what will happen with a triggering event can be quite instructive in many firms
that have not had to deal recently with retirement or other ownership departures.”
Identifying the big gaps in expectations is essential. For example, what is the current generation willing
to pay for the benefit of acquiring a practice? It might be completely different from what you expect. It’s
important to reconcile the expectations between those who are retiring and those who are succeeding.
“The key,” says Seigneur, “is to pick a pathway that is best suited for your firm’s specific situation.”
When picking your pathway, be mindful that the participants in this conversation may have vast differences
in perspectives and objectives.
The retirees’ perspective
The first thing to clarify is what type of retirement those who are exiting are looking for (if they even know
themselves). Many people at retirement age are finding that they are either not willing or not able to simply
stop working.
“We’re receiving a lot of calls from partners inquiring on how to monetize their ownership interest, but with
a desire to continue to work, even if at a reduced schedule and with less of the trappings that come with
being an equity owner of the enterprise.” says Seigneur. “Instead of ‘I’m retiring; I’m outta here,’ many lawyers
now either want or need to continue to work. But many small and mid-sized firms don’t have sufficient
funded plans to exit on terms that retiring lawyer’s desire.” Retiring or exiting lawyers are also finding that it’s
a buyers’ market.
“Those looking to exit are learning the hard way that members of the up-and-coming generation are often
not willing to pay the price, in terms of both dollars and commitment, which prior partners had received
Page 2
upon their exit from productive practice,” warns Seigneur. “And legacy firms are now coming to the next
cycle, getting ready to transfer to a third generation. The lawyers who bought out previous generations had
to pay a substantial compensation for the practice, and they’re expecting a similar buy-out. But things have
changed dramatically. Now it’s ‘easy in, easy out.’ In most instances, lawyers are not being charged as much
to buy into a firm and are likewise not being paid out more than their hard capital when they leave. Often
it is just a matter of having a little skin in the game, getting paid fairly while fully engaged and productive,
coupled with a lower expectation upon exit.”
The successors’ perspective
The younger lawyers will want to understand
how the financial obligations brought on by
the retiring partners will affect them and how
responsibility will transfer to these younger
lawyers.
“These younger practitioners view the economic
side of succession planning as something where
they are only willing to pay for the incremental
opportunity to do more appealing work, work
for better or more prestigious clients, and to
bill at higher rates, all in relation to their current
standing within the firm, or as compared to their
next best alternative in the marketplace that can
be realized by simply moving to another firm,”
says Seigneur.
Don’t assume, though, that they even want that
responsibility.
How to improve the value of your practice
“Value Drivers are factors that affect the actual
and perceived value of a practice,” says Seigneur.
“Potential investors, whether internal or external,
look for performance in the two areas—universal
value drivers and industry-specific value drivers.”
Universal value drivers include increased cash
flow, enhanced operating systems that improve
sustainability of cash flows, improved technology
platforms and facilities, reduced or restricted
debt, documented sustainability of earnings,
implementation of strategies to grow and sustain
the inflow of clients and client service opportunities,
and insuring for a competent administrative/
management team.
Industry-specific value drivers include stability and
outlook for growth in the areas emphasized within
the practice, technical expertise, diversity of clients
and services provided, and employee performance
and morale. Focusing on tactics to improve and
enhance the value drivers for your firm, can pay
“The baby boomer generation now exiting the
workplace was generally a group who lived
to work,” says Seigneur. “However, those now
entering the labor market tend to often hold the
converse view in that they work to live. They want
to be paid a decent wage and go home at the end
of the average day leaving their work behind. In other words, the younger generations, generally speaking,
are more inclined to disengage from their work, as compared to the baby boomer generation.”
Take, for example, founding partner “Joe” who, after 30 years in a firm, had been counting on his two
younger associates to take over when he retired. One associate was his son, Kevin; the other, Sue, a lawyer
he’d been mentoring. When Joe approached Seigneur for help planning his exit from the business, Seigneur
had to be the bearer of the bad—and surprising—news: Sue and Kevin didn’t want to buy the business.
The clients’ perspective
“Rainmaking is king in our profession, too, as
it is in law firms,” says Seigneur. “Maintaining relationships is very important, especially in today’s ever
challenging and competitive environment where no one should take their long-standing client relationships
for granted.”
Larger law firms are more institutionalized. They have robust succession plans, and most of their clientele are
institutional clients. While there are rainmakers in BigLaw, the clients themselves hire firms, not individual
lawyers. But in smaller firms, there are different considerations. It’s important to consider your clients’
concerns. Do they have a preference as to who succeeds their lawyer? Are they themselves going through a
transition process?
Page 3
Remember that it is not only your partners who are considering retirement; many of your clients might also
be planning their own exits from the workforce.
Assessing the value of your practice
Whether the retiring lawyer can expect to get value for the practice depends on the practice.
“It’s the transferability of attractive, recurring work opportunities that drives the potential for value to
the exiting practitioner,” says Seigneur. “For example, a law practice focusing on wills, probate, and estate
planning will have a much better chance in transitioning a client base to one or more successors, versus a
complex litigator that is hired routinely for his or her reputation in trying complex litigation matters.”
In the latter circumstance, you want to consider branding tactics. “Often it becomes an issue of identifying
what the brand is that clients and referral sources look to in making their purchase decisions and then
developing a strategy to transfer that brand identity to either one or more other successor practitioners or to
a firm itself as the surviving institution,” Seigneur says.
To assess the value of your practice, Seigneur recommends that you look at:
• the scope and nature of services offered,
• the quality of the clientele and the likelihood of being able to align them with new service
providers,
• the quality of the personnel and facilities, if any, to be transferred, and
• the overall profitability of the practice.
Pay attention to branding
“The concept of branding is critical to focus
on early in the succession planning process. Many professional practitioners believe the only significant
value associated with their practice resides in their professional goodwill and that this is not readily
transferable,” says Seigneur.
“However, a long-term commitment to putting the proper people in place and in transitioning the required
client and related work relationships, most any type of law practice can benefit from this with the payoff
being more recurring work opportunities for the practitioners interested in succeeding to the practice of an
exiting individual.”
Implementing the plan
Now you need to build a practice transition framework, the core element of which will be a commitment to
create a pathway to leadership positions for the next generation of lawyers in your firm.
“You need to treat succession planning as an activity that can be incorporated into the firm’s everyday
activities,” says Seigneur.
For example, ongoing activities would include:
•
•
•
•
Coordinating and implementing training and mentoring
Evaluating compensation practices
Identifying and elevating new leaders and rainmakers
Developing a structured client transition processes
This is particularly important if a key element of your firm’s success is in the branding you have done as an
institution. It becomes even more critical it the key brand clients look to is embedded in certain individuals
who are reaching retirement age.
Seigneur points to his own succession planning as an example. “Our income partner is my primary NextGen
and someone who has all the technical skills and capabilities to sit in my chair,” he says. “The primary gap
Page 4
is in her building her own brand by
being more visible within the niches
we serve and in her experience as a
testifying expert.”
To address this, Seigneur has
consciously made it a continuing
practice of his to develop her brand, as
well as help her establish relationships
with the clients.
Retirement by the Numbers
•
•
•
•
•
•
700 retirees = 27,000 years of experience
55 or older = 1/3 of the practicing partners in the Am Law 200
Early retirement for lawyers occurs between 55 and 62
65 = age of normal retirement
By 2018 youngest baby boomers will be in their mid-50s
By 2018 oldest baby boomers will be in their early 70s
“Most of my best clients know they can always count on her to get them rolling on whatever their needs
are when I am out or unavailable. We have invested significant time in meeting with key clients and referral
sources together, when only one of us could easily handle the specific need at hand.”
One particular tactic that Seigneur recommends is to have the NextGen actively contact clients whenever
a senior lawyer would have otherwise needed to contact them for a valid reason, indicating that they are
filling in for the senior lawyer and wanting to address the issue right away so the firm can continue to give
the client prompt, responsive service. Seigneur adds, “This tactic alone offers a great way to position the
client to know and trust the NextGen as someone who is trusted by the senior lawyer sufficiently for them to
have confidence in prospectively.”
Look for suitable ways to help the succeeding
lawyers build their brand, confidence, and
abilities, such as authoring articles and making
presentations to build their reputations as thought
leaders.
Conclusion
However you choose to approach the topic, do it
now.
“For law firms with an aging ownership,” says
Seigneur, “I would encourage you to do what is
necessary to get your elephants up on the table
and deal with the realities of your particular
situation. Consider using a qualified facilitator to
have the difficult conversations that are often the
key obstacle to moving this process along.”
Ron Seigneur is a recognized leader,
educator and innovator in the
valuation field. He lectures frequently
on valuation, litigation, and financial
analysis issues to other valuation
professionals and attorneys. Ron
is also nationally recognized for
his consulting expertise with law
firms and attorneys, subsequent to a 7 year stint as
a legal administrator and Chief Financial Officer for
a 50-attorney Denver law firm. He can be reached at
[email protected] or 877-775-2676.
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Page 5

FM12 Valuing an Ownership Interest in a Law Firm

Transcription

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