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- [00:00]
A
Ready or not, 2025 is here and so is the next wave of AI. It's crucial for lawyers to take advantage of AI and automation that's going to disrupt the legal space that's to come in 2025. And that's why I'm hosting a free event for lawyers called Lawyer club fiesta on December 12th at 2pm Pacific 5pm Eastern. It's a valuable action backed event filled with insights on AI and automation where we'll also be discussing lawyer hot takes on controversial topics and a chance to win a 42 inch monitor and an Apple iPhone and a unique opportunity to connect with like minded legal professionals. You'll leave with actionable strategies to position your law firm to ride the next wave and profit from being an early adopter. However, seats are limited and going fast. Click the button below to register now. Hey, it's Sam Alai here, founder of my Legal Academy where we help lawyers scale and automate their law firms so they could send up more clients and reclaim their precious time. If you're looking to grow your practice while working less, click the link in the show notes to book a free call to discover a radically different way to grow your law firm. Enjoy the episode.
- [01:11]
B
Welcome to our little spontaneous little show. We got Tom here. Tom let you introduce yourself and we'll take it from there.
- [01:23]
C
Yeah, absolutely. Sam, thanks for having me. Good to talk to you and spend the next little while with you. Tom Linfesti, I'm an attorney, cpa, was a practicing attorney for years on estates, corporate and tax. And then as I was telling Sam, a little bit a little over a decade ago, I got the idea as I was helping other professionals in my own law practice. I was helping CPAs, dentists, doctors do their succession planning or help them when they sold their practice and exited and retired. So I created the Law practice exchange over 10 years ago to help lawyers have the same options as other professional business owners or really any business owner in general. The opportunity to grow and exit for value, or the opportunity to buy as a growth strategy, grow through acquisition, or buy into equity as part of that. So really to create continuation strategies for law firms, we do a lot of guidance on buying and selling. We host the marketplace for buying and selling law firms and then we're there of course to do a lot of valuations for law firms, to put numbers to law firms and to build out deal structures to make sure they're successful.
- [02:35]
B
Beautiful. This topic that we'll be talking about, I think we'll try to make it as practical as possible Because I do have my first law firm, which I don't want to give out the name so that, you know, that won't cause any issues, but that I'm considering possibly selling. So I'll ask specific questions about that. But Tom, by the way, your platform is called the Law Practice Exchange. I'll put the link of it below. What percentage of law firms are being sold versus being purchased on your website?
- [03:04]
C
Yes. As far as how many sellers versus buyers that we have, is that kind of what we're looking at? Yeah. Buyers have historically outpaced. Well, I'd say historically in the last two, three years, buyers have really picked up the pace and we probably have five times as many buyer prospects as we do. Sellers are, you know, your typical, if you're thinking of it. Most of our baby boomers, we sell practices for 30 year olds too that have built good businesses and want to exit and move on to a software company or be at home, you know, with the family, all their strategies. But most of our attorneys are retiring later, so they're entering the sale process later. But our buyers are of the next generation, are probably a little bit more focused on business. But it's really picked up, you know, post Covid and everything else. We had a big bump, excuse me, of attorneys and law firms looking to see we can expand geographically, we can expand our legal services and offer those remotely so we don't have to have a law firm that's in where we are, it can be somewhere else and we can be successful. So that really picked up our buyer pace to that. So five times as many buyers as sellers, which is great for sellers of good quality law firms. You know, overall those have to be qualified, meaning buyers that are really committed to the process, which is part of our plan of educating them. But I think overall that tide will turn. We will level out a little bit as more sellers look to, you know, focus on retirement and really look at having a succession plan for their practice. So right now it's a good seller's market.
- [04:41]
B
Amazing. I would have not expected that. Which is good news. Who are typically the buyers and who are typically the sellers? You mentioned about the sellers being usually, you know, the kind of on the outset of their career or it could also be, you know, people that are looking to that are younger but who are typically the buyers.
- [04:58]
C
Yeah, absolutely. Our sellers are, you know, again, usually true solos up to, you know, solos that have, you know, big staff with small ownership groups.
- [05:08]
D
Right.
- [05:08]
C
Is really who we're dealing with versus large firms. Large firms build out hopefully good succession strategies on the buy side. Usually what we're dealing with. You know, early on in this, we had younger attorneys who would look at, you know, leaving a practice, buying into a practice that's changed over the last few years. Now our biggest buyer demographic is really other boutique law firms looking to expand geographically or looking to expand by practice area, you know, headcount overall client base from that. So we'll get, you know, a trust in estates attorney that's doing great things in their metro, who wants to expand to the other metro. And they, of course, can go do that, or they can acquire and really roll that into their systems, their integration. We have that a lot in personal injury otherwise. So mostly who our buyers are still going to be, you know, small ownership groups. So solo owned, boutique, more process driven, more of sam, who we want them to probably be in the next generations. They're trying to do those good things and they're really doing it as a growth strategy. They're going where the consumer potentially would be or the geographic community that they would have to be in.
- [06:21]
B
And who do you see as the top three practice types that are usually transacted?
- [06:27]
C
Yep. Personal injury for us leads the way. And then immigration's probably, you know, close second. There's a lot of consolidation we're seeing in immigration, a lot of change in how practices are run, everything else from that side. So we're seeing a lot of movement in immigration, but personal injury definitely leads the way. Personal injury attorneys tend to have historically spent more money on marketing, spent more money on systems, and then if they're looking to grow, it doesn't seem so foreign to them to spend money to grow, to acquire a brand that has a proven history and data stream for intake and leads through digital marketing, through brand marketing, billboards, TV advertising, everything else. So that plaintiff space definitely leads immigration, as I said, probably second in the activity level. And then, you know, from a third standpoint, it probably varies. Trust in estates is probably our third practice of where we see a good amount of movement. But real estate, even residential real estate, moves in there. Family law moves in there in ebbs and flows. You know, we're recording this in 2024 right now, family law just seems to be so busy themselves, that acquisition isn't a huge driver for growth. They can get growth through natural marketing, but the family law attorneys will acquire for talent. Like if you're selling your firm and you've got five associates, they would love to have five more associates because they need good quality attorneys potentially on their team. So they would do it for strategic play and then really it kind of ebbs and flows based on economic factors or otherwise from there. But definitely personal injury and immigration seem to be leading the way right now.
- [08:09]
B
Amazing. And we'll tie in how AI plays into that and why is it affecting, let's just say immigration and estate planning. We'll, we'll get to that. There's been a trend with non law firm entities or individuals who are entering the legal space. For example, Arizona, I think, I believe was the first state to allow that. How do you see this playing out into the future and then how does that affect the market when it comes to buying, selling, law firms? And where do you see this going?
- [08:40]
C
Yeah, it's coming. Right, Meaning non attorney ownership in one way, shape or form is going to happen. It's happened in every other profession. And so the fact that we can really say, yeah, we're different, but we're only different. For so long, you know, the UK has had non attorney or ABS alternative business structure, which is what Arizona and Utah, you know, have passed. D.C. has a version of it as well. Washington might be our next state to kind of go to an ABS model or at least a sandbox model like Utah. But really I think, Sam, we're going to head there. It's just a matter of when and what type of structure it would really take. I think, you know, overall it's going to open up a lot of opportunities for some sellers of bigger firms. So like our personal injury sellers or otherwise, they may have some opportunities because you know, some of these personal injury firms have reached 100, 200 million in revenues. They've got big firms. You know, the only way to fund their exit is actually private equity. Like banks aren't going to fund that, a goodwill, you know, asset sale. So private equity would be needed to borrow the money and private equity would probably come in and say, well, we can lend the money to the buyer. Or what's happening in Arizona with some of the private equity, the traditional, like private equity lenders, they've set up their own ABS and now they offer, we can lend it to you or we can partner with you.
- [10:07]
D
Right.
- [10:08]
C
Like we have our own law firm that we can co counsel or split fees or kind of structure it that way. I don't think a lot will change just based on ABs for certain practices, but certain practices definitely will be impacted by it over time. Personal injury is one of those that we're seeing roll up and the bigger, you know, opportunities will have private equity if you're Smaller, you'll compete potentially against private equity. I really think that's what we're, you know, going to see in that area. I was at a conference we put on a couple of years ago and one of the lenders that we had, you know, really put it nicely of you can either be to a point where, you know, you're just one of the numbers that's going to get rolled up, or you can strategically build to compete against private equity or be their prize gem. And I think that applies to the personal injury space. I don't think that applies to maybe your estate planning attorney.
- [11:03]
D
Right.
- [11:04]
C
Who's doing all the right things, has a million, couple million dollar practice. There's probably a different alternative business structure, opportunity to open up family office with wealth management and with accounting and some other things there. So I think it's just going to evolve. The biggest thing I look to is if you look to UK and Australia and other markets that have had abs for a while, the sky has not fallen. It's, you know, settled into certain practice groups. It's really, you know, customer client complaints to the board have actually gone down in certain markets because, you know, there has been a focus on care and responsiveness and communication. So I think overall we'll see it happen. I think it will drive up the value of law firms overall, which is probably a good thing and it will change how, you know, law firms are owned and managed as we go forward. But I think it's because there'll be more resource out there, more proven resource that we can kind of combine together to use.
- [12:02]
B
Got it. Are there any states that are that extra limitations on this transfer of ownership? Any particular states are just, you know, tough, you know, before you even share your answer. And you know, Florida is notorious for just being extra, extra tight with everything.
- [12:18]
C
Yeah, I was going to say the only, I mean there's, I'm sure others. But the one that, you know, we have, you know, come up against with clients is Florida. Florida actually requires under their rule 1.17, which is saleable offer.
- [12:30]
D
Right.
- [12:31]
C
So the ABA has their model rule and then each state's adopt it. Florida's rule says it actually has to be a Florida attorney that buys your firm.
- [12:40]
D
Right.
- [12:41]
C
Every other state that we've run across did not adopt that requirement. And it's interesting, of course, because, you know, if you, you know, I'm in North Carolina, you're in California.
- [12:51]
D
Right.
- [12:51]
C
Sam, you know, if you want to come in as a North Carolina attorney, I can buy a California, you know, buy a California firm, I just can't practice law there.
- [12:59]
D
Right.
- [13:00]
C
But Florida wants to, to be a little bit more protective or different. But again, that's one hurdle to do so and kind of keeping it within that market. Otherwise, I think the biggest thing that we see really is getting good guidance from the state bars right now, because so many of them that have accepted or approved, you know, sale of a law firm, that's one mode of selling your firm. But usually when you're doing it, it kind of breaks out of that a little bit. And most state bars are very accepting of. If you want to have a plan for continuing your firm and taking care of your clients and transitioning the right way, they're very supportive of that.
- [13:37]
D
Right.
- [13:38]
C
So that's the aspect that the rules may not be out there yet, but we've had great, you know, help from state bars on guidance beyond the rules.
- [13:45]
B
Great. And I'm sure you're leading the way and you have all those insights and expertise to be able to advise your clients on those limitations. What about taxes? How do. What are the tax implications? Is it considered ordinary income? And also what are the payouts? Is it. What's the combination? Is it cash, is it stock, and is there a cliff of how long it takes for it to be divested? All that stuff? You can share some insights about that.
- [14:12]
C
Yeah. Structures vary based on the type of firm, the goals, everything else. So the most common structure we see in the marketplace is a true business asset sale, where you're going to sell the goodwill, the brand that you've built, the referrals, the relationships, the systems, you're selling everything, you're really selling those assets to somebody else who's going to take them, keep them probably as they are, keep the brand. Right. And kind of go through that. When you do a structure like that, which is very common of other business types. Right. The goal is continuation from a tax standpoint. That should be capital gains tax to you as the seller. So instead of a potential 35, 45% tax rate, you're hopefully at a 15, 25% tax rate. So the goal on that is the seller can convert, you know, ordinary income into capital gains treatment or anything they receive from the sale of assets, which works out pretty good for some sellers who are at the higher brackets or otherwise when they turn that future ordinary income that they would receive if they were to hold on to the practice into capital gains. On the flip side, the buyer, if it's treated as an asset sale, has something they can depreciate. Right. So if they pay, you know, a million dollars for a practice to purchase it, they can actually depreciate that, that goodwill or other value over a few years. Which is nice to get a tax deduction of the million dollars that you're paying for this practice. So hopefully everything works out, you grow and everything else. But you're also getting a tax deduction for those dollars spent to offset that purchase as compared to like equity purchase or mergers or affiliations. Those are going to be different. And a lot of those are going to be ordinary income to the seller and would be ordinary income paid by the buyer, you know, to you to come join us. Right, and retire with us. Like come over here as of counsel and then just slow down and we'll pay you, you know, overtime and we'll monetize the value of your practice. So, you know, join us as up council. You retire in 12 months, but we'll keep paying you out. A lot of those can be ordinary income, but they can be, you know, still financially favorable to those type of practices that really do. So the tax traps are really making sure that, you know, when you get an offer, you really go through that, of course, and make sure it's structured the right way from the seller, the buyer standpoint, so that it doesn't, you know, hit something down the road and kind of, you know, take the deal off the rails.
- [16:42]
B
Aren't there any special type of entities that works work out easier? Is it a C Corp. S Corp. Doesn't matter if it's an LLC or anything like that.
- [16:49]
C
Yeah, don't have a C Corp, you know, that owns real estate. That's not good. Don't have an S Corp that owns real estate. You know, we've tripped up against that recently, especially with S Corps. We just. Even in my private practice as an attorney, cpa, that's, you know, it's a hard no to have those entities own the real estate that the law firm operates in. But overall, you know, if you're an S Corp, pretty easy from a tax structure. As long as you don't own your real estate in that S Corp, you're just operating the law firm. If you're a pllc, right. Should be about the same. If you're a C Corp and you're selling those assets a little, you know, couple steps that may need to be done, but you can still get there. It's when you own weird assets in those entities that it becomes a little bit more complicated. But S Corp, LLC are the preferred.
- [17:40]
B
What do you think about and where do you see Amazon entering the space? Do you see that happening and what are your kind of feelings and you know, feelings about that?
- [17:50]
C
Yeah, I mean, they're everywhere else.
- [17:51]
D
Right.
- [17:52]
C
And I think it's one of those things where it's kind of like legal zoom, you know, 15 years ago or whenever that battle was, was fought. You can fight it, but it's happening or it's going to happen.
- [18:04]
D
Right.
- [18:04]
C
So some of the first. If you look at some of the first ABSs that were filed in Arizona, right. The first, you know, are like the rocket lawyers, some of these, you know, forms, plus the nonprofits that are there to, you know, close the access to justice gap. But overall, right there is the evolution that's probably going to have to happen for lawyers. Like the transactional side. And he said, we talk about AI, but the transactional side of what lawyers had done, right. Of drafting and everything else. If that's what LegalZoom is doing and they've invested in software, if that's what Amazon is doing now and they've invested in better then as lawyers, there is an aspect just like everybody else. We're going to have to evolve.
- [18:45]
B
What are the top three things that you look for? I'm sure this is probably your number one question for acquiring a law firm or very quickly, you know, you're looking to just do a quick analysis. Like just say, give me these three things. Like, what are those top three things you look for?
- [18:58]
C
Yeah, I'm going to look at strong earnings, right? So revenues are great, but I want to see a good, profitable firm even after, you know, we have paid and potentially would have to replace any attorney that's working in that firm. So we're really talking about, you know, true owner's benefit. Like you own a firm that's got a million dollars and it produces 250,000 of true owner's benefit.
- [19:19]
D
Great.
- [19:20]
C
And that is that financial trends, not all over the place. And the other part of I think that is once you get past those, you know, having true earnings is clean data and financials. So we have lots of attorneys that come to us and say, yes, my financials, say I haven't made any money. But just tell them, right? It's in there, Right. It's buried in these conference expenses, travel expenses, whatever else. It's a very hard practice to sell. You can sell it based on performance, like what is called earn out payment, a percentage of revenues otherwise. But banks won't touch it. If you can't show it on your tax returns, they won't do it so, you know, clean financials and clean data. And the other part is just strong intake. Where two clients come from is the number one question that our buyers will ask a seller. Where do your clients come from? And if you have clean intake numbers to show and if those intake numbers are less reliant on you personally?
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D
Right.
- [20:17]
C
It's no offense again to build a practice from a referral basis. But a referral basis has to be transitioned. I have to introduce, I have to take you to different associations. I have to have those people warm up to you to accept you when, you know, digital marketing or other, you know, aspects which can be a little bit quicker transfer or less attached to me as the owner of the firm, are much better. And if you've got those three components, you probably got a pretty good sellable firm.
- [20:45]
B
And I'm assuming you look at the net when it comes to that.
- [20:48]
C
Correct? Yeah. Everybody likes to look at revenues, and we do too. We're looking at revenues because certain practices will sell based on revenue models. But overall we want to see the health because most of the time when you're talking about selling a law firm, you have to remember you're talking about selling your structure. We don't know who the buyer is. The buyer may come in and have their own structure and only want your revenues. And those can be deal term discussions. But when really with most, they're looking at that profit. And because that's how a purchase price is going to be paid, it's going to be paid out of that net. That 250 example. Right, that 250,000, that's the bucket we have for a buyer to say, okay, if I take this over, I would potentially get 250,000 out of that. I've got to pay Sam.
- [21:34]
D
Right.
- [21:35]
C
I've got some other expenses I've got to pay for this transitional element. Everything else from that side. Now, I don't want to go backwards, I don't want to go negative. So that's really where you want to get. You have a, you know, if that 250 is 500, they're going to have a higher value and you're going to have a more excited buyer.
- [21:50]
B
We have a law firm that makes $5 million net. What's the evaluation calculator and what's the multiple typically that you're seeing right now?
- [22:00]
C
Yep, all over the place. But most law firms on a net, you know, we're talking about net earnings, you know, adjusted out are usually, I'd say the market standard is going to be about a 2.5 to 275 on that. And what that means is you're talking about that 250,000. Right. Times 2.5.
- [22:18]
D
Right.
- [22:18]
C
Or times, you know, 2.75. So you get down to that normalized earnings and go from there. Certain firms will definitely break through that and we'll push past. We have some, you know, larger firms at three and a half or we have a real sizable immigration firm right now, 50% margin, you know, running 45 million in revenues. They're healthy, they're a systems first. They're, you know, an anomaly. They're the ones that you're like, yes, you guys did it right. They're of course at a much higher multiple. But for the most part, the everyday, you know, law firm, if you're doing the right things, is somewhere there. Which when you look at other businesses, it's probably a lower multiple. But for a lot of lawyers who haven't considered that they have value in their practice to sell.
- [23:03]
D
Right.
- [23:04]
C
Hopefully this is a bonus feature. The other thing is you got to remember that most law firms come with transition after closing. So that means me as the seller, I'm going to sell and stay on for a little bit to transition, whether that's 6 months, 12 months, 18 months, or for some of our sellers, longer. There's usually compensation tied to that post closing work that would be paid to me and that is a drain to those cash flows. So that kind of pushes our multiples down a little bit on that side. But again, just depends on the practice and what you built.
- [23:36]
B
What's the first step to selling? So let's just say I brought up the example. Have a law firm, don't have time for it, don't have the desire for it, looking to offload to someone else who's kind of passionate about the same space or already has the same business and can just take on my past clients, offer upsells built opportunities and upsells communities or different things. But besides all that, what's the first couple of steps that I need to take to go to sell my offer?
- [24:05]
C
Yeah, everything starts with knowing your value, right. Really getting a valuation of your firm. You and I were talking a little bit, you know, early on free, but it's just that's what we do. A lot of the biggest thing that I started out for was to build the marketplace because then you have marketplace data of really what do firms sell for and why. And so when we do valuations for law firms, we're always doing it from a market opinion Structure, because it really is, you know, what, you know, what somebody is willing to pay for it right now that would be in the marketplace. I've seen lots of appraisals for litigation, divorce, otherwise for law firms. And you know, they miss key parts of really how to accurately define transferable value. Because that's really what you're looking at, Sam, in any sale is what is transferable value from one to another and how does that transition, you know, work? And so some of the things you need to look at in valuation is not just what's my number, it's how is that number going to be achieved and be paid if you've got a transition and you got to stay on, you know, 12 months post closing and there's comp tied to that, that needs to be modeled as part of it. So really it's the valuation just to know what are you working with.
- [25:22]
D
Right.
- [25:22]
C
And that really opens up to what type of buyers. What would be the best potential sales structure? Is there going to be bank financing required? You know, bringing that in to have that pre qualified and really go through the structure from there.
- [25:37]
B
Very good here. Actually, I want to ask one more question and then how do you. How can lawyers use ChatGPT to become sellable?
- [25:44]
C
Oh, I mean, there's lots of things from the marketing side, again, I think that would be huge. I would actually go to what I've used and played around with a lot is systems, you know, checklists and just taking data. So it's one of those things if you have a bunch of like, you know, past consult notes or you've got a checklist and you've always used a yellow legal pad and you really want to compile a nice, you know, system of how we do this for clients. Right. We're a family law attorney. How do we bring them in from intake to this? And you can just upload those all into ChatGPT and say, you know, create us a nice system, you know, for this. Buyers love systems. Sellers, you know, because of generational or otherwise and how they've run the firm, lack systems. And so I do think, you know, taking a lot of the pieces that you have and having it compiled in there would be awesome. There's of course way better uses for ChatGPT. But I would go to the concept of if, you know, tremendous value and buyer excitement comes from where you as the owner have delegated your role and responsibilities in a firm.
- [26:49]
D
Right?
- [26:49]
C
The traction concept of delegate and elevate, but really where you've delegated to people in Your firm that are going to transition, stay with the buyer or to systems or to people on those systems. And so if you're lacking on any of those using GPT to, to do some of that, I think would be huge.
- [27:09]
B
So reps, that is the law practice Exchange. Com. You have a very nice clean. But it says get started. You can lay out what the steps look like for somebody who is looking to buy or sell. You know, what are steps that they have to take? Let's say in the next 30 days.
- [27:24]
C
Yeah, we start. Everybody just kind of understand your path, right? There's a process to buy and sell, but your situation, your firm, what your goals are unique. So we start everybody out with just a quick call assessment, a confidential call to go through that and understand, hey, is the marketplace where you're heading, do you have an internal buyer? If you're a buyer and you say, hey, I've looked, I'm not here yet, maybe it's not right to buy yet.
- [27:50]
D
Right.
- [27:50]
C
Understand your timeline as well, but really just starting with what's your path and what are your goals and then joining the marketplace. Part of the reason that we created the marketplace at the Marketplace Law, you can create an account is just to be part of the community to learn and educate and keep an eye on the market for when you're ready to really do that. And then if you're a seller, get evaluation. If you're a buyer, go through a strategic buy plan and session with our team just to kind of know. So many buyers come in and say, I want to buy a law firm. And they're like, well, I'm, you know, I'm an estate's attorney, but I think I want to buy this personal injury firm two towns over. No, you don't.
- [28:27]
D
Right?
- [28:28]
C
You really don't. You probably want another trust in the state firm as your first purchase, because that's what you know, and you just maybe need to wait for it or, you know, go through a little bit more active search to do that. So getting guidance on making sure you have defined goals and you're really prepared to buy would be that key part. So start with just an initial, you know, call to decide, well, what paths are open for you. Join the marketplace. And then if you're a seller, get evaluation. If you're a buyer, let's help you determine your buy strategy.
- [28:56]
B
Amazing. Thank you so much, Tom. I'll leave Tom's contact information all right below. Tom, I'll be saving your contact information. I'll be in touch with you. I'll be going through your website as well. And I appreciate you, Tom. Thank you so much.
- [29:07]
C
Yeah, thanks, Dan. My pleasure.
- [29:10]
E
Thanks for listening to the Law Entrepreneur. If you found value in the show, please rate, review and subscribe on Apple, Spotify or wherever you're listening. And don't forget to share the episode with a friend. It could help transform their life. To get access to a treasure trove of exclusive free resources for Lawyers, go to joinlawyerclub.com Again, that's joinlawyerclub.com we'll see you on the next episode.