Question John, where do you begin to get a value on a family law practice? It seems that one times gross revenue is unfair since it is usually one time business. I saw you speak at an ISBA event and this question was not addressed.
Answer: Regarding your question - it sort of depends on whether you are buying or selling and where you want to start. In general I agree with you that a multiple of one times gross for a family law practice is probably high. It depends on whether the practice has built up more of a firm brand vs. an individual brand. In other words institutionalized the practice. Also on where and how the firm gets business - advertising, referral sources, etc. A firm that has practice (institutional) goodwill might very well start at a multiple of one whereas a practice where the goodwill is personal goodwill the multiple might be .75 or less - in some cases even zero. I know of a few family law practices in the Chicago area that have been sold for .33 of gross revenue.
Often the initial asking price has little to do with regard to where you end up. Often, due to the concern that the clients and business might not materialize for the new buyer many firms are sold on various forms of an "earn-out" or a small payment at closing with the remainder paid and based on a percentage of revenues collected over a period of time - 3 to 5 years.
I have seen PI and other one shot matter firms sell for one times gross revenues but this is a best case scenario. CPA firms fare much better.
If you are the seller and your practice is a personal
practice you probably will have to start with an asking
price around .75 or less - if you have branded the
practice and have others besides yourself - you might
ask for more.
If you are the buyer I would balk at 1 times gross
and would want to discuss provisions for reduction
in purchase price if revenues fall below a certain
level over a certain time period. Better yet - no
payment at closing with the payout totally based
and paid as revenues are collected in the future.
Getting to "the number" will involve balancing the
seller's concern that the buyer will let the practice
die on the vine versus the buyer's concern that the
clients and referrals with not materialize.