Cameron Miranda
In the US, only lawyers can own law firms, and non-lawyers cannot own any part of a law firm directly. However, there are some jurisdictions, such as Arizona, Utah, and Washington, D.C., that allow non-lawyer ownership. If you are considering buying a law firm, it is essential to conduct due diligence, which includes reviewing financial statements, meeting with the firm's owners and key employees, and seeking guidance from experts to ensure you pay a fair price. The valuation process can be complex and time-consuming, and it may be helpful to work with a financial advisor, accountant, or legal advisor. There are online platforms and marketplaces, such as The Law Practice Exchange, that can assist with buying and selling law firms, providing resources and guidance throughout the process.
| Characteristics | Values |
|---|---|
| Can a non-lawyer own a law firm? | In the US, non-lawyers cannot directly own a law firm. However, there are some jurisdictions that allow non-lawyer ownership, such as DC, Arizona, and Utah. |
| How to buy a law firm? | Identify a target firm, create an account on a marketplace to search for available firms, and conduct a valuation to assess the firm's worth. Due diligence is an important step and may include reviewing financial statements, meeting with the firm's owners and employees, and seeking guidance from experts. |
| Factors affecting the cost of a law firm | The cost of a law firm depends on various factors, including practice area, clients, revenue, and existing business debts. |
| Challenges in buying a law firm | The marketplace for buying law firms is immature, with potentially no comparable sales data. Deals are confidential, and it is challenging to determine a fair price. |
| Ethical considerations | Only lawyers can own law firms ethically. However, there are creative ways to structure ownership, such as through bonds or management services organizations. |
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What You'll Learn
- Non-lawyers can own law firms in some US jurisdictions, including DC and Arizona
- Due diligence is the most time-consuming part of the buying process
- The cost of a law firm depends on practice area, clients, revenue, and existing business debts
- State Bar Associations can help guide and support the buying process
- The Law Practice Exchange is an online platform that helps law firms change hands
Non-lawyers can own law firms in some US jurisdictions, including DC and Arizona
In the United States, the general rule has been that only lawyers can own law firms. However, this is changing, with a growing recognition that non-lawyer ownership may not be harmful and could even be beneficial. As a result, several states are relaxing their rules, with some US jurisdictions, including Washington, Oregon, Utah, Arizona, and the District of Columbia, allowing non-lawyers to own law firms under certain circumstances.
In the District of Columbia, non-lawyer ownership has been permitted under limited circumstances since 1991. A non-lawyer can hold a financial interest in a firm if they provide professional services that assist the firm in providing legal services to clients.
Utah has also been at the forefront of this change, with the creation of the Utah Office of Legal Services Innovation, which licenses and regulates ABSs and ALPs within the state. The Utah model allows for the licensing of traditional law firms with non-lawyer ownership, as well as non-lawyer-owned entities that employ lawyers to practice law.
Arizona is another state that allows non-lawyer ownership of law firms.
Some other states have taken more modest steps towards allowing non-lawyer ownership. For example, California amended its rules in 2021 to permit greater fee-sharing with non-attorney-owned non-profit organizations that qualify as nonprofits under IRS rules. Similarly, in Massachusetts, law firms may share fees with "qualified legal assistance organizations" as long as the fee-sharing is disclosed to and approved by the client. Georgia firms may also work and share fees with non-lawyer-owned firms and legal organizations based in other jurisdictions that allow them.
Outside of the US, countries like Australia, the United Kingdom, and Canada have permitted non-lawyer ownership of law firms with some success and a low number of public complaints. These countries have seen increased innovation and competition within their legal industries.
When considering buying a law firm, it is essential to conduct due diligence, which includes reviewing financial statements, meeting with the firm's owners and key employees, and building a team of professionals, such as financial advisors, accountants, and legal advisors, to assist with the deal.
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Due diligence is the most time-consuming part of the buying process
Due diligence is a critical aspect of buying a law firm, and it can be a complex and time-consuming process. It involves a comprehensive review and analysis of the firm's operations, financial status, legal compliance, and potential risks. Here are some key considerations to keep in mind:
Financial Due Diligence:
This includes examining the firm's financial health, such as tax returns, bank statements, balance sheets, profit and loss statements, financial audits, and business debt. It is essential to assess the firm's cash flow management and determine if the costs accrued are accurate.
Operational Due Diligence:
Here, you'll learn how the firm operates daily, including its processes, risks, and challenges. You can identify areas for improvement and assess customer satisfaction. Technology plays a crucial role, so reviewing the firm's current patents, software, and programs is essential.
Legal Due Diligence:
This aspect involves reviewing contracts, agreements, and potential legal risks or pending lawsuits. It is crucial to ensure the firm has adequate PII (Professional Indemnity Insurance) for the work undertaken. Run-off cover is also important to consider, especially for successor practices.
Document Management:
Accurate and accessible document management is vital. For law firms, this includes a bank of wills or deeds, ensuring they are up-to-date and relevant. Invoicing practices and work in progress (WIP) management also fall under this category, and you should assess the firm's ability to manage outstanding invoices and debtors.
Building a Team:
Due diligence is most effective when supported by a team of experts. Engage a financial advisor, accountant, and legal advisor with experience in law firm acquisitions. They can guide you on financial implications, tax matters, and deal structure, ensuring a fair and competitive price.
State Bar Associations:
These associations are valuable resources. They can offer guidance, support, and connections to lawyers who have gone through similar acquisition processes.
Due diligence is a meticulous process, and by taking the time to thoroughly review all aspects of the law firm, you can make a well-informed decision about the acquisition and proceed with confidence.
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The cost of a law firm depends on practice area, clients, revenue, and existing business debts
In most places, only lawyers can own law firms. However, there are some jurisdictions that allow non-lawyer ownership, including Arizona, Utah, and Washington, D.C.
Determining the cost of a law firm is a complex process that takes into account various factors. The practice area, clients, revenue, and existing business debts all play a significant role in valuing a law firm.
The demand for a particular practice area can influence the valuation of a law firm. Specializations within the legal sector with high demand can lead to higher expected valuations. For example, a law firm with a large client base and strong client relationships can demand a higher valuation. Additionally, multiple revenue streams and diverse revenue sources showcase a firm's financial resilience and can increase its valuation.
When valuing a law firm, it is essential to consider its financial health and growth potential. This includes evaluating the firm's strategies for acquiring new clients and its ability to retain existing ones. A firm's dependency on a small number of clients can make it challenging to predict its financial stability, impacting its valuation.
Existing business debts and liabilities can also affect a law firm's valuation. These liabilities can be short-term or long-term, and they play a role in understanding the firm's profitability and financial health.
Due diligence is a crucial step in the law firm buying process. It involves reviewing financial statements, meeting with the firm's owners and key employees, and building a team of professionals, including financial advisors, accountants, and legal advisors, to ensure a thorough understanding of the deal and its potential impact.
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State Bar Associations can help guide and support the buying process
State Bar Associations are a valuable resource for anyone considering buying a law firm. While the process of buying a law firm can be complex, State Bar Associations can provide guidance and support to help navigate the process.
Firstly, State Bar Associations can help you identify potential firms to buy. For example, the Washington State Bar Association offers a career centre that allows users to filter and find attorneys who may be retiring or looking for buyers. Similarly, the Oregon State Bar has a forum where members can post inquiries about firms for sale and connect with lawyers who have been through the process of buying a firm. Even if your state bar association doesn't have these formal resources, they may still be able to assist you in finding a firm or point you in the right direction.
Secondly, State Bar Associations can help guide you through the due diligence process, which is an extensive and critical step in the buying process. Due diligence involves reviewing financial statements, meeting with the firm's owners and key employees, and building a team of advisors to assist with the deal. This team typically includes a financial advisor, an accountant, and a legal advisor. State Bar Associations can help you connect with other lawyers who can recommend best practices and refer professionals to help with due diligence.
Additionally, State Bar Associations can provide support in navigating the valuation process, which can be complex and overwhelming. They can help you identify experts in financial and accounting fields who understand the unique aspects of these transactions. By working with experienced professionals, you can ensure that you are paying a fair and competitive price for the law firm.
Finally, State Bar Associations can offer general guidance and resources on the process of buying a law firm. They can provide information on the steps to take, common pitfalls to avoid, and how to structure the deal. Through their networks and resources, State Bar Associations can help you make informed decisions and increase your chances of a successful acquisition.
While the specific resources and support offered may vary by state, State Bar Associations are a valuable starting point for anyone considering the purchase of a law firm.
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The Law Practice Exchange is an online platform that helps law firms change hands
In most US states, only lawyers can own law firms. However, there are some creative ways to get around this, such as litigation financing firms, where a private lender owns the future settlement receipts of the firm. In addition, some US jurisdictions allow non-lawyer ownership, including DC, Utah, and Arizona.
The Law Practice Exchange (LPE) is an online platform that helps law firms change hands. It is a law firm brokerage and consulting company that advises and assists owners of law firms in selling their firms over time using a transition-based process. LPE provides exit and transition plans that help preserve client goodwill, attorney legacy, and allow for a value-based exchange with a buyer.
If you are looking to buy a law firm but have not identified a target firm, LPE recommends beginning with a "Preparing to Buy Strategy Session" to define your acquisition criteria. You can then create an account in their marketplace to search for available firms. Once you find a target, proceed with a valuation to assess the firm's worth. LPE also offers additional support such as due diligence management, recruitment, and compensation modeling.
LPE is the national leader in law practice sales and succession plan development and implementation for law firms. The company was founded by Tom Lenfestey, an attorney, CPA, and business broker. He created The Law Practice Exchange so that lawyers would have the same options as other professionals when it comes to exit and retirement strategies.
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Frequently asked questions
Yes, you can buy a law firm, but it is a complex process that takes time and effort.
Only lawyers can own law firms, but there are some ways around this, such as litigation financing firms or bonds. Some US jurisdictions, such as Arizona, Utah, and Washington, D.C., allow non-lawyer ownership.
The cost of a law firm depends on various factors, such as the practice area, clients, revenue, and existing business debts.
There are online marketplaces, such as The LPE Marketplace, where you can find law firms for sale. State Bar Associations can also guide and support lawyers when choosing which firm to buy and how much to pay.
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