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Clients always want to know one thing when negotiating an insider sale: what's a fair price? The answer is not so simple. In fact, the answer depends on yet another question: fair based on what?
I always tell clients that my appraisal is an excellent starting point for negotiations, but it is rarely the final word. When pricing a law firm for selling to an insider, the sale price usually comes down to three factors:
- The firm's appraisal value
- The buyer's alternatives
- Whether both sides can keep greed at bay
This article explains how those three factors shape the final number in most small-firm insider deals.
Key Takeaways
- When pricing a law firm to sell to an insider, an objective valuation gives both parties a good starting point. However, it is rarely the final negotiated price.
- Insiders may evaluate the buyout against the time, cost, and risk of starting a competing firm or taking a job elsewhere.
- While most sellers want to reward loyal employees, they also don’t want to give away decades of the hard work they put in to build their practice.
- Overplaying with an inflated price can alienate a prospective buyer and cause them to walk away from the deal entirely.
Know the Appraisal Value
If you are selling your firm to an insider, it’s always wise to start with a professional appraisal. This will give you a defensible starting point for the conversation and help prevent the offer from seeming to be pulled out of thin air.
Understand How the Marketplace Keeps Law Firm Sellers Honest
If the owner asks for too much, insiders will make a new calculation: “What would it cost to start my own firm as compared to buying this one?” Alternatively, they may compare the risk of the buyout to finding a comparable job at another law firm. Smart insiders realize the significant advantages of staying in place and taking over an existing enterprise. However, they also recognize that those advantages are only worth so much.
Find the Line Between Fair and Too Much
Another factor that impacts a law firm’s insider sale price is the relationship between the seller and buyer and how much generosity flows from one side to the other. At one extreme, there are retiring sellers who are more than happy to practically give away their firm to those who have been loyal associates for years. Other sellers view a sale as an arms-length transaction that can enhance their retirement portfolio.
In my experience, most sellers fall somewhere between those two extremes. They want to be kind to the insider buyer, especially if that person has been loyal to the firm. But they also do not want to give away what they have spent decades building.
Should a seller attempt to overplay their hands, it can seriously damage the relationship. For example, one buyer I worked with had this reaction to an offer he believed was far too high:
“The term and price presented have put me off the whole deal to where I don’t want to participate or to even spend energy to architect a counter (which he is open to) to someone that ruthless, and who nonetheless insists that I’ve been presented the deal of a lifetime.”
When pricing a law firm to sell to an insider, don’t be greedy. As the saying goes, pigs get slaughtered.
Consider the Law Firm Buyer’s Side of Fairness
Buyers also come to the table with differing attitudes. Some are more than happy to help fund an owner's retirement after years of steady employment. Others take a more entitled view and believe the firm should be handed to them on a silver platter in return for their years of hard work.
Here again, most buyers fall somewhere between those extremes. They may appreciate the opportunity, but they are also making one of the biggest business decisions of their entire career. That's exactly why buyers, too, shouldn't overplay their hands. A lowball offer may feel like smart negotiating, but it can backfire on them. The owner may decide to shop the firm around, find a better offer, and sell to someone else.
At that point, the insider has not only lost the opportunity to buy the firm. They may also find themselves working for a new owner who has different plans, different loyalties, and no obligation to keep them employed.
Set a Fair Price and Terms for Insider Sale Success
Level-headed minds should be able to reach a fair price and reasonable terms. The goal is not to win the negotiation at all costs, but to reach a deal that is realistic enough to close and durable enough to last.
Contact Roy Ginsburg, J.D. to Learn More
If you want an objective basis for beginning the negotiation of your law firm sale, I am an expert law firm appraiser and consultant and would gladly help. If you have questions about pricing a law firm when selling to an insider, feel free to reach out to me to discuss further. You can reach me at 612-524-5837 or you can contact me online.
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