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Valuation of a Law Firm and a Law Practice

By James D. Cotterman
September 02, 2014

Part One, last month, discussed the current state of law firm valuation, how to determine what it is that is being transferred, and a few of the methods used for valuing a law firm. Part Two will examine a possible solution to the differing valuation methods and look at issues that arise in an external transfer when someone outside of the firm is interested in buying it.

The Profit Sharing/Earn-Out Model (A Potential Solution)

The traditional method of looking back at earnings and applying a multiple over some payout period has also been dubbed the “unfunded buy-out.” Much of the legal profession has altered its view of these programs ' labeling them unworkable in their most historic form and a dangerous tax on the current earnings of mobile partners with portable books of business. Some firms have retained such plans, many with features to improve their economics. A few feel their culture and reputation are sufficient to maintain the economic expectations of successors and retirees with the arrangements in place.

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