Buying a Law Firm: 3 Financial Considerations for Plaintiffs Firms

Buying a law firm can provide plaintiffs firm leaders with a path to growth, but a successful acquisition requires a clear understanding of valuation, funding and how capital will be deployed before and after the transaction, according to legal industry expert Tom Lenfestey, founder and CEO of The Law Practice Exchange.

Watch the video to learn three financial considerations law firm leaders should address when evaluating an acquisition.

What You’ll Learn

• How to assess firm value before an acquisition
• How to prepare your acquisition funding strategy
• Why 100% cash at closing isn’t always required

1. Start With a Realistic Understanding of Law Firm Value

Before determining how to fund an acquisition, buyers and sellers need a reasonable understanding of what the firm is worth.

Tom identifies seller expectations around valuation as one of the first financial challenges buyers encounter when buying a law firm.

Overall you’ve got to get the seller to understand what is a reasonable aspect. Hopefully, if they worked with good advisors, they’re already there. But if not, that is a challenge we hear over and over again from buyers is making sure that the seller understands and can agree on reasonable value,” Tom says.

For plaintiffs firm leaders, valuation is a practical deal consideration, not simply a number to negotiate at the end of the process. A significant gap between what a seller expects and what a buyer believes the firm is worth can make it difficult to establish terms that work for both parties.

Buyers should understand what they are acquiring and whether the seller’s expectations reflect a reasonable value before investing significant time and resources in a potential transaction.

2. Develop a Complete Acquisition Funding Strategy

Once the parties have addressed value, the next consideration is funding.

Law firms may pursue acquisitions to expand geographically, increase revenue or add practice areas. But identifying an attractive opportunity is only part of the equation. The buyer also needs the financial capacity to execute the transaction.

Tom cautions against building an acquisition strategy around finding a firm that can be purchased without an upfront capital commitment.

“If you’re looking to come in and buy a law firm for no cash down, those opportunities are out there, but they are not the good opportunity. Those are not the opportunities that are really going to integrate and scale quickly post-acquisition or post purchase or anything else,” Tom says.

The firms with established systems and brands that offer opportunities to scale may require a funding commitment at closing. For buyers, that means financing should be considered as part of the acquisition strategy, not after a target has been identified and negotiations are underway.

Tom also points out that buyers may need capital beyond the transaction itself to support the acquired firm and pursue the growth opportunity that made the acquisition attractive in the first place.

“They’re going to require some funding commitment at closing. and there’s going to be post-acquisition funding that’s needed to happen to grow their marketing, to grow their team as part of your integrated platform,” Tom says.

For plaintiffs firms, that creates two related capital considerations:

• Funding needed to complete the acquisition
• Funding needed to support marketing, staffing and growth after closing

Committing available capital solely to completing the transaction could leave less flexibility to make the investments necessary to integrate and grow the acquired practice. The financial plan for an acquisition should therefore extend beyond the purchase price.

Understanding available capital and funding capacity can help leadership determine what type and size of acquisition the firm is positioned to pursue, both at closing and as the combined firm moves forward.

3. Buying a Firm Does Not Require 100% Cash at Closing

Many buyers assume they must have the entire purchase price available at closing to pursue an acquisition. According to Tom, that assumption can keep firms from pursuing otherwise attractive opportunities.

As Tom explains, “We’re not talking about 100% cash at closing deals, we’re talking about that something that is a percentage of the overall purchase price that is meaningful to that seller. That is meaningful to them.”

The structure of a transaction can be just as important as the purchase price itself. A meaningful upfront commitment may be necessary, but buyers should understand that many acquisitions are completed using a combination of buyer capital and external financing.

“The most success that we’ve seen are actually fully funded through banking, through other funding sources, where they come and deploy capital,” Tom says.

By exploring available financing options and transaction structures early in the process, buyers may have greater flexibility to pursue larger opportunities while preserving capital for future investments.

Buying a Law Firm Requires Financial Preparation

Buying a law firm can accelerate growth, but the opportunity needs to be supported by a sound financial strategy.

For plaintiffs firms considering an acquisition, Tom’s three considerations provide a practical starting point: understand the seller’s firm value, have funding in place and recognize that meaningful capital at closing does not necessarily mean paying 100% of the purchase price in cash.

For contingency fee firms, buying a law firm is as much a strategic capital decision as it is a growth decision. Firms that take the time to assess value, evaluate funding options and plan for the structure of a transaction are better positioned to pursue opportunities when the right fit emerges.

Financial preparation gives leadership a stronger foundation for evaluating opportunities and determining when the firm is prepared to act.

Watch the full video to hear Tom Lenfestey share practical insights on firm valuation, acquisition funding and transaction structure for law firm leaders considering growth through acquisition.