Lynda ArtesaniLegal Accountant and Data Migration Specialist at The Proper Trust

How can you "de-risk" your law firm before selling? #lawfirms #lawtalk

4 Jun 2024 · 1 min

Watch on YouTube

0:56

In this segment, the speaker explains how buyers mitigate risk when acquiring a law firm. When a firm is perceived as high‑risk, buyers often use holdbacks or earn‑out structures, paying a small portion of the purchase price upfront (e.g., 20%) and releasing the remainder only if the seller meets predefined performance targets over a set period. Conversely, if the target firm is already de‑risked, buyers are willing to pay the majority of the price upfront, often via a simple check. The speaker likens the most de‑risked transaction model to buying a franchise like McDonald’s, where standardized processes, demographic studies, and proven operational playbooks ensure a near‑certain success rate (about 99.8%). This analogy highlights that the more a business can be standardized and its outcomes predicted, the less financial protection the seller needs, and the smoother the sale proceeds.

Chapters

And the other thing is, if I'm buying a business and there's a goodwill period, that's what you're describing. But if I'm buying a business that is fairly de-risked, I'm much more likely to just write you a check or write you the majority of the purchase price upfront. If I'm worried about how this is going to go, I may have holdbacks where we agree on $5 million. I'm only giving you $1 million upfront and we have to meet certain goals over X amount of years before you get all your money. So now you're in a position where you don't have ultimate control, but you've only gotten 20% of what you were hoping to for your business. So the more we can de-risk, the more we can— I mean, the final iteration of something like this is buying a McDonald's, right? They do so much work. They do a demographic study. They know how to build a burger, right? Everything is done for you. And all they ask you to do is do it the way we've always done it. And 99.8% of these things succeed.