LAW FIRM
(SIC No. 8111)
(NAICS No. 54111
A.??????????????? Nature of the Business
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Attorneys provide legal advice and assistance for corporations, businesses, and individuals.? They assist in negotiating contracts, advise clients on real estate transactions, handle divorces, and defend clients in civil and criminal cases.
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B.??????? Industry Statistics
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Dun & Bradstreet?s Industry Norms & Business Ratios (1992-1993) surveyed 1,060 law firms and reported the average law firm in 1992 had net sales of $1,770,762, gross profit of $1,131,517, and net profit after tax of $208,950.? Profitability figures reveal an average of 9.6% return on sales, 15.3% return on assets, and 29.5% return on net worth.
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In 1996, 912 law firms were surveyed, and Dun & Bradstreet?s report showed the average firm had $2,712,636 in net sales, gross profit of $1,486,525, and net profit after tax of $344,505.? Profitability figures show an average of 8.5% return on sales, return on assets of 20.6%, and 34.0% return on net worth.
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C.??????? Income and Expense Pro Forma - $500,000 to $2 million[1]
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1.???????? Net Sales??????????????????????????????????????????????????????????? 100%
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2.???????? Operating Expenses????????????????????????????????????????? 85.2%
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3.???????? Operating Profit??????????????????????????????????????????????? 14.8%
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4.???????? All Other Expenses?????????????????????????????????????????????? .5%
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5.???????? Profit Before Taxes????????????????????????????????????????? 14.3%
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D.??????? Valuation
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1.???????? Rules of Thumb[2]
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- Zero to 100% of annual fee revenue (may require earnout).? Firms specializing in estate work would approach 100%.
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b.???????? Goodwill at 2 to 4 times excess earnings after taxes (may require earnout).
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Rules of Thumb may or may not be industry averages.? They are usually applied to sales in some form.? They result in an example of value for a business having that level of sales.? Please see Section II, Chapter 5, for a discussion of Rules of Thumb and their limitations.
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The values of fixed assets are generally included in Rules of Thumb; however, they are sometimes added in separately.? Working Capital (e.g., cash, inventory, less payables), debt and real estate are many times not included.? These three are generally valued separately and added to the formula value.? Intangible Assets including goodwill and leasehold may be included, but normally only in Rules of Thumb based on earnings/cash flow.
2. ??????? General Valuation
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Legal ethics forbid the sale of clients? files and any goodwill of the firm.? However, in divorces and partner dissolutions, many courts have recognized goodwill as part of the total value of the practice.? As such, several methods have been considered when placing a value on a professional practice such as a law firm.? These methods include:? (a) excess earnings, (b) capitalization of earnings, (c) cash flow, and (d) revenue multiplier.
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Please see Section I, Chapter 3, ?How to Value a Service Business.?? Please also see Section II of this book for a detailed description of the methods of valuation.
E.??????? Sources for Further Statistical Information
(See also the bibliography at the end of this book, ?Recommended for Reference.?)
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- Associations
American Bar Association (ABA)
321 North Clark Street
Chicago, IL? 60610?????????????????????????????????????????????????????????????????????? www.abanet.org
(312) 988-5522, (800) 285-2221;? Fax (312) 988-5528
American Law Institute (ALI)
4025 Chestnut Street
Philadelphia, PA? 19104????????????????????????????????????????????????????????????????????? www.ali.org
(215) 243-1600, (800) 253-6397;? Fax (215) 243-1664
Inter-American Bar Association (IABA)
1211 Connecticut Avenue, NW, Suite 2
Washington, DC? 20036?????????????????????????????????????????????????????????????????? www.iaba.org
(202) 466-5944;? Fax (202) 466-5946
- Trade Publications
Legal Management
75 Tri-State International, Suite 222
Lincolnshire, IL? 60069????????????????????????????????????????????????????????????????? www.alanet.org
(847) 267-1252;? Fax (847) 267-1329
Managing Partner
5900 Hollis Street, Suite L
Emeryville, CA? 94608-2098?????????????????????????????????????????? www.infocomgroup.com
(510) 596-9300, (800) 959-1059;? Fax (510) 596-9331
Law Firm Partnership & Benefits Report
1617 JFK Boulevard, Suite 1750
Philadelphia, PA? 19103?????????????????????????????????????????????????????????? www.ljnonline.com
(800) 722-7670;? Fax (215) 557-2301
Law Office Management & Administration Report
3 Park Avenue, 30th Floor
New York, NY? 10016?????????????????????????????????????????????????????????????????? www.loma.com
(212) 244-0360;? Fax (212) 564-0465
Law Practice Management
321 North Clark Street, 15th Floor
Chicago, IL? 60610?????????????????????????????????????????????????????????????? www.lawpractice.org
(312) 988-5251;? Fax (312) 988-5249
ABA Journal
321 North Clark Street, 15th Floor
Chicago, IL? 60610??????????????????????????????????????????????????????????????? www.abajournal.com
(312) 988-6018;? Fax (312) 988-6014
Law Office Administrator Ardmore
P.O. Box 52843
Atlanta, GA? 30355
(404) 367-1991;? Fax (404) 367-1995
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[1] RMA Annual Statement Studies 1996.? (Philadelphia:? RMA, 1996), p. 768.
2 West, Thomas L., and Jeffrey D. Jones, eds.? Handbook of Business Valuation.? (New York:? John Wiley & Sons, Inc., 1992), pp. 123-124.
Source: http://www.zamucen.com/blog/how-to-value-a-law-firm/
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