Principals of firms are constantly undervaluing, or even disregarding the value of their firms. More specifically the dollar value of its goodwill.
I continue to see practitioners purchasing equity in firms, even smaller, sole practitioner firms. If the incoming principal didn’t think there was a value, they wouldn’t pay anything.
Banks are lending to firms to enable succession and acquisitions to occur, and securing it solely against the firm, without any personal security other than guarantees from the principal(s). Believe me, if the banks didn’t think there was value, they wouldn’t lend money for it or against it
So, what’s your practice worth?
The value is that which a willing and educated buyer will buy and a willing, but not anxious seller will sell. At the end of the day, a buyer will consider the risk and return to work out how much they will pay. The lower the risk and the higher the return, the greater the value.
To improve value, you need to:
- Increase your profit and maintain your risk level,
- Maintain your profit and reduce your risk level, or
- Increase your profit and reduce your risk level
Profit is what the firm makes after it pays all principals a commercial salary. Risk level is the likelihood that the profit will be earned into the future after the purchaser buys the practice, or an interest in the practice, and turns into cash.
If the profit you make in your business is just enough to pay you a commercial salary, then your value will be minimal. This is because your profit is non-existent. Also, it probably won’t have a strong cash flow and will struggle to fund itself. So, the risk is very high.
If your firm totally relies on you and your fellow principals to bring in all the revenue, and to a large extent, to do all the work, but makes a profit after commercial salaries to principals, then there will be a value, but the value will be lower due to the risk.
Contrast the above with a firm that generates work without the principals, either from brand strength or proactive marketing activities. The firm can function and maintain its profitability because of it’s leverage and reduced reliance on principals. Higher profits, lower risk equals greater value
How to increase your value
Increase your profitability by better client engagement. Estimate the work early and advise your clients of the fees as you progress, especially if it’s out of scope, you need to re-price.
Follow what your costs agreement or engagement terms are. Educate your clients on what your firm does and challenge their attitudes to price and value. Remove discretion around time entry. Build systems and educate fee earners around what doesn’t get entered into WIP.
Engage your fee earners around their time entry and billing budgets. Monitor the value of time entered against budgets every week, encourage your fee earners to plan their weeks around work to be done to achieve their budgets, run a weekly matter workflow meeting to focus on priorities.
Consider Improving your cash flow from regular and systematic billing to reduce risk.