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Unlike lawyers, tax advisors command a significantly higher sale price for their practices—between 100 and 200 percent of revenue.
The reason: Tax advisors benefit above all from the fact that the proportion of their long-term clients is significantly higher. “Lawyers have something to earn, but nothing to sell.”
“Experienced attorney offers a colleague an affordable entry into a vibrant general practice firm.” This, or something similar, is how the numerous sales listings read. There’s no doubt about it: the German legal profession, like the small and medium-sized business sector, is facing a generational shift. According to age structure statistics from the German Federal Bar Association (BRAK), nearly 25% of them are between the ages of 50 and 70. Law firm owners link the sale of their practice to the expectation of a secure retirement income. However, the hope that one’s life’s work will ultimately be adequately rewarded often proves to be a fallacy. “Unless there are special circumstances, such as a high level of local recognition, the question of when the firm will break even and when it will become profitable remains entirely open for the new owner. This is a risk that is very difficult to quantify.”
Determining a Law Firm’s Value—Not Always Easy
Consequently, attorneys struggle to determine a market-based firm value. Lawyers who wish to hand over their firm to a successor often believe they can simply look up the purchase price in a table. The BRAK has, at least, developed guidelines that can be used to determine a law firm’s value. However, one shouldn’t expect too much from these guidelines, which were last updated in 1992. They were primarily designed for disputes involving inheritance and matrimonial property law. If a lawyer gets divorced, the court appoints an appraiser to determine the value of the law firm—for example, to calculate the amount of spousal equalization of gains. But experts warn: “These are not market values. The market operates on the basis of revenue.”
A large client base increases value
And this revenue-based method is determined in three steps: First, the revenue from the last three years is used as a basis, with the most recent annual revenue counted twice for updating purposes. This sum, divided by four, yields the actual revenue excluding sales tax, which is then adjusted in a second step to exclude extraordinary and personal revenue—such as compensation the attorney receives as a politician, author, speaker, or supervisory board member—in short: income that has nothing to do with the law firm itself or is one-time in nature.
However, the actual value of the law firm is determined by multiplying the adjusted revenue by a valuation factor, which, according to the BRAK, ranges from 0.5 to 1.0, and in exceptional cases can even reach 1.5. This factor is composed of various positive and negative characteristics of the respective law firm. For example, the fact that revenue is generated by a large number of clients has a value-enhancing effect. A good reputation, a convenient location, and a low-cost structure also increase the firm’s value. Lawyers can also gain an advantage by specializing early on in a promising area of law. Selling the practice before the age of sixty also has a positive impact on the purchase price. However, experts estimate that this is rather the exception. “If the seller is of advanced age, you can expect a discount of up to 70 percent.” The reason: If the seller is too old, there is no time left to introduce the buyer to the clients. Furthermore, there is a risk that the clients themselves are also too old. As a result, revenue often drops off just one or two years after the firm is taken over.
