After 33 years of practice, I decided to explore what my firm might be worth if I chose to sell. What I discovered through extensive research might surprise you – and could help you make better decisions about your own practice’s future.
As solo practitioners and small firm owners, we often think about our practices in terms of monthly revenue, client satisfaction, and daily operations. But have you ever seriously considered what your life’s work is actually worth in the marketplace? After three decades of building Hayton Kosky Law Firm, I found myself asking this very question.
What started as casual curiosity turned into comprehensive research that revealed both encouraging opportunities and sobering realities about law firm valuations in Australia. If you’re a solo practitioner or small firm owner wondering about your practice’s value – whether for retirement planning, succession considerations, or simple curiosity – here’s what I learned.
The Reality Check: What Are Small Firms Actually Worth?
The first surprise was discovering that there’s no simple formula for valuing legal practices. While many industries have established valuation multiples, law firms are uniquely complex due to the personal nature of client relationships and the varying characteristics of different practice areas.
After researching current market conditions and consulting industry experts, I found that small law firms typically sell for 0.5x to 3.0x their annual revenue for goodwill alone. For my firm with $280,000 annual turnover, this suggested a range from $140,000 to $840,000 – quite a spread that depends entirely on specific circumstances.
The more realistic range, after accounting for the challenges facing solo practices, appears to be 0.8x to 2.2x annual revenue. This means a practice generating $280,000 annually might realistically sell for between $224,000 and $616,000, with $420,000 being the most likely outcome.
But here’s the crucial insight: the multiple you achieve depends far more on how well you’ve prepared for succession than on your current revenue levels.
The Succession Planning Reality
The biggest eye-opener in my research was learning how dramatically succession planning affects valuation. Practices with well-developed succession plans can command multiples 20-30% higher than those without any planning.
Why? Because buyers are purchasing future revenue streams, not past performance. A practice heavily dependent on one person’s relationships creates what industry experts call “key person risk” – the very real possibility that clients will leave when the principal does.
The hard truth: if your clients are loyal to you personally rather than your firm, your practice has limited transferable value.
This doesn’t mean solo practices are worthless – far from it. But it does mean that maximising value requires intentional planning to shift client relationships from personal to institutional.
Beyond Goodwill: The Hidden Value Components
While researching valuation methods, I discovered that goodwill is just one component of a practice’s total value. Other significant assets include:
Work in Progress (WIP): This represents substantial additional value, typically worth 70-90% of face value depending on how it’s handled in the sale. You can either transfer WIP to the buyer (who pays you as they collect) or sell it upfront at a discount for immediate payment.
Client Database and Records: Three decades of comprehensive client records, matter histories, and institutional knowledge represent significant intangible assets. For practices handling deeds in custody or ongoing client relationships, this database provides natural touchpoints that support relationship continuity.
Operational Infrastructure: Even modest support staff and established systems add value by demonstrating that the practice can function beyond the principal’s personal involvement.
Location and Market Position: Regional practices often benefit from “locational goodwill” where clients choose the firm based on convenience and local presence rather than solely on individual lawyer reputation.
The Age Factor: Opportunity and Challenge
At 64, I represent the demographic reality facing our profession – baby boomer principals approaching retirement without adequate succession planning. This creates both challenges and opportunities.
The challenge is that approaching retirement age can create urgency that affects negotiating position. Some clients may hesitate to engage in long-term matters with a practice undergoing ownership transition.
The opportunity lies in the growing number of younger practitioners seeking to acquire established practices rather than starting from scratch. Building a practice organically takes years and significant investment, making acquisition attractive for the right buyer.
What I Wish I’d Known Earlier
If I could go back five years, here’s what I would have done differently:
Started succession planning immediately. Even if you’re not ready to sell, developing succession protocols, client introduction procedures, and operational documentation creates options and enhances value.
Documented everything systematically. Client preferences, matter histories, and relationship notes accumulated over decades represent valuable institutional knowledge that buyers will pay for – but only if it’s properly documented and transferable.
Invested in modern systems. While not glamorous, updated practice management software and efficient operational systems demonstrate business sophistication and reduce buyer learning curves.
Built firm brand alongside personal reputation. This is perhaps the hardest but most valuable change – gradually shifting client loyalty from individual lawyer to firm brand through team involvement and systematic service delivery.
The Work-in-Progress Decision
One practical consideration that surprised me was the complexity of handling work in progress. You essentially have two options:
Transfer Arrangement: The buyer takes responsibility for completing and collecting your WIP, paying you an agreed percentage as they collect. This typically provides full value but requires ongoing involvement and creates collection risk.
Upfront Purchase: The buyer pays you immediately for WIP at settlement, usually at a 10-30% discount to account for their collection risk. This provides immediate payment but at reduced value.
The choice depends on your WIP composition, the buyer’s financial capacity, and your preference for immediate payment versus maximum value recovery. Given established client relationships, collection rates are typically favourable for either approach.
Market Timing and Strategic Positioning
Current market conditions appear favourable for practice sales, with continued demand for established practices and reasonable valuation multiples. However, demographic trends suggestan increasing supply of practices for sale as more principals approach retirement.
This creates urgency around preparation rather than immediate sale. The practices that will achieve premium valuations are those that begin succession planning early and systematically address transferability challenges.
Being a non-urgent seller provides a significant strategic advantage. This flexibility allows for careful buyer selection, optimal timing, and the ability to negotiate favorable terms rather than accepting suboptimal offers due to time pressure.
Practical Next Steps
Based on my research, here are the immediate actions every solo practitioner should consider:
- Develop a formal succession plan – even if retirement is years away. This single action provides the greatest value enhancement opportunity.
- Document client relationships systematically – create detailed profiles including service history, preferences, and relationship notes that demonstrate transferability.
- Organize financial records professionally – clean, well-organised statements and reports demonstrate professional management and facilitate future due diligence.
- Consider gradual team building – even modest support staff additions can reduce key person risk and improve operational transferability.
- Evaluate technology systems – modern practice management tools improve efficiency and demonstrate commitment to contemporary business practices.
The Bottom Line
What I learned is that law firm valuation isn’t just about current revenue – it’s about demonstrating sustainable value beyond the founding principal’s personal involvement. Practices that successfully make this transition can achieve premium valuations and provide excellent retirement security.
The key insight is that succession planning isn’t just about exit strategy – it’s about value creation. Every step you take to reduce key person risk and improve operational transferability enhances your practice’s value, whether you sell next year or in a decade.
For those of us who’ve spent decades building our practices, it’s encouraging to know that our life’s work has real, measurable value in the marketplace. But realizing that value requires the same careful planning and professional execution that made our practices successful in the first place.
The question isn’t whether your practice has value – it’s whether you’re taking the steps necessary to maximize and realize that value when the time comes.
What steps are you taking to enhance your practice’s transferable value? The decisions you make today will determine the options available tomorrow.