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How to do Valuation of Law Firms

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Valuation of Law Firm

Valuation of Law firms: Growth comes to a law firm and the attorneys in two ways which are organic and acquired. When a law firm figures out the organic growth, it could lead to speedy development. However, organic growth has some limitations.

When the Valuation of law firms decides there are locations or aspects of law they should practice or be in that they are yet to do because of being second fiddle to an already existing firm in the place or practice, organic growth won’t work here.

This is so because a law firm can’t market itself or the attorneys in the firm to areas they don’t have a presence. This leads to law firm acquisitions which births different questions such as how much to buy other law firms. The answer to the question is not straightforward, which leads to law firm valuation.

How to do Valuation of Law Firms

Valuing the business of another law firm

The business of another firm simply means assets that belong to the Valuation of Law Firms business entity. When a law firm buys another law firm, the one buying may be buying both the assets and obligations of the other law firm, which may include:

Building, land, lease, and improvements.
Cash on hand.
Equipment like faxes, telephones, computers, photocopies, etc.
Prepaid expenses.
Client funds held in trust.
Account payable.
Client costs and unbilled fees.
Account receivable.
Office fixtures and furniture.

The value of the business of a law firm is on the law firm’s balance sheet’s net book value.

Documents to consider in law firm valuation

The buying law firm should consider the following documents as they would help in valuation of law firms:

Client agreements.
Financial statements.
Debt agreements.
Titles to assets.
income tax returns.
Insurance policies and applications.
Compensation records for staff and attorney.
Leases agreements.
Subscription agreements.
Bank records and statements.

Apart from these documents above, other clients’ information such as fees owed versus paid and the firm’s time billed to client’s matters. With the records, determining the target law firm value becomes easier.

Valuing the practice of another law firm

The practice of another law firm allows the law firm to generate revenue. The future income to be generated by the law firm is from the law firm attorney’s knowledge and sources of network referrals. That is the people and professional contacts that have helped the law firm in the past to earn.