July 11, 2025 • 22 mins
What's your family law firm actually worth if you decided to sell tomorrow? Most attorneys are shocked by the answer. In this J Sterling Insider episode, Richard James—founder of Your Practice Mastered, who's helped over 900 attorneys build scalable practices—reveals the brutal truth about law firm valuations and what drives them.
Drawing from real valuation worksheets and market data, Richard breaks down:
- The four types of law firm owners and why your exit strategy determines your valuation approach
- How value drivers like growth rate, profit margins, and LTV-to-CAC ratios can multiply your worth
- The major detractors that kill valuations: keyman risk, single channel dependence, and lack of systems
- Why most successful firms are worth far less than owners think—and the market realities limiting buyers
Listen in for Richard's exact framework that will show you exactly how to build a sellable firm—even if you never plan to sell—by maximizing the fundamentals that create sustainable profitability.
-------------------------
Go to: www.JSterlingHughes.com for tons of Family Law Practice resources.
My purpose is to Empower Family Law Attorneys so they can build a beautiful family law practice and have the practice of their dreams.
I share my family law firm’s secrets, tactics, and strategies of how we have grown from 0 to 25 attorneys and over $15m in revenue in our first ten years.
When I am not podcasting, I am the CEO and Co-Founder of SterlingLawyers.com.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
Can you just kind of talk through high level how
consumer, client oriented firmsare valued?
So, the very first thing, well,hello and welcome to the J
Sterling Hughes show, where weshare how we have built our
family law firm from zero to 25plus attorneys and 15 million in
revenue all in the past 10years, and my purpose here is to
document what's working andwhat's not working, with hopes
(00:22):
that you can take that andrecontextualize it and have the
firm of your dreams.
My name is Jeff Hughes and I'myour host, and today I have a
guest with me and we're going tobe talking about how do you
value family law firms for asale.
My guest is Richard James.
Richard is the founder and CEOof your Practice Mastered and
Partner Club, which my firm is apart of.
We get a ton of value from thatprogram and we've done another
(00:45):
podcast on that.
Over the years, richard and histeam have helped over 900
attorneys build and grow asustainable predictable.
The key there is predictablepractice.
He's also the author of fourbooks on law firm marketing and
business systems and someonethat I've gone to for help
whenever we've encounteredproblems that I wasn't familiar
with and I wanted to draw on hisexpertise from looking at so
many other firms and comparethat to kind of how we are
(01:08):
thinking about the problem.
So welcome, richard.
I'm looking forward to thispodcast to hear more about how
you value firms and how you'veseen them valued.
Speaker 2 (01:16):
Yeah, jeff, thanks so much and again, as always,
congratulations to you and yoursuccess.
I appreciate the love that youthrow our way about helping you,
but action kills fear and yourfirm is a firm that takes rapid
action, there's no question.
That's why you one of the keyreasons why you're successful,
you know, in addition to yourintelligence and your hard work.
But anyway, congratulations toyou and to Jeff and your
(01:38):
partners and all that you'vebuilt, because not only are you
building a great firm, but Ithink that law firms do God's
work and you're doing it at avery high level because you're
helping people in some of themost difficult times.
So, anyway, thanks to yourcommunities that you serve.
Speaker 1 (01:50):
Thank you, I believe that too, and I believe he's
given us this business tosteward for his kingdom, so we
try to treat it that way.
That's good Boy.
Speaker 2 (01:59):
I feel like I fail every day at being a good
steward, but I'm trying, boy,I'm trying.
Speaker 1 (02:04):
That's our condition, isn't it Our human condition?
You gave a really insightful,informative talk at our last
conference with your practicemaster on valuation of firms.
Now, this is not talked about alot.
It's hard to get good qualityinformation on how law firms are
valued and I would love to kindof turn you upside down and
(02:25):
shake as much out as I can fromyour brain on this topic.
So can you just kind of talkthrough high level how consumer
client oriented firms are valued?
In particular, me and myaudience are, as you know, are
interested in family law firms.
That's where we sit.
So what are your thoughts?
Speaker 2 (02:44):
there, yeah.
So first of all, thank you forthe compliment on the
presentations that was.
My partner and I presented onthat over the period of three
hours, so we're going to do thebest we can in 20 minutes to
give you a high level ofperspective, but I think we can
do a good job.
So the very first thing we haveto understand from two basic
premises.
The first premise is you haveto decide what type of law firm
(03:04):
owner you are.
So are you a level one law firmowner and you're going to keep
it small and keep it all andyou're going to maximize your
profitability and you're goingto take July and December off or
whatever that looks like to youand you're just going to like?
Your exit is going to be looksomething different than the
level four investor.
Who is the level four law firmowner?
Who is investor, who is builtas practice to the point where
(03:27):
they no longer have to work inthe business at all and they
have a CEO running the business.
And, of course, in betweenthere is the manager level we
call that law firm hell and thenthe third level is CEO level,
and so understanding where youare and what you want to build
is really important.
And then, secondly, what doesan exit look like for you as a
law firm owner?
And then, secondly, what doesan exit look like for you as a
law firm owner?
Because there's a couple ofoptions.
You can die with your boots onand just once you're done,
(03:48):
you're just going to close thepractice, and that's an option,
and many folks do that.
The next is you could succeedit to somebody else and kind of
just you're bringing up anassociate and you're just going
to mentor them and eventuallythey're going to take over and
they're going to buy it from youat some level or some future
pay out or whatever.
And then there is this generalidea that you're going to
(04:10):
actually sell the practice.
Right, and that's the otherextreme In between those two.
So, by the way, sell thepractice means you're selling,
you're exiting, you're at somepoint no longer involved.
In between the like, succeed itand sell it is this area that's
called run it from the mountainsand the beach.
So you don't actually want tosell it, you're just going to
let it run itself.
(04:31):
Systems are going to run yourlaw firm, people are going to
run systems, and you're going toeither go to the mountains or
the beach and you're going tolet everybody else kind of run
the firm and you're just goingto derive profits from it, and
that's possible too.
So you have to understand whereyou are and what you think you
want.
It doesn't matter which one ofthose you want.
Valuation fundamentally is thesame, and the path to the
valuation is going to get at allof you in any one of those four
(04:56):
positions, exactly what it isyou want, because the way we
create more value in a law firmis to fundamentally create more
cash.
When we're selling a law firm,it's not like we're selling some
SaaS company that can havenegative cash flows and we're
selling for future valuations.
Because, a, that's not how lawfirms traditionally work and, b,
(05:17):
because of the nature of lawand the guidelines, there are no
P companies or VC companiescoming in and making agile
investing, investing oracquisition at any high level,
which means if we're going tosell the law firm, we have to
figure out who we're going tosell it to, and those options
currently are limited.
They're there but they'relimited, and so the liquidity of
(05:39):
the market is going to affectall of this.
You get that, I'm assuming.
Speaker 1 (05:42):
Jeff, right, yeah, you've got to have a pool of
buyers to drive the price up.
Speaker 2 (05:46):
Yeah, yeah, the supply and demand curve is off
right now because there's moresupply than there is demand, not
because there wouldn't bedemand just because the law does
not allow for there to bedemand.
Currently there are someplayers stepping up in this
world and they're starting downthis process of building some of
this demand world, and they'restarting down this process of
(06:06):
building some of this demand.
I'm watching it happen.
I'm part of one of them myself,and so it's fun.
It's fun to watch and I'mlooking forward to the next 10
or 15 years.
I feel like that's going to bemy second mountain is watching
all that unfold, and so I'mexcited about that.
But for now, when you'revaluing a law firm, it really
comes down to value drivers andvalue subtractors, and so, if I
(06:28):
just go to the top of the page,like I have a whole worksheet
for this.
If you're interested in theworksheet, you can contact me
outside of this podcast and I'llget it for you.
But you obviously have it, jeff.
Speaker 1 (06:38):
What's your email for folks to contact you on that,
Richard?
Like how would you get onRichard?
Speaker 2 (06:42):
Jay at YourPpracticemastercom, richard
Jay at yourpracticemastercom andmy assistant will get it to you
, but anyway, it's a worksheetthat basically walks you through
how to value a law firm from anattractor and a detractor
perspective.
So you start at the top withgross revenues and where your
(07:03):
gross revenues are puts you in acertain threshold.
So like, if you're under amillion dollars or less, you're
going to be automatically at acertain threshold of multiple.
And what is a multiple?
Well, and then we go to EBITDAright, or profit.
Said differently, owner'sbenefit is another way to make
the statement.
I'm not going to get tootechnical because we can't get
to it right now, but justsuffice it to say the amount of
(07:25):
money that law firm makes.
And so the way that law firms,any business, is fundamentally
valued, traditionally speaking,is a multiple on EBITDA, not a
multiple on revenue.
Very rarely do any businessesget multiples on revenue.
There are businesses who do,but they are typically in a tech
space.
In a traditional business model, it's a multiple on revenue.
(07:47):
By the way, a great book on,just as a sidebar, richard
Parker wrote a book called howto Buy a Good Business at a
Great Price.
Speaker 1 (08:07):
Highly recommend it.
Hes, it's jsterlinghughescomand subscribe.
It would mean the world to meand what I will do for you there
is.
I will send you weekly contentto help you build and grow your
practice, as well as news anddevelopments in the greater
world of family law.
Thank you, and back to the show.
Just for clarity's sake, soEBITDA is another word for our
(08:28):
conversation for profit.
So when you say EBITDA, you'retalking profit.
Okay.
Speaker 2 (08:32):
If I say EBITDA or I say owner's benefit, I mean
fundamentally the same thing.
Okay, there are nuances that wedon't have time to get into,
but that's fundamentally what Imean.
So for profit, we're going tohave a multiple.
Now the question is is how doyou determine what the multiple
should be?
And that's where these we'llcall them value drivers and
value detractors come in.
(08:53):
So, like a value driver is howmuch is revenue growing year
after year?
And then if it's growingnothing or less than 30%, it
doesn't get much of a bump invaluation.
If it's growing between 30 and100%, it gets another bump in
valuation.
If it's more than 100%, it getsanother bump in valuation.
So growth does play a part invaluation, because a business
(09:16):
that's acquiring your businessis going to want to see growth.
And then it's what is thepercentage of profit to revenue?
And if you're keeping less than30%, then you get no bump.
If you're keeping more than 30%, well then you get a bump in
valuation.
So you want to make sure you'reas profitable as possible.
(09:38):
So right there, if we just stopright there, a value driver is
to have your firm growing and tomaximize profitability.
So if we grow and maximizeprofitability.
Regardless what level law firmowner you are, you're going to
succeed.
So the reason why this is soimportant to understand is
because, even if your businessintention isn't to sell your
firm, understanding how to buildyour firm to sell means that
(10:02):
you're building your firm tomaximize profitability.
Does that make sense?
Yeah, and then it's future.
Cash flow is another driver.
So future cash flow means we'remeasuring and look.
Most law firm owners, to beclear, wake up broke every month
.
So family law attorneys wake upbroke every month, which what I
mean is you got to go get newbusiness all the time.
You don't have a family whopurchases your services and is a
(10:24):
client for two years, fiveyears, 10 years, whatever.
That's not how family law works.
Although you all probably haveone of those clients, you
typically you have to go get anew client all the time and
there's some sort of clientvalue.
So what is future cashflow?
And future cashflow is likewhat is your future earnings on
that case?
Because in a cash business, youhave what you earned today from
what they paid you as a retainerand what you build against it,
(10:45):
and then they have what youthink the case is valued at and
how long it's going to take youto earn that money and being
able to take all your cases andput it through that pool and go
okay over time.
It's going to take this longfor these cases to work through.
The cases are worth about thisbecause we're putting this many
hours or flat fee into it, andso my future cash forecast looks
(11:06):
like this.
It's a very important number tohave as you're growing or
managing a business, because ifyou don't know your future cash
forecast, you can find yourselfupside down really quickly, and
so that's a main driver invaluation.
Then there's something calledLTV to CAC ratio, which is
basically what is your clientacquisition cost and what is
your lifetime client value andwhat does that ratio look like,
(11:27):
and the higher that is, the moreyou get in valuation.
And then there's deal structureand this is where really the
rubber meets the road in a lotof firms.
So you could take a $500,000firm and they could be making
$150,000 in profit, and in atraditional market they may be
worth $250,000 or $300,000because of their multiple, and
(11:47):
they might think to themselvesoh my gosh, that's just one or
two years of profit.
Why don't I just keep it openfor one or two years and close
the door.
Three years and close the door.
And yeah, that's an option.
Speaker 1 (11:54):
I think that's what most of them do.
Right, that's what most of themdo.
Yeah, yeah, yeah.
Speaker 2 (11:58):
But if you're willing to take risks, so deal flow,
deal structure means how muchrisk are you willing to take.
So if you're a small law firmand you're a $500,000 firm and
you're willing to say, listen,don't pay me anything today, but
pay me out over time as apercentage of the future profits
, well now you can set thisvaluation closer to $500,000 or
$600,000 because you're takingthe risk.
(12:19):
So that's the extreme versionof the risk.
And so between the low versionof the risk I sell you the firm
and I leave tomorrow, I got fastexit and the high version of
the risk hey, don't pay me anickel and pay me out over time
and I'm going to be part of thefuture deal Between those two
extremes is where this sits.
So again, one extreme is you'regoing to get a lower valuation.
(12:40):
The other extreme is you get amuch higher valuation.
So deal structure has a lot todo with overall valuation.
Now the detractors are thingslike key man risk.
Is it one person that iscontrolling the ship in some way
, shape or form?
And if it is, how do we dealwith it?
Is there a single channel risk?
We get all of our business fromone lead source, like the worst
number in business is one.
(13:00):
This is happening over and overagain.
So in key man risk and singlechannel risk, when you're
starting to position your firmto actually sell, you want to
diminish that risk.
If you're not going to sellyour firm, those risks aren't
overwhelming, but there stillare a risk.
And then systems risk.
Do you have systems that runyour law firm or do you rely on
the knowledge that's in Betty'shead or the knowledge that's in
(13:22):
your head valuation and then doyou have a data risk.
Do you run your business by thenumbers?
Do you have a CEO scorecardthat shows very clearly the key
performance indicators of allthe major numbers?
And you have the data tosupport all of this so that you
(13:45):
can point to somebody and showthe truth about what's actually
happening in your business.
And if you don't have data, thenyou have data risk.
And if you have data risk thenyou reduce your valuation.
So what you do is you take yourgross revenues, you take your
EBITDA, you take, based on thosetwo numbers, what your actual
valuation would be, based on amultiple, and then you add in
your value drivers, you subtractout your value detractors and
(14:08):
then you have your multiple atthe bottom and what we did.
This exercise with everybody inPartners Club and the sad truth
was the vast majority of themembers, despite their success
from a cash flow perspective,were very unhappy with their
overall multiple, and what thismeans is most law firms are
worth a whole bunch less thanwhat everybody thinks they're
(14:31):
worth.
Speaker 1 (14:31):
Yeah, so on these factors that are detractors or
what'd you call them, ads orsomething I mean whatever you
want to call them Adders,detractors it works right.
Yep, okay.
So do you in your formula?
Do you put a formula or apercentage on each of these,
like, okay, if you're the onlyperson running the firm and
you're retiring, that's key manrisk, so you're marked down 20%,
(14:54):
but you've got great yeah, solet's take your business You're
10 million plus.
Speaker 2 (14:59):
So at the 10 million plus you automatically qualify
for like a six-time multiple Ofmy profit.
Six-time multiple of yourprofit, correct?
So then you take revenue growthWell, are you growing at or
below 30%?
And then you get to add a pointto that and so that would be
one multiple point.
But then if you have key manrisk, you're like detracting
(15:19):
three points.
Like, if there's a major keyman risk, it's a major detractor
, right.
And so if you have singlechannel risk, you detract a
point.
So what happens is you takeyour initial baseline multiple
of six or whatever it is basedon your revenue and profit size,
and then you detract, youeither add to that multiple or
you subtract off that multiple.
I suspect, based on what I knowabout your practice, I suspect
(15:43):
that you're somewhere in a sevento eight mark.
That's my suspicion of you.
Yeah, that's my suspicion basedon what I know about your
practice.
I can't guarantee that.
By the way, look, if we havemore liquidity, more buyers,
that value goes up.
Like, by the way, this hashappened to chiropractors, this
has happened to dentists, thishas happened to doctors, like
(16:04):
all these professional practicesthat are out there,
veterinarians, they have alltheir multiples.
What happens is when the peoplewho are going to buy them when
the buyers enter the market, thewhat happens is when the people
who are going to buy them whenthe buyers enter the market, the
multiples skyrocket.
Right, because there's thishunger for this, and so when
this happens, there will be amassive opportunity to exit at a
multiple higher than when itsettles down.
(16:25):
It's just a supply and demandcurve, yeah.
Speaker 1 (16:29):
We're not there yet.
The dental model in particularis very instructive in this
space.
I've spent some time reading upon that.
Oh, I completely agree.
Speaker 2 (16:36):
I think that and I think, yeah, here's the
difference.
There is a difference.
So, dental, veterinarian, thosetype of businesses, they have
lifetime client values andclients stay with them for years
.
Yeah Right, that's thefundamental driving difference.
So what the purchasers of lawfirms don't know yet that they
(16:59):
will someday, is that there isnot a lot the residual business.
You always have to keep themarketing machine going.
Here's the thing that currentlyallows law firms to succeed
where these dental practices andveterinary hospitals and
chiropractors don't, is thatyour CAC to LTV or LTV to CAC
ratio.
That ratio is very, very highin law firms.
(17:21):
So, like healthy is five, Ioftentimes see law firms LTV to
CAC ratio as high as 15 or 20 ormore, and so that is a.
Speaker 1 (17:32):
So break that number down.
I'm not catching that entirely.
So if my long-term client valueis $10,000 and it costs me
$2,000 to get that client,that's a 5.1.
Correct, right, you got it.
That's five, okay.
So obviously the higher thenumber the better, right,
because you're Correct Okay.
And the lower the number, theworse off you are.
(17:54):
So you're spending fivethousand to get to that ten
thousand hour client.
You don't have any money leftover to service the client, so
it doesn't work.
Ok, all right, I interruptedyou.
Finish what your thoughts?
Speaker 2 (18:04):
No, no.
And we said we I preface thisin the beginning like you and I
could do two hours just on LTVto CAF, yeah.
Right Because how do you fixcost of acquisition?
Well, everything we teach right.
The whole PCLC and new clientattraction pipeline right.
How do you increase LTV?
Well, it's about pricing andmaking sure we're getting paid
(18:26):
and moving things through thepipelines, through the flow
methodology that we teach.
So that whole process ofincreasing LTV and decreasing
CAC is a masterclass in and ofitself.
But generally speaking, youwant to maximize your LTV to CAC
ratio so that you can maximizeyour valuation.
But again, even if you don'tplan on selling like, take
(18:50):
Jonathan Breeden, he's not afirm of your size but he started
off doing I don't know, I thinkJonathan said publicly he did
$30,000, $40,000 a month and nowJonathan is poised to have a
multiple seven-figure year andhe went from not knowing any of
these things to applying allthese things and taking his LTV
to calculation, to where it is,and so he applied all of this.
(19:12):
Jonathan doesn't plan on sellinghis practice, but now he's able
to have his practice.
He's now the CEO of his lawfirm, has almost he only has, I
think he has three cases leftand makes, you know a lot of
money every year as compared towhat other people make or
lawyers make for slugging awayat doing the work, and so I can.
We could read off example afterexample after example of people
(19:35):
who don't expect to sell theirfirm, but use this framework to
identify what they need tostrengthen up, which pillar they
need to strengthen up to allowthem to maximize profitability
and to allow them to raise theCEO or possibly even the
investor level, so that theirfirm can operate without their
daily input certainly as alawyer and they can yield a high
(20:00):
level of profitability.
And that's really where we areright now, because we don't have
a lot of liquidity in themarket.
Speaker 1 (20:06):
Richard, I know we have like two minutes left here,
but I want to go down marketwhere the majority of our
listeners are sitting, andthat's in that $500,000 to $1.5
million $2 million range.
Again, every firm's differentfor all the reasons you just
described.
What are the general ranges andmultiples someone could expect
on a sale in that part of themarket?
Speaker 2 (20:24):
I think you'll get two times multiple if you want
to stick around a little shortperiod of time and exit.
I think you can get a one-timemultiple on gross revenues if
you're willing to take some riskand hold some paper.
Speaker 1 (20:36):
And I mean it typically looks like you stick
around for two or three yearsand just make sure.
Speaker 2 (20:41):
You might have to stick around and operate because
they probably want you out ofthe way anyway.
But you'll be the lawyer thatthey'll need as a backup.
But then you'll hold the paperand get paid out over time, and
usually that time is three tofive years.
So the longer you're willing tohold the paper, the higher the
multiple.
Yeah, and I would say youshould expect the top side on
that firm at one time multipleof gross revenues, right,
(21:01):
regardless of what EBIT is, andif you just wanted to sell it
and get out, you're looking at atwo to 2.5 multiple.
Speaker 1 (21:09):
On the profit.
Speaker 2 (21:10):
On the profit, and that's, by the way, doesn't
include any buildings that youown or anything like that.
That's just the business, that,not including real estate.
Speaker 1 (21:16):
Yeah Well, thank you, this has been real informative.
I've I've appreciated, enjoyedit immensely.
So if someone needs to getahold of you, you, you want to
give your email address one moretime.
Speaker 2 (21:25):
Yeah, it was the richardj at
yourpracticemastercom.
Visit us atyourpracticemastercom.
Consume some of our freecontent.
Schedule a call with us and seeif we're the right fit.
If you wanted a copy of thatform that we talked about happy
to give it to you Just email me.
My assistant will get over toyou.
You can start filling out thatcalculator for yourself and have
fun with it and hopefully youcan see what your valuation is.
(21:46):
And if you're disappointed,don't blame me.
If you're disappointed in yourvaluation, don't blame me.
Yeah, very good.
Speaker 1 (21:52):
All right, thank you, richard.
Thanks for coming on today.
All right, jeff, it's always apleasure.
Speaker 2 (21:57):
Congratulations to you, to your success, to your
family.
Your success really is my joy.
I've been fortunate that Godhas blessed me to the point I
don't have to do this anymore,but I just I love watching you
guys succeed, and so I love whatyour firm is doing.
Congratulations and thanks, bythe way, for helping everybody
and putting this message outthere to all those that are
listening.
I think it's what a greatservice to your fellow peers,
(22:18):
especially in the family lawrealm, because many of them find
themselves lost at times.
So congratulations to you.
Speaker 1 (22:22):
Thanks for that Awful lot of times.
Thank you Appreciate it.
Can you just kind of talk through high level how
consumer, client oriented firmsare valued?
So, the very first thing, well,hello and welcome to the J
Sterling Hughes show, where weshare how we have built our
family law firm from zero to 25plus attorneys and 15 million in
revenue all in the past 10years, and my purpose here is to
document what's working andwhat's not working, with hopes
(00:22):
that you can take that andrecontextualize it and have the
firm of your dreams.
My name is Jeff Hughes and I'myour host, and today I have a
guest with me and we're going tobe talking about how do you
value family law firms for asale.
My guest is Richard James.
Richard is the founder and CEOof your Practice Mastered and
Partner Club, which my firm is apart of.
We get a ton of value from thatprogram and we've done another
(00:45):
podcast on that.
Over the years, richard and histeam have helped over 900
attorneys build and grow asustainable predictable.
The key there is predictablepractice.
He's also the author of fourbooks on law firm marketing and
business systems and someonethat I've gone to for help
whenever we've encounteredproblems that I wasn't familiar
with and I wanted to draw on hisexpertise from looking at so
many other firms and comparethat to kind of how we are
(01:08):
thinking about the problem.
So welcome, richard.
I'm looking forward to thispodcast to hear more about how
you value firms and how you'veseen them valued.
Speaker 2 (01:16):
Yeah, jeff, thanks so much and again, as always,
congratulations to you and yoursuccess.
I appreciate the love that youthrow our way about helping you,
but action kills fear and yourfirm is a firm that takes rapid
action, there's no question.
That's why you one of the keyreasons why you're successful,
you know, in addition to yourintelligence and your hard work.
But anyway, congratulations toyou and to Jeff and your
(01:38):
partners and all that you'vebuilt, because not only are you
building a great firm, but Ithink that law firms do God's
work and you're doing it at avery high level because you're
helping people in some of themost difficult times.
So, anyway, thanks to yourcommunities that you serve.
Speaker 1 (01:50):
Thank you, I believe that too, and I believe he's
given us this business tosteward for his kingdom, so we
try to treat it that way.
That's good Boy.
Speaker 2 (01:59):
I feel like I fail every day at being a good
steward, but I'm trying, boy,I'm trying.
Speaker 1 (02:04):
That's our condition, isn't it Our human condition?
You gave a really insightful,informative talk at our last
conference with your practicemaster on valuation of firms.
Now, this is not talked about alot.
It's hard to get good qualityinformation on how law firms are
valued and I would love to kindof turn you upside down and
(02:25):
shake as much out as I can fromyour brain on this topic.
So can you just kind of talkthrough high level how consumer
client oriented firms are valued?
In particular, me and myaudience are, as you know, are
interested in family law firms.
That's where we sit.
So what are your thoughts?
Speaker 2 (02:44):
there, yeah.
So first of all, thank you forthe compliment on the
presentations that was.
My partner and I presented onthat over the period of three
hours, so we're going to do thebest we can in 20 minutes to
give you a high level ofperspective, but I think we can
do a good job.
So the very first thing we haveto understand from two basic
premises.
The first premise is you haveto decide what type of law firm
(03:04):
owner you are.
So are you a level one law firmowner and you're going to keep
it small and keep it all andyou're going to maximize your
profitability and you're goingto take July and December off or
whatever that looks like to youand you're just going to like?
Your exit is going to be looksomething different than the
level four investor.
Who is the level four law firmowner?
Who is investor, who is builtas practice to the point where
(03:27):
they no longer have to work inthe business at all and they
have a CEO running the business.
And, of course, in betweenthere is the manager level we
call that law firm hell and thenthe third level is CEO level,
and so understanding where youare and what you want to build
is really important.
And then, secondly, what doesan exit look like for you as a
law firm owner?
And then, secondly, what doesan exit look like for you as a
law firm owner?
Because there's a couple ofoptions.
You can die with your boots onand just once you're done,
(03:48):
you're just going to close thepractice, and that's an option,
and many folks do that.
The next is you could succeedit to somebody else and kind of
just you're bringing up anassociate and you're just going
to mentor them and eventuallythey're going to take over and
they're going to buy it from youat some level or some future
pay out or whatever.
And then there is this generalidea that you're going to
(04:10):
actually sell the practice.
Right, and that's the otherextreme In between those two.
So, by the way, sell thepractice means you're selling,
you're exiting, you're at somepoint no longer involved.
In between the like, succeed itand sell it is this area that's
called run it from the mountainsand the beach.
So you don't actually want tosell it, you're just going to
let it run itself.
(04:31):
Systems are going to run yourlaw firm, people are going to
run systems, and you're going toeither go to the mountains or
the beach and you're going tolet everybody else kind of run
the firm and you're just goingto derive profits from it, and
that's possible too.
So you have to understand whereyou are and what you think you
want.
It doesn't matter which one ofthose you want.
Valuation fundamentally is thesame, and the path to the
valuation is going to get at allof you in any one of those four
(04:56):
positions, exactly what it isyou want, because the way we
create more value in a law firmis to fundamentally create more
cash.
When we're selling a law firm,it's not like we're selling some
SaaS company that can havenegative cash flows and we're
selling for future valuations.
Because, a, that's not how lawfirms traditionally work and, b,
(05:17):
because of the nature of lawand the guidelines, there are no
P companies or VC companiescoming in and making agile
investing, investing oracquisition at any high level,
which means if we're going tosell the law firm, we have to
figure out who we're going tosell it to, and those options
currently are limited.
They're there but they'relimited, and so the liquidity of
(05:39):
the market is going to affectall of this.
You get that, I'm assuming.
Speaker 1 (05:42):
Jeff, right, yeah, you've got to have a pool of
buyers to drive the price up.
Speaker 2 (05:46):
Yeah, yeah, the supply and demand curve is off
right now because there's moresupply than there is demand, not
because there wouldn't bedemand just because the law does
not allow for there to bedemand.
Currently there are someplayers stepping up in this
world and they're starting downthis process of building some of
this demand world, and they'restarting down this process of
(06:06):
building some of this demand.
I'm watching it happen.
I'm part of one of them myself,and so it's fun.
It's fun to watch and I'mlooking forward to the next 10
or 15 years.
I feel like that's going to bemy second mountain is watching
all that unfold, and so I'mexcited about that.
But for now, when you'revaluing a law firm, it really
comes down to value drivers andvalue subtractors, and so, if I
(06:28):
just go to the top of the page,like I have a whole worksheet
for this.
If you're interested in theworksheet, you can contact me
outside of this podcast and I'llget it for you.
But you obviously have it, jeff.
Speaker 1 (06:38):
What's your email for folks to contact you on that,
Richard?
Like how would you get onRichard?
Speaker 2 (06:42):
Jay at YourPpracticemastercom, richard
Jay at yourpracticemastercom andmy assistant will get it to you
, but anyway, it's a worksheetthat basically walks you through
how to value a law firm from anattractor and a detractor
perspective.
So you start at the top withgross revenues and where your
(07:03):
gross revenues are puts you in acertain threshold.
So like, if you're under amillion dollars or less, you're
going to be automatically at acertain threshold of multiple.
And what is a multiple?
Well, and then we go to EBITDAright, or profit.
Said differently, owner'sbenefit is another way to make
the statement.
I'm not going to get tootechnical because we can't get
to it right now, but justsuffice it to say the amount of
(07:25):
money that law firm makes.
And so the way that law firms,any business, is fundamentally
valued, traditionally speaking,is a multiple on EBITDA, not a
multiple on revenue.
Very rarely do any businessesget multiples on revenue.
There are businesses who do,but they are typically in a tech
space.
In a traditional business model, it's a multiple on revenue.
(07:47):
By the way, a great book on,just as a sidebar, richard
Parker wrote a book called howto Buy a Good Business at a
Great Price.
Speaker 1 (08:07):
Highly recommend it.
Hes, it's jsterlinghughescomand subscribe.
It would mean the world to meand what I will do for you there
is.
I will send you weekly contentto help you build and grow your
practice, as well as news anddevelopments in the greater
world of family law.
Thank you, and back to the show.
Just for clarity's sake, soEBITDA is another word for our
(08:28):
conversation for profit.
So when you say EBITDA, you'retalking profit.
Okay.
Speaker 2 (08:32):
If I say EBITDA or I say owner's benefit, I mean
fundamentally the same thing.
Okay, there are nuances that wedon't have time to get into,
but that's fundamentally what Imean.
So for profit, we're going tohave a multiple.
Now the question is is how doyou determine what the multiple
should be?
And that's where these we'llcall them value drivers and
value detractors come in.
(08:53):
So, like a value driver is howmuch is revenue growing year
after year?
And then if it's growingnothing or less than 30%, it
doesn't get much of a bump invaluation.
If it's growing between 30 and100%, it gets another bump in
valuation.
If it's more than 100%, it getsanother bump in valuation.
So growth does play a part invaluation, because a business
(09:16):
that's acquiring your businessis going to want to see growth.
And then it's what is thepercentage of profit to revenue?
And if you're keeping less than30%, then you get no bump.
If you're keeping more than 30%, well then you get a bump in
valuation.
So you want to make sure you'reas profitable as possible.
(09:38):
So right there, if we just stopright there, a value driver is
to have your firm growing and tomaximize profitability.
So if we grow and maximizeprofitability.
Regardless what level law firmowner you are, you're going to
succeed.
So the reason why this is soimportant to understand is
because, even if your businessintention isn't to sell your
firm, understanding how to buildyour firm to sell means that
(10:02):
you're building your firm tomaximize profitability.
Does that make sense?
Yeah, and then it's future.
Cash flow is another driver.
So future cash flow means we'remeasuring and look.
Most law firm owners, to beclear, wake up broke every month
.
So family law attorneys wake upbroke every month, which what I
mean is you got to go get newbusiness all the time.
You don't have a family whopurchases your services and is a
(10:24):
client for two years, fiveyears, 10 years, whatever.
That's not how family law works.
Although you all probably haveone of those clients, you
typically you have to go get anew client all the time and
there's some sort of clientvalue.
So what is future cashflow?
And future cashflow is likewhat is your future earnings on
that case?
Because in a cash business, youhave what you earned today from
what they paid you as a retainerand what you build against it,
(10:45):
and then they have what youthink the case is valued at and
how long it's going to take youto earn that money and being
able to take all your cases andput it through that pool and go
okay over time.
It's going to take this longfor these cases to work through.
The cases are worth about thisbecause we're putting this many
hours or flat fee into it, andso my future cash forecast looks
(11:06):
like this.
It's a very important number tohave as you're growing or
managing a business, because ifyou don't know your future cash
forecast, you can find yourselfupside down really quickly, and
so that's a main driver invaluation.
Then there's something calledLTV to CAC ratio, which is
basically what is your clientacquisition cost and what is
your lifetime client value andwhat does that ratio look like,
(11:27):
and the higher that is, the moreyou get in valuation.
And then there's deal structureand this is where really the
rubber meets the road in a lotof firms.
So you could take a $500,000firm and they could be making
$150,000 in profit, and in atraditional market they may be
worth $250,000 or $300,000because of their multiple, and
(11:47):
they might think to themselvesoh my gosh, that's just one or
two years of profit.
Why don't I just keep it openfor one or two years and close
the door.
Three years and close the door.
And yeah, that's an option.
Speaker 1 (11:54):
I think that's what most of them do.
Right, that's what most of themdo.
Yeah, yeah, yeah.
Speaker 2 (11:58):
But if you're willing to take risks, so deal flow,
deal structure means how muchrisk are you willing to take.
So if you're a small law firmand you're a $500,000 firm and
you're willing to say, listen,don't pay me anything today, but
pay me out over time as apercentage of the future profits
, well now you can set thisvaluation closer to $500,000 or
$600,000 because you're takingthe risk.
(12:19):
So that's the extreme versionof the risk.
And so between the low versionof the risk I sell you the firm
and I leave tomorrow, I got fastexit and the high version of
the risk hey, don't pay me anickel and pay me out over time
and I'm going to be part of thefuture deal Between those two
extremes is where this sits.
So again, one extreme is you'regoing to get a lower valuation.
(12:40):
The other extreme is you get amuch higher valuation.
So deal structure has a lot todo with overall valuation.
Now the detractors are thingslike key man risk.
Is it one person that iscontrolling the ship in some way
, shape or form?
And if it is, how do we dealwith it?
Is there a single channel risk?
We get all of our business fromone lead source, like the worst
number in business is one.
(13:00):
This is happening over and overagain.
So in key man risk and singlechannel risk, when you're
starting to position your firmto actually sell, you want to
diminish that risk.
If you're not going to sellyour firm, those risks aren't
overwhelming, but there stillare a risk.
And then systems risk.
Do you have systems that runyour law firm or do you rely on
the knowledge that's in Betty'shead or the knowledge that's in
(13:22):
your head valuation and then doyou have a data risk.
Do you run your business by thenumbers?
Do you have a CEO scorecardthat shows very clearly the key
performance indicators of allthe major numbers?
And you have the data tosupport all of this so that you
(13:45):
can point to somebody and showthe truth about what's actually
happening in your business.
And if you don't have data, thenyou have data risk.
And if you have data risk thenyou reduce your valuation.
So what you do is you take yourgross revenues, you take your
EBITDA, you take, based on thosetwo numbers, what your actual
valuation would be, based on amultiple, and then you add in
your value drivers, you subtractout your value detractors and
(14:08):
then you have your multiple atthe bottom and what we did.
This exercise with everybody inPartners Club and the sad truth
was the vast majority of themembers, despite their success
from a cash flow perspective,were very unhappy with their
overall multiple, and what thismeans is most law firms are
worth a whole bunch less thanwhat everybody thinks they're
(14:31):
worth.
Speaker 1 (14:31):
Yeah, so on these factors that are detractors or
what'd you call them, ads orsomething I mean whatever you
want to call them Adders,detractors it works right.
Yep, okay.
So do you in your formula?
Do you put a formula or apercentage on each of these,
like, okay, if you're the onlyperson running the firm and
you're retiring, that's key manrisk, so you're marked down 20%,
(14:54):
but you've got great yeah, solet's take your business You're
10 million plus.
Speaker 2 (14:59):
So at the 10 million plus you automatically qualify
for like a six-time multiple Ofmy profit.
Six-time multiple of yourprofit, correct?
So then you take revenue growthWell, are you growing at or
below 30%?
And then you get to add a pointto that and so that would be
one multiple point.
But then if you have key manrisk, you're like detracting
(15:19):
three points.
Like, if there's a major keyman risk, it's a major detractor
, right.
And so if you have singlechannel risk, you detract a
point.
So what happens is you takeyour initial baseline multiple
of six or whatever it is basedon your revenue and profit size,
and then you detract, youeither add to that multiple or
you subtract off that multiple.
I suspect, based on what I knowabout your practice, I suspect
(15:43):
that you're somewhere in a sevento eight mark.
That's my suspicion of you.
Yeah, that's my suspicion basedon what I know about your
practice.
I can't guarantee that.
By the way, look, if we havemore liquidity, more buyers,
that value goes up.
Like, by the way, this hashappened to chiropractors, this
has happened to dentists, thishas happened to doctors, like
(16:04):
all these professional practicesthat are out there,
veterinarians, they have alltheir multiples.
What happens is when the peoplewho are going to buy them when
the buyers enter the market, thewhat happens is when the people
who are going to buy them whenthe buyers enter the market, the
multiples skyrocket.
Right, because there's thishunger for this, and so when
this happens, there will be amassive opportunity to exit at a
multiple higher than when itsettles down.
(16:25):
It's just a supply and demandcurve, yeah.
Speaker 1 (16:29):
We're not there yet.
The dental model in particularis very instructive in this
space.
I've spent some time reading upon that.
Oh, I completely agree.
Speaker 2 (16:36):
I think that and I think, yeah, here's the
difference.
There is a difference.
So, dental, veterinarian, thosetype of businesses, they have
lifetime client values andclients stay with them for years
.
Yeah Right, that's thefundamental driving difference.
So what the purchasers of lawfirms don't know yet that they
(16:59):
will someday, is that there isnot a lot the residual business.
You always have to keep themarketing machine going.
Here's the thing that currentlyallows law firms to succeed
where these dental practices andveterinary hospitals and
chiropractors don't, is thatyour CAC to LTV or LTV to CAC
ratio.
That ratio is very, very highin law firms.
(17:21):
So, like healthy is five, Ioftentimes see law firms LTV to
CAC ratio as high as 15 or 20 ormore, and so that is a.
Speaker 1 (17:32):
So break that number down.
I'm not catching that entirely.
So if my long-term client valueis $10,000 and it costs me
$2,000 to get that client,that's a 5.1.
Correct, right, you got it.
That's five, okay.
So obviously the higher thenumber the better, right,
because you're Correct Okay.
And the lower the number, theworse off you are.
(17:54):
So you're spending fivethousand to get to that ten
thousand hour client.
You don't have any money leftover to service the client, so
it doesn't work.
Ok, all right, I interruptedyou.
Finish what your thoughts?
Speaker 2 (18:04):
No, no.
And we said we I preface thisin the beginning like you and I
could do two hours just on LTVto CAF, yeah.
Right Because how do you fixcost of acquisition?
Well, everything we teach right.
The whole PCLC and new clientattraction pipeline right.
How do you increase LTV?
Well, it's about pricing andmaking sure we're getting paid
(18:26):
and moving things through thepipelines, through the flow
methodology that we teach.
So that whole process ofincreasing LTV and decreasing
CAC is a masterclass in and ofitself.
But generally speaking, youwant to maximize your LTV to CAC
ratio so that you can maximizeyour valuation.
But again, even if you don'tplan on selling like, take
(18:50):
Jonathan Breeden, he's not afirm of your size but he started
off doing I don't know, I thinkJonathan said publicly he did
$30,000, $40,000 a month and nowJonathan is poised to have a
multiple seven-figure year andhe went from not knowing any of
these things to applying allthese things and taking his LTV
to calculation, to where it is,and so he applied all of this.
(19:12):
Jonathan doesn't plan on sellinghis practice, but now he's able
to have his practice.
He's now the CEO of his lawfirm, has almost he only has, I
think he has three cases leftand makes, you know a lot of
money every year as compared towhat other people make or
lawyers make for slugging awayat doing the work, and so I can.
We could read off example afterexample after example of people
(19:35):
who don't expect to sell theirfirm, but use this framework to
identify what they need tostrengthen up, which pillar they
need to strengthen up to allowthem to maximize profitability
and to allow them to raise theCEO or possibly even the
investor level, so that theirfirm can operate without their
daily input certainly as alawyer and they can yield a high
(20:00):
level of profitability.
And that's really where we areright now, because we don't have
a lot of liquidity in themarket.
Speaker 1 (20:06):
Richard, I know we have like two minutes left here,
but I want to go down marketwhere the majority of our
listeners are sitting, andthat's in that $500,000 to $1.5
million $2 million range.
Again, every firm's differentfor all the reasons you just
described.
What are the general ranges andmultiples someone could expect
on a sale in that part of themarket?
Speaker 2 (20:24):
I think you'll get two times multiple if you want
to stick around a little shortperiod of time and exit.
I think you can get a one-timemultiple on gross revenues if
you're willing to take some riskand hold some paper.
Speaker 1 (20:36):
And I mean it typically looks like you stick
around for two or three yearsand just make sure.
Speaker 2 (20:41):
You might have to stick around and operate because
they probably want you out ofthe way anyway.
But you'll be the lawyer thatthey'll need as a backup.
But then you'll hold the paperand get paid out over time, and
usually that time is three tofive years.
So the longer you're willing tohold the paper, the higher the
multiple.
Yeah, and I would say youshould expect the top side on
that firm at one time multipleof gross revenues, right,
(21:01):
regardless of what EBIT is, andif you just wanted to sell it
and get out, you're looking at atwo to 2.5 multiple.
Speaker 1 (21:09):
On the profit.
Speaker 2 (21:10):
On the profit, and that's, by the way, doesn't
include any buildings that youown or anything like that.
That's just the business, that,not including real estate.
Speaker 1 (21:16):
Yeah Well, thank you, this has been real informative.
I've I've appreciated, enjoyedit immensely.
So if someone needs to getahold of you, you, you want to
give your email address one moretime.
Speaker 2 (21:25):
Yeah, it was the richardj at
yourpracticemastercom.
Visit us atyourpracticemastercom.
Consume some of our freecontent.
Schedule a call with us and seeif we're the right fit.
If you wanted a copy of thatform that we talked about happy
to give it to you Just email me.
My assistant will get over toyou.
You can start filling out thatcalculator for yourself and have
fun with it and hopefully youcan see what your valuation is.
(21:46):
And if you're disappointed,don't blame me.
If you're disappointed in yourvaluation, don't blame me.
Yeah, very good.
Speaker 1 (21:52):
All right, thank you, richard.
Thanks for coming on today.
All right, jeff, it's always apleasure.
Speaker 2 (21:57):
Congratulations to you, to your success, to your
family.
Your success really is my joy.
I've been fortunate that Godhas blessed me to the point I
don't have to do this anymore,but I just I love watching you
guys succeed, and so I love whatyour firm is doing.
Congratulations and thanks, bythe way, for helping everybody
and putting this message outthere to all those that are
listening.
I think it's what a greatservice to your fellow peers,
(22:18):
especially in the family lawrealm, because many of them find
themselves lost at times.
So congratulations to you.
Speaker 1 (22:22):
Thanks for that Awful lot of times.
Thank you Appreciate it.
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