Law firms are known for their profitability, but often the challenge lies in translating such financial success into capital value for the owners when they are looking to exit their practice. In this blog, I look at how forward-thinking law firm owners can create more value and recover much of it upon selling their ownership share by investing in digital solutions for their clients on a subscription basis.
The Elusive Value of Law Firms:
Compared to most other businesses traditionally, law firm owners have found it difficult to quantify and realise the value they have contributed to the firm during their tenure and therefore have relied heavily on trying to maximise the profits they make via regular drawings. In many cases, the lack of a mechanism for value transfer has deterred long-term ownership perspectives and has often led to law firm owners making short-term decisions to maximise profit rather than longer-term investments that maximise the value of their business. This scenario is more prevalent in large law firms, where the concept of “goodwill” was abolished many years ago so that nowadays, partners receive little, if any, compensation for their contributions when they leave.
Unlocking Value in Small Firms:
For smaller law firms, a different approach to valuing ownership stakes has become possible. Partners can agree on the value of their ownership, especially when a new partner joins, or an existing one retires. However, even in small firms, challenges arise when attempting to value and transfer value, particularly if the practice heavily relies on personal relationships and lacks standardised systems. Without good systems, precedents, and training, the value of most practices really is just personal to the owners and not easily transferred as you would expect with many other businesses.
The Changing Landscape: Subscription-Based Digital Solutions:
Fortunately, with advancements in technology and the emergence of subscription pricing models, the legal landscape is changing. Forward-thinking lawyers can now identify recurring problems faced by their clients and design innovative solutions that continuously add value. This shift from selling billable hours to providing ongoing solutions opens significant new revenue opportunities for law firms.
Leveraging Technology and Partnerships:
To create these value-added solutions, law firms don’t need to become technology experts themselves. They can collaborate with technology providers and partners specialising in legal automation.
A good and relatively simple example of this in action is creating self-service document automation solutions that clients can use without any input from the firm, directly from their own SharePoint site. This creates no time-based revenue for the law firm but huge time savings, risk reductions, and contract data opportunities for the client. Clients are willing to pay for this on a subscription basis. The price to the client can be a small portion of the overall value that they receive, and this revenue can become a significant contributor to the law firm’s revenue. Every year, the firm can have greater assurance that as long as the solution continues to meet the needs of its clients, the client will continue paying for it.
The solution can still carry the firm’s branding and make it very easy for the client and the firm to collaborate when things become more complex. By becoming part of the client’s core business processes, the firm’s relationship with the client can become even stronger and more difficult to break.
Enhancing the Firm’s Value and Attractiveness:
Moreover, recurring subscription revenue is valued more highly by potential purchasers compared to one-off or repeating revenue. It’s one thing if you can show that some of your clients keep coming back every year for something or other, and you attempt to convince a purchaser it is reasonably likely that they will continue to come back in future years as well – hopefully, even if their main contact is no longer there. But it is much more likely that subscription revenue will continue, and therefore easier for purchasers to pay a higher multiple for such recurring revenue.
When a law firm boasts a substantial subscription revenue line, it can transform the way partners perceive their contributions, invest in the longer-term sustainability, manage exits, and bring in new partners.
The Proactive Approach: Embrace Subscription Models:
As subscription business models increasingly permeate various industries, including professional services and legal work, proactive law firms should be planning ahead and seek specialised expertise to navigate this shift successfully.
It’s not just about technology and pricing – it affects all aspects of the firm and how contributions are valued, during the term of a partnership and on exit. Experts like those in the LawX collaboration can offer valuable guidance on strategic planning, pricing, systems and precedents, marketing, financial management, succession planning, and valuations in this new landscape.
Embracing subscription-based digital solutions can be a game-changer for law firm owners, unlocking the value they create while ensuring continuous benefits for their clients.
By taking advantage of emerging technologies and partnering with experts, law firms can position themselves for future success and ensure they are attractive to new talent when the time comes for retirement. As the subscription economy grows, incorporating these models will become essential to staying competitive and thriving in the legal industry.
If you are interested in the intersection between subscription business models and technology, come to the ALPMA Summit in September, where John Chisholm and I are talking on this very topic. You can register here.