One of the most popular responses we got was what I’ll call the Nihilist Explanation: Law firms have no value because, after all, everyone could walk out the door tomorrow.
If we observed that the same could theoretically happen at Goldman Sachs or McKinsey or for that matter The New Yorker magazine, and they seem to have non-zero value as businesses, the answer was the Universal Solvent for explaining Law Land’s idiosyncrasies: “Aaah, but law firms are different.”
We even heard this posited with respect to a firm headquartered a few stops on the #1 local train from where I’m sitting that consistently has had among the highest PPP numbers since Steven Brill introduced the entire poxed notion three decades ago. Namely, that that celebrated firm has no discernible value. Well, on that basis we hereby issue a standing offer to our readers and the market: If the powers that be want to hand Adam Smith, Esq., LLC the keys to that firm for $0.00, we will accept.
But putting common sense aside, an intellectual move we find we have to play fairly often, any going enterprise can be valued by experienced and knowledgeable people. Start with the recent track record of revenue and profit margin, adjust for the dynamics of the industry and any firm-specific characteristics or conditions (pro and con), and you will be able to come up with a plausible guesstimate of its enterprise value. And it will not be zero.
Stated a bit differently, if the entity has earnings (and all law firms do or they cease to exist virtually at once), the P/E ratio will be a positive number > 0.
Two quick caveats.
First, one of these very smart people we talked to confirmed that it is legal and within the bounds of professional ethical responsibility to buy law firms in all 50 states. (Clients cannot be bought and sold, but that’s of no matter to our question.) And second, that same eminent expert (I say that because anyone in the field would point to him as that very thing, the real deal) noted that small firms, typically solo’s or very small partnerships, are bought and sold for a P/E usually in the range of 1.5–3.0. What the acquirers, who must of course be lawyers themselves, are essentially buying is their own future income stream. But sales for monetary consideration do occur, so it can’t violate the laws of nature.
All of which leaves us back where we came in, without an “a-ha!” answer to the question.
“It simply isn’t done” may be as far as we can get no matter how hard we push on this..And maybe that’s just as well. After all, can you imagine a room full of lawyers debating the value of their firm, and of the other folks’ firm as well, or asking an impartial auction process to settle it for them? Our M&A market would seize up once and for all, and every once in awhile some judicious A or M does make sense for law firms.
Best not to go there.