Episode Transcript
[00:00:00] Speaker A: Welcome to the relay presented by Lexamica. My name is Gabriel Steeritz, founder and CEO of Lexamica, the leading attorney referral network. We are leaders who are passionate about leveraging technology and AI to enhance law firm practices. Our listeners are owners and c suite executives at personal injury, Social Security, disability, med mal, consumer class action, mass tort, and other law firms. My guest today is Tomlinfesti, founder of the law firm Practice Exchange. Tom, great to have you on today.
[00:00:30] Speaker B: Yeah, Gabriel, thanks for having me.
[00:00:32] Speaker A: Yeah, absolutely. Just before we dive in here, I don't want to screw it up and give a misunderstanding of what you do. What is the law firm practice exchange and what does it do?
[00:00:44] Speaker B: Yeah, absolutely. So the law practice exchange is really there to be the marketplace for buying and selling law firms. Our goal really is to disrupt the historical process of buying and selling, to really try to normalize, to make sure that if you own a law firm or a law practice, you know, you've built value and you can create a continuation plan, an exit strategy for that, that's going to be able to monetize that value. And if you're looking to grow your firm, acquisition of another firm might be a viable option for you. So we're there to essentially be the marketplace, and then our advisors are there to help our buyers and sellers through that marketplace.
[00:01:27] Speaker A: Fantastic. Now, when I first met you, and this was probably two years ago, this was not on my radar at all. And I didn't really know that you could buy or sell law firms. I guess I assumed that you either handed a law firm down to your son or your daughter, or you just wrapped up shopping, called it a day. And I think that our listeners know that with only a couple of exceptions, law firms can only be owned by lawyers. And it may be a surprise to know that there are lawyers out there looking to buy law firms. What does that profile look like? And I guess before we talk about that, what's the history of buying and selling law firms? Is this something that's new? Has it been around for a long time?
Catch us up a little bit?
[00:02:13] Speaker B: Sure, sure, absolutely. So we'll get to the profile of what a buyer looks like or anything else but the history. You know, the ABA passed rule 1.1 725 years ago, something like that. But everything moves a little bit slower in law. And so overall, you know, sale of a law firm, I think, was utilized but not really talked about. And, you know, my entrance into this and really the formation of the law practice exchange came around ten years ago when I was an attorney, CPA in practice, helping a lot of dentists, a lot of cpas with their succession planning, and I tell everybody, got a little jealous of, wait a minute, why are cpas, why are others doing this? And it doesn't seem like lawyers are able to do it. And so that started the good research and then the opportunity, really, to create a marketplace for lawyers to do so. So even though it's been accepted and been done for a while, I don't really think the community and the profession has embraced it and talked about the opportunity for. For selling and buying.
[00:03:17] Speaker A: Yeah. So 25 years ago is when this became legal at all. So before that, you could not buy or sell a law firm. Am I understanding that correctly?
[00:03:25] Speaker B: No, I think you could. I think the ABA opinion that said, you can. Right. It's everything in law. There's ethical opinions. Right. And so there's the elements of things happened before that, but really giving guidance on it. And so once the ABA and other states come out, like Texas just passed, you know, their version of rule 1.17.
But law firms have been bought and sold in the Texas state bar. We've had clients that have contacted, and they're like, yeah, you can do it. Look to this opinion. Look to this opinion to make sure you do it in the right way.
But it's. So the lack of having an opinion doesn't mean it wasn't done, but it helped. Right. You know, anything that's publicized and kind of rubber stamped or improved and given guidance helps kind of move that forward. And so that's really it. And so my goal back then was to really help first on an education standpoint. So that's really where we started. And your entree or kind of intro to this, of, I didn't even know you could do this ten plus years ago, that's what I ran into a lot. Right. I would talk to attorneys, they're like, you can't sell a law firm. And, you know, it's done different for a lot of firms. Some firms, it's very similar to other industry models, but we tell everybody we do a transition based sale, right. Whether it's succession planning to an internal, to an outside prospective buyer or anything else, most of it is it has to be a baton pass versus a throw the keys and walk out the door. Some professions, like dental, have mastered that. It's like, here you go, plan on this retention rate or anything else. But for us, we do it in a little bit different approach to preserve the value that we as attorneys have built personally and transition that over to another firm or another buyer attorney, and then the value that the firm has built from that side. And so a little bit different approach. But yeah, it's about growing that education, that knowledge. And our biggest thing is just having attorneys know that this is an option. Selling or succession is an option. Buying or acquisition is an option. Whether it's the right option for you, you have to determine. But will it be successful? Absolutely. If you give it the time and the reasonableness to do so, sure.
[00:05:37] Speaker A: So let's hit some nitty gritty questions here that I have for you as a business guy. How many of these are happening a year across the personal injury industry ballpark? If you don't have a solid number, how many of these do you think are happening right now?
[00:05:53] Speaker B: Yeah, my guess, right now there's probably somewhere around 100 transactions happening a year of decent sized personal injury firms. I may be off on that number just based on the activity. Personal injury leads our marketplace. In overall activity, we see a lot more interested buyers than interested sellers. So that's really the stumbling block is getting the good sellers into the market right now. But lots of buyers interested in growth through acquisition, especially geographic expansion. Growth through acquisition.
[00:06:26] Speaker A: Tom, hold on, though. That's crazy, because I would assume, from my perspective, I would have assumed that it would be the other way around, that you've got these guys that are looking to retire. They built their firms kind of as advertising came online and they're just trying to sell. But you're saying that there's actually more buyers out there looking to acquire firms than there are good sellers who have market ready firms to hand over?
[00:06:49] Speaker B: Yeah. Five to one is our numbers of buyers coming in compared to sellers coming in.
[00:06:55] Speaker A: Are these are qualified buyers that you're. That are like ready to write a check or are these people that are just kind of looking around and talking about it?
[00:07:02] Speaker B: Five to one is interested buyers. Qualified buyers take a little bit more. Right. And the numbers probably lower. It's probably a two to one, but still, you know, still significantly higher. I think the biggest thing, you know, and I do a lot of talks about this, attorneys aren't retiring. And once they build a pretty good PI firm, a lot of them, the only motivation they really have for exit is to have a succession plan. Like, what is, what is the plan if, you know, something happens to me, right. Health, you know, get hit by a bus. Anything else from that side? Because, you know, for those that have built successful practices and they've really built the business systems and everything else, or those that are in the process, they're enjoying the benefits of that and probably have some flexibility.
And lawyers are scared of the r word of retirement because we've been lawyers some of these for four or five decades. Right. And they've been lawyers that long. And the fear of, well, what do I do if I'm not a lawyer, right. Really hits home. And so we go through a lot of what I'll call emotional counseling of, you don't have to stop being a lawyer. There's lots of things through this transition based sale of pairing up with a growth focused firm. They usually still want the seller to be there for branding, marketing, other knowledge. It just takes the burden of what is my succession plan off your plate, and it allows you to monetize your value now to enjoy retirement, to do some things with. Carry that forward.
[00:08:32] Speaker A: Yeah. So let's talk about the multiples. What are we talking about? Is it a revenue, is it Ebitda?
What are the multiples and what's the basis for a transaction?
[00:08:43] Speaker B: Yeah. In our world, we look at valuation approaches, we look at revenues, we look at market comparables, because we've been tracking that data for the last decade. We, of course look at asset approach, which in the PI space means case inventory. So you're looking at current case inventory intake numbers to look over and project that. But at the end of the day, really, deals get done based on EBITDA. Right. It gets done on how much cash does this firm, you know, produce to the owner. What is my benefit of ownership is what I tell everybody is really how deals are structured and done. If you're going to bring a bank in to finance part of the acquisition, that's what the bank's looking to. Right. They're looking to that deal. If you're looking for a buyer, and, you know, most buyers in the legal space want to buy cash flowing deals. And so overall from that structure, they're looking at that to say, how can I buy this? Pay a purchase price, and then hopefully, you know, still cash flow going forward from that aspect.
[00:09:43] Speaker A: So, and definitely are you seeing on EBITDA and. Yeah, yeah, obviously there's going to be at least geographic and work in progress valuation fluctuations, but just give us a range here.
[00:09:59] Speaker B: Yep. PI usually leads the space as long as there's good case inventory and there's good brand side strengths, meaning marketing, you know, brand recognition, everything else. If it's a referral only kind of personal, you know, real, fewer cases, but higher case values, that might be a little bit less. But typically our multiple somewhere between a 2.5 to a 3.5 on, you know, EBITDA. So if your average EBITDA is, you know, a million dollars, you're talking, it could be 2.5 or it could be 3.5.
[00:10:29] Speaker A: That's a pretty tight range, though. You're not saying it's between five and 50. I mean, like I'm in the SaaS space, you get stuff as low as six and as high as you really do have a ten x range multiplier in there based on certain metrics. So two and a half to three and a half is pretty straightforward.
And then what, what kind of sale sizes are you seeing in this space? And is there like a, is there like a low end and a high, obviously high end? Probably not as important here, but is there kind of like a smaller shop size that you're hitting a floor on? And what are the normal sales?
[00:11:03] Speaker B: Yeah, absolutely. And you know that normal sales too, especially in the plain of space, two and a half to three and a half. We are seeing the larger plan of firms, of course, surpass that three and a half. They are getting to up to the fours and beyond because they've really proven the business model. They've scaled to a certain point. They've got enough case inventory, everything else to do that, and then it's just finding the right buyer for them. But the typical deal that we see, if you go to the lawpracticeexchange.com now and look at the market, marketplace, we have a lot of self users going in with very small firms. But in the plain of space, the average deal that you're looking to get done is somebody who's doing hopefully at least two and a half to 3 million in EBITDA per year. The coveted, the higher multiples, they're looking for 10 million EBITDA and above. And that's what I mean, that would be the seller that is in more demand because there's more buyers looking for you. Lead your market, hopefully, or you're a top in that market. If you have a 10 million plus cash flow per year, you might be number one in your state or number one in the metro or a multistate practice at that point. But our normal one that you really look at is probably marketing brand dominant in a city or a metro, they're probably doing somewhere between two to 5 million in net cash flows to the owner. It's a good healthy practice. That owner probably still participates in reviewing, you know, settlements and coaching team and everything else, but they can be transitioned out pretty you know, easily, and the brand can stay in place and the intake and the systems and everything else can be scaled up.
[00:12:50] Speaker A: And how long are these transactions taking? From a first handshake Zoom call to, you've got a deal done?
[00:12:57] Speaker B: Yeah, very. I mean, we've had them, of course, as quick as six months to entering market to a deal done. But I'd say on, you know, traditional transactions, because these are lawyers, and lawyers like to go through things go through dot the I's, cross the t's, but also lawyers get busy with their own practices, and that usually will delay our buyers somewhat or anything else. Twelve to 18 months is really when you look at entering the market as a plaintiff firm, you should look at twelve to 18 months. It could be longer. Like I said, if you're a smaller, smaller municipality or geographic area or you've got a little bit more referral firm otherwise to do that. So times the biggest asset in the market openly. It's a confidential marketplace. So it's really like going in and saying, hey, I'm not ready for two or three years. Great, go in now. And it's much better to tell people no than to have to accept the only yes. Right. I mean, like the only one and everything else.
[00:13:57] Speaker A: And if you're listening, let me just call that out, because that's huge. Tom, you're saying if you're thinking of selling your law firm three years, five years from now, you want to enter the marketplace, you want to start conversations two years before you are ready to sell. That is a very long lead time. If I'm trying to sell my house in Little Rock, Arkansas, I need two weeks to do that, you know, to get that on the market, and we're off to the races. This is a very long transaction process. Even though there are more, even though it's a seller's market, it still is taking time to sell. So that's, that's really, really important. And as a next question that's related to that, what are you recommending to law firms? If I'm thinking, hey, I might want to retire, hey, I just might want to sell my law firm, go do something else. What are the three things, and you're going to have to narrow it down. There may be more. What are three things that you should really be thinking about to package your law firm up, to get it ready to sell for the best multiples and to condense that transaction time as much as possible? What are three things you can be doing?
[00:14:58] Speaker B: Yeah, I'd say first is get your house in order. And I tell everybody valuations are made up of really three components. You have your financials, which is what you and I have just been talking about. How much profit are you making? Is your data clean your financials, are your margins in line to do that? That's going to help you on valuation, to maximize that. But also, if you find a deal, it's going to be financial discovery. And so making sure you have that data, the second piece of that is really your systems. And so if you do not have the software that you really need with the data in the systems, if you do not have the data and the KPI's that you really want or the systems that you're really hoping for, and this comes into software, it comes into just employee HR systems, whatever you really have, go through that and in that category, in systems. That's a point where we always, people ask all the time, well, how can I maximize the value of my firm if I'm looking to build? Well, invest in systems and delegate attraction principle. Delegate to, elevate, but build good systems and then delegate to your people on those systems so that you as the owner become less needed. You have then typically a more sellable firm because a buyer is going to come in and say, oh, Gabriel, this is what you're doing for the company. We can transition you out of that versus, oh, you're here and you're here and you do this, too, and you do that. That seems a little scarier to a buyer. So get your house in order through those. The last piece of the component of evaluation is your ip, your brand. And so if you don't have your brand coupled with your systems, coupled with your financials. Right. You know, to really do that, that's a key part to lock in on. The second thing that I would really say of, you know, looking to sell or anything is know what your value is like today, know what the value is of your firm. That may be surprising good or surprising bad to you, but we have firms all the time that will get a valuation and then come back to us twelve to 18 months later to get it revalued, just to know what they have in the market. Our goal is to do market valuations and really to say you're here now. If you're building to sell, truly, then knowing what you have now and knowing where you want to get to is going to be you're here and you're here because these key value drivers are negatives. These are positives, right. These are good things you're doing. These are bad things. You need to increase your profit margin. You need to go through that. And so really getting that valuation, knowing what you have and then potentially looking at the third piece is what is your timeline? I mean, really know what your timeline is based on what you and I were just discussing. If you say, I want to be out in three years, well, then you better be in the market today, you know, exploring and everything else. Because three years with giving transition to a buyer, you know, needs to happen today to find complete and then transition. And if it's, you know, five years, then good. You're giving yourself time to really explore the law firm marketplace, you know, compared to others. Right. If we were selling laundry mats, it moves slower, but it's picking up pace, it's picking up better quality buyers and sellers. But still to that point, time is the biggest asset or it's going to be your biggest liability.
[00:18:21] Speaker A: Sure. And just to recap, so three things, get your house in order. Your financials, your technology, systems and people and your ip and your brand. So getting your house in order, get that valuation, nail it down, make sure that it's something that you want to work with in terms of doing a deal and fix that if that's a problem. And then know the timeline for the sale, for the transaction, and also for the transition, which is what I want to talk to after one more question on this note, which is what are you seeing as the big deal killers in the space? Why do deals not go through?
[00:18:55] Speaker B: Yeah, I would say two components. One is really having, you know, knowing the value of what you want and conveying that to buyers. So we've had lots of buyers and sellers come to us after months of discussing not really get anywhere, but having really not focused on the financial metrics, focused more on like the fit, like they like each other. It seems like a good fit, but seller may want too much, buyer doesn't want to pay that. So going back to knowing that value, the other part of deal killer for us is on seller emotions.
We were talking about at the beginning. Retirement is scary and we've dealt with it for a decade and it should be. But there's lots of ways that we've worked with sellers to explain like, yes, it can be scary but can also be good, right? Like look at these different things and there's a lot of fear over loss of control and everything else. But I think seller to recognize that is huge is like, this is an emotional process for me. I need to recognize that early and just, you know, have somebody to talk to. Have somebody as an accountability partner, but also buyers to recognize that, because when deals really work well is when the buyer comes to say, hey, Seller, you've built something great. We really don't want to change a lot of that. Like you've done well and we want to keep. If you want to stay like you hold value, right. And everything else, and all of a sudden you just see, like, the seller's shoulders drop, like things get a little easier. Right. They breathe a little calmer because that is their big fear. It's the fear of change that comes with exit, retirement, the next stage in life, because for the last 40 years, this is what they've been doing. So emotions.
[00:20:29] Speaker A: Yeah, absolutely. Thanks, Tom. And we're getting close to time here. Want to look down the road a little bit. So as a high level, you've got a space where there's around 100 of these transactions happening annually. They're a few million dollars a piece.
Not massive transactions, not a huge market right now. Very niche. If you're looking to sell your law firm, sounds like it's a good time to do that, though. Where is this headed? Give us the view. Three to five years out from here. What's changed? Are people building law firms just to sell them? Is there less activity because we've gone through a wave of it and we're at a peak. What does it look like down the road? And how can sophisticated law firm owners who are running firms today take advantage of the change in trends?
[00:21:15] Speaker B: Yeah, I think the marketplace is building, and it's building faster than I've had the opportunity to see it. Hopefully we've contributed to that. But I think a big, you know, there's some, you know, factors to it. One of the biggest factors is Arizona and Abs. So with alternative business structure and what's happening with mass tort and plaintiff firms in Arizona, just having alternative buyers. Right. Makes different things move. And, you know, that is really kind of shifted.
You know, just the landscape in the future. Look, now, again, we've got a lot of other states that the dominoes have to fall. I know there's alternative structures that are being examined of how to build firms based out of Arizona. But at the end of the day, I think that's the biggest thing. We'll actually see a speed up, I think, in the amount of transactions. And again, hopefully a normalizing of, yes, this is what you can do. Here are the multiples. Here is the process. I mean, that is our goal is to really lay that out so that as an attorney, you can sit there and say, great, I know what my value is, I know what my timeline, I know what kind of buyers, because I think that's what the other professions enjoy. But they're a decade or so ahead of us, and that's really our goal to get there. So I would say the values are creeping up to your point, Gabriel, we are seeing kind of the next generation firms build to exit a little bit more. Like their goal is to build with an exit in mind, where our current sellers didn't start their firms with an exit in mind. Right. They started their firms to be good attorneys. They built it with business in mind, but they really didn't look at the law firm exit or sale as that opportunity. But our next generation attorneys, they're focused more on systems, they're focused more on building value, and they see this as great. If I get to this point, I will be increasing my value for when I'm ready to retire, and maybe I don't want to retire at 75. I'm going to retire at 55 because I built this value, and I'm going to exit it.
[00:23:12] Speaker A: Fantastic. Thanks for the look ahead there, Tom. Really appreciate having you on here. It's been fantastic to chat with you. I would personally tell anyone who's looking to buy or sell law firms to go look at the law practice exchange, reach out to Tom. Great guy to talk to. And this is a very bespoke place still to buy and sell law firms. So you need an advisor. You need someone who's been down the road. Tom is one of the very few people in the country who's been on more than a dozen of these transactions. Probably count that, that group of people on one or two hands at this point. So very, very deep knowledge of the industry. This is one of the few places you can find it is actually talking to Tom. So, Tom, thanks for being on today. Wonderful to have you and hope to have you back on again soon.
[00:23:56] Speaker B: Absolutely. Thanks, Gabriel. Appreciate it.
