There are several ways for experts to calculate a law firm’s valuation.
For a start, there are many reasons why your accountant should never undertake the valuation of your solicitors’ practice. What’s wrong with my accountant, you say? Surely your accountant, given their knowledge of your businesses and their accounting skills, should be perfectly suited to valuing a business?
Based on the many law firm valuation reports produced by accountants, it is safe to say that most accountants don’t know how to value law firms and many of the accountant-produced valuation reports just don’t stack up. In fact, most of these valuations are not “valuations” at all – they’re simply calculations (i.e., net profit x 3 = value) — if your accountant has sold you something like this before, ask for your money back! But that one is for another day.
Whichever method, or combination of methods, you opt for, adding this one strategy to your current workings will maximise the final valuation of your law firm.
Making the “intangible” tangible
Whether an asset-based, market-value, or earning-value approach is used when calculating a client company’s worth, these are all largely based on “tangible” aspects.
Fees, turnover, investments, property, staff, liabilities, etc, can be described by hard data.
But there’s another, equally important aspect of a law firm that should always play a part in its valuation – the brand itself. This is usually the part which isn’t visible in the accounts.
The brand doesn’t need to just be name recognition or clever marketing. It’s your firm’s values, practice management accreditations and certifications, public perception, governance procedures, management structure and strength of middle management. All the things that aren’t so easily boiled down to numbers.
While often left out of the conversation for this reason, the brand is becoming not just an important firm asset – but the asset itself.
Years ago, adverts sold the strength of the product. Whether it was the fastest car, cheapest dinner, or smoothest shave, simple data could back up why consumers should go for one over the other. Now products are sold on the ‘feeling’ the brand provides consumers.
For example, Gillette’s latest advertising campaign wasn’t focused on the product’s benefits, or even the product at all – it was instead about the perception of men in society. Successful or not, this demonstrates the shift towards companies spending big money on building brand perception, rather than just product awareness.
So to get the maximum asking price for your law firm, it pays to include this perception, and understand how to value this in the first place.
How do you put value on your firm’s brand?
There’s a saying that your true brand is what people say about you when you’re not in the room. This is also true of solicitors’ brands, and shows how difficult it can be to put a number to brand value.
There are a few data-based methods to work this out. Client loyalty, the cost of trademarks, and the money spent on historical advertising will provide concrete numbers to use. But feelings are subjective, and feelings towards legal brands can’t always be identified with numbers – so use words to fill in the gaps.
You need to gather as much feedback as you can from your clients, as well as their propensity to recommend it. Use focus groups for evidence of your brand’s perception and emotional power.
Scour social media for instances of your firm’s brand being discussed and assess the sentiment attached to it. This can be towards the brand as a whole, a particular marketing campaign, or social cause your firm may have engaged with.
Once the above is added to your already strong grasp of the more conventional valuation methods, your firm’s value will reach new heights.
Remember, selling your law firm isn’t the only way to move on from it – there are various other exit strategies you could consider instead.
Talk to Advantage Consulting on 0121 212 6580 or visit our website www.advantageconsulting.co.uk about which of them is best suited to your personal circumstances and goals.
