The valuation of a law firm is not an exact science. The actual value can only be determined by marketing the business for sale and then negotiating between a willing buyer and a willing seller. In the absence of such procedures, law firms are normally valued using one of three methods:

1. Applying a multiple to maintainable fee income

2. Applying a multiple to maintainable net profits or earnings

3. Valuing the net recoverable assets of the practice and determining whether to add an element of goodwill.

Usually, firms tend to be valued at no lower than the value of the net recoverable assets. However, if the business is to cease trading, the valuation would be based on the break-up value of the net assets. On a break-up basis, the net recoverable assets would be lower than on a continuing basis, due to:

• assets that do not realise full value once the business is broken up, such as work in progress, unpaid bills, and unbilled disbursements; and
• liabilities for winding up the business such as accounting costs, legal costs, regulatory and redundancy costs and, potentially, for involving intervention agents.

Valuation of your law firm using multiples
The valuation multiple will reflect the valuation of goodwill in the business. Goodwill is mainly driven by having a good name, reputation and connection of a business. The calculation of goodwill will be the excess in the valuation of the business over the value of the net tangible assets in the business. To obtain an excess, the estimated annual maintainable profits from the business must be greater than a financial return from the investment in the net tangible assets.

Valuations based on maintainable fee income
Multiples based on a maintainable fee income have been rarely used in the last few years and are only really used when a firm has large amounts of recurring work and fees. Often brokers may quote multiples of fees as a valuation basis, but in reality, when you are buying a firm it is the right to the future profits of the firm that you are acquiring, and so multiples of profit are the usual real valuation basis in law firm transactions.