Death and Dirt — How Law Firms Are Valued — For Sellers and Buyers

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[00:00:00] Announcer: [music] Welcome to Death and Dirt, a podcast from the Real Property, Probate, and Trust Law section of the Pennsylvania Bar Association. Join us as we delve into real estate, estate planning, and trust and estate administration. This podcast offers in-depth analysis and education for legal practitioners, real estate professionals, financial advisors, or anyone interested in real estate, trusts, or estates. And now, our co-hosts.

[00:00:31] Jay: Hello, everyone. Welcome to season two of Death and Dirt. This is Jay Hagerman. I'm joined today with my friends and lovely co-host, Jen Galloway and Fred Long. Today we have with us one of my dear friends. I've known him for quite a while. His name is Owen Carhart. He's an accomplished entrepreneur and business leader. He was born in Pittsburgh, not too far away from where I grew up. He currently is lucky and resides in Miami, which weather patterns are a little bit more favorable than they are, at least where I'm at right now. He is the principal and founder of Business Optimization Group. It's a consulting practice that partners with leadership teams to improve financial performance, strengthen operations of different companies, support strategic growth, business planning, financial management, execution support, all good things for business. How I met my dear friend is we both graduated, and of course he did as well, from Gettysburg College. We're Bullets, still in the Commonwealth, right? He served on the endowment committee and was a fellow at the Center for Study of the Presidency and the Eisenhower Institute. So we're going to manifest Dwight's image back here and bring some along. He brings a lot of broad business development and financial expertise across multiple industries, including finance, legal issues, which we'll talk about today, manufacturing, healthcare, retail, commercial, residential real estate, even political consulting and fundraising. Owen's never shy about asking people for money. There's no doubt about that. I can promise you that's true. Anyway, he's also served as a trusted advisor for launching new products, structuring and negotiating complex deals, and improving business and operational skills. I think I've checked all the boxes off. Owen, thank you for being here. We're so happy to have you.

[00:02:06] Owen: Pleasure is mine. Thank you all for having me.

[00:02:09] Jay: Excellent. And our listeners today, so typically we talk about a substantive area of law, whether it be on the death side or the dirt side. And we're trying to learn as much as we can for our end user, which of course would be our clients or even maybe advocating in front of the court. But this is a little bit different. This is a direct impact on our listeners because we're going to talk about how to value and optimize your law firm, that business. So you're a lawyer, right? And if you have any equity stake as an owner, whether you like it or not, you're in business. You're just in the business of law. So you have to recognize that. And there are good things and bad things about that. And at some point, I mean, unless death is the only option, you are probably going to want to sell your business or have a succession plan. And maybe you're a young lawyer listening to this. And at some point you want to buy into an equity stake or maybe buy out a lawyer who is getting up in the tooth and wants to sell their practice. This podcast is directed specifically to you. because we're going to talk about how to value the business, the pitfalls, the potholes, the loopholes, all the good things. Owen, thank you so much once again for joining us. Let's just get to it.

[00:03:13] Owen: My pleasure. Again, thank you guys for having me and thank you for the warm introduction. I'm here to answer whatever questions you all have for me, I guess, getting started. I think it's very important as we go through this conversation to define a few key terms because there's nothing more annoying than acronyms that you don't understand. So throughout this discussion tonight, we're going to be talking about three acronyms that everyone should understand. The first one is SDE, which is Seller Discretionary Earnings. The second is EBITDA. a very interesting topic that accounting people love to discuss, which means earnings before interest taxes, depreciation, and amortization. And the other one is KPIs, which are key performance indicators, which people typically associate with marketing, but there are KPIs for all sorts of different operational functions in the business. So when you hear me talking about those, I hope you all understand what they are. And of course, if my hosts here have any questions about the specifics, I'm happy to answer them. I'll turn it over to you all to frame up the meeting.

[00:04:14] Jen: Thank you, Owen. And you know, I appreciate the acronym, the alphabet soup interpretation that you provide us. Although I will say Jay has made very clear that his favorite is OB3. And I don't think that any of these, even EBITDA is in the running to compete with OB3. You'll have to listen to episode one of season two to know what we're referring to. But thank you, Owen. Thanks for joining us. And I want to just kind of frame this up a little bit for our listeners and ask you to explain for us what a business valuation actually means for a law firm as opposed to, you know, your mom and pop pizza shop or other businesses that might be familiar to people.

[00:04:50] Owen: So very generally, people think that, oh, I don't need or want a valuation because I'm not selling my business. Valuation for any type of business generally is something that you want to partake in because it helps you to understand your own operations. It helps you to understand what you're doing really well and what you're not doing well and look through a sober lens of, hey, here's what's going on in the business. Here's what this business is worth, and here's why it's worth this. And specifically with law firms, it's incredibly important because law firms tend to be... especially small and medium-sized owner-dependent. And so whenever you're valuing a law firm, the dependency of the revenue from the owner is really, really important. And then taking steps to move away from dependency of revenue on the owner, the rainmaker, if you will, is the goal so that you can maximize the valuation. Because if you, Jen, or you, Jay, or you, Fred, leave your law firms tomorrow, and half of the revenue walks out the door, then you have a problem with the valuation. And so providing or doing the exercise of getting a valuation for your business, for your firm, is going to help you to understand operationally what you're doing well and what you're not doing well. It's not an emotional thing. It's literally just, here's what the numbers say, and here's what we do to make... the valuation maximized.

[00:06:16] Jen: I think there's a common misconception around business valuations, especially with law firms. People might think, and I think, you know, I probably [unclear word] guilty of this as well, that my firm is a book of business, meaning, you know, that's what it's worth, the business that I have. Can you explain that a little bit for us? Is that true? Is that a myth? Is that a misconception?

[00:06:35] Owen: Yeah, I'd say that's the major misconception because the value of the firm is not the clientele. It's not just the clientele. Of course, the clientele is important, but really the value of the firm is the operational process that the firm has in place so that their practice and the services they offer can be repeatable. For example, if it is just the book of business, then the value of the firm is very, very low because that firm is dependent, going back to dependency on the owner, it's dependent on one single person to bring in revenue rather than a repeatable marketing process, a repeatable sales process. These processes and the know-how and the expertise and the quality assurance and quality control are what matter to a buyer. They don't care if you have a $100 million book of business. It doesn't matter if the minute that you leave, that $100 million also leaves with you. Or maybe we use a million dollars as the example, because it's a little more digestible probably for most people. But you understand what I'm saying. If you leave and the money leaves, your business is worth nothing.

[00:07:41] Jen: You gave a couple of acronyms in the beginning. Can you, I guess, start where you'd like? I'd like to know some of the basics of a business valuation, but if you want to, in answering that question, specifically tailor it to law firms, that makes sense for our listeners as well. Why don't you break down for us the SDE and the EBITDA abbreviations and the differentiations between the two?

[00:08:02] Owen: So law firms typically are valued... Most law firms, not large law firms, but most medium to small to medium sized law firms are going to be SDE valued because there is ownership dependency. That's not a bad thing. It's just the way that they're valued. SDE, again, seller discretionary earnings. So whenever somebody is buying a business based on seller discretionary earnings, what the buyer is asking is how much money am I reasonably going to be able to take home if I purchase this business? So we're going to calculate what the business has made over the past three years. Perhaps we go back the past five years. We're going to look at what attrition might occur when the owner leaves. Probably going to assign a lower multiple on this type of business because of ownership dependency or the semblance of it. And we're also going to start discluding certain things, right? So whenever a smaller firm is owned by an individual, one individual or two individuals, typically inside the books. There are expenses that are what are considered discretionary earnings. Those get added back to the value of the company because if you're a quote unquote professional manager, maybe you're not going to have as many client meals. Maybe, you know, you can operationally determine like based on looking at the books, like, well, I would never spend that much on meals entertainment, right? You're looking at the P&L, you're saying this expense here. probably should be added back to the value of the business because I wouldn't have made that expensive if I were operating the company. This is how you work with SDE. Because you're not just purchasing a business, you're in a way you're purchasing a job. You're going to fill the shoes of the exiting owner and then you're going to therefore run the firm. And that's what you're looking at. If I run this firm, how much money am I going to be able to extract? from the firm. People don't buy businesses, they buy cash flow. And that's really, really important to understand. It doesn't matter if you make a million dollars a year, your revenue is a million dollars a year or $5 million a year. It doesn't really matter. if the owner is not able to extract money from that million dollars a year. And so that's very, very important to understand on the SDE side. And this is typically for small to medium-sized firms. Now, medium-sized to large firms are likely going to use EBITDA when they're doing their valuation. And we're going to move forward in a minute on three different types of valuations, but EBITDA... is typically used for law firms or businesses in general that have management. So the owner is not necessarily the CEO. The owner is not the CFO, CMO. There are layers of management. There are departments. There are repeatable processes. It's literally a corporation. So think of the Edgar Snyder's, for example, of the world. That type of firm would likely use EBITDA. rather than SDE because they have management, they have departments. They operate like a business rather than a smaller firm. Those are the two acronyms regarding valuation that we really need to be focused on this evening.

[00:11:13] Jay: Okay, Owen, so just to back up a little bit, you mentioned a couple things within that realm of describing SDEs and EBITDA. I like to go the kind of Socratic method a little bit of, let's try to teach by analogy and by example. So let's say that we have a guy or a gal who owns a solo shop and they do a million dollars of gross revenue a year. They're bringing in a million in the door. They're getting to be at the age where they don't want to work anymore. And maybe they have a young lawyer or maybe they're trying to sell to another outfit or something else like that. You had mentioned something called attrition. You also mentioned P&L. Whenever we go through this, let's pretend that we don't know anything about this. So what I'm assuming is, and correct me if I'm wrong, let's start with attrition. What is an attrition rate or what is attrition?

[00:11:57] Owen: So attrition is essentially whenever you sell the business and you are no longer involved with the business, how much of the business is going to remain under the new buyers, the new owners leadership. So typically, let's say you do a million and then based on looking at matters, looking at the history of the business, you can say, okay, of that million, 750,000 is going to remain under this leadership. That of course affects the valuation in a tremendous manner.

[00:12:25] Jay: So in that example, you would have an attrition rate of 25%.

[00:12:28] Owen: 25%, yeah.

[00:12:28] Jay: Because only 750, which is 75%, would stay around.

[00:12:31] Owen: Correct.

[00:12:31] Jay: Okay. So then going also, you mentioned a P&L. Now I'm assuming you mean profit and loss statement, right?

[00:12:37] Owen: Yes.

[00:12:37] Jay: That's a financial tool that a bookkeeper tracks and maybe uses QuickBooks and stuff like that. So that also begs the question that these law firm owners that are listening potentially that don't generate P&Ls or that are running their law firms with an Excel spreadsheet. probably to the dismay of their accountant, there's an issue there. So talk a little bit about the importance of a P&L.

[00:12:57] Owen: I mean, having accurate financials is, of course, incredibly important for your valuation. I would sort of push back a little bit on the Excel spreadsheet. It depends on how good they are at Excel, right? You can absolutely run your books on an Excel spreadsheet if you're good at using Excel.

[00:13:13] Jay: I guess I can barely open the thing. I just know it's the green one, not the blue one.

[00:13:17] Owen: Probably a lot of law firm owners are and should be focused on running their practice and practicing law rather than doing books. So another mistake is doing your own books. You should let a bookkeeper do the books while you practice law, while you bring in revenue. I promise. that your hourly rate is probably larger than the bookkeepers. And so, yeah, doing the books yourself is a big mistake. Not having accurate financial statements is a huge mistake. You have to have your books in order. You have to be able to show, here's what my revenue is, and here's how I got there, and here's how much is going to stay. These are the important aspects of looking at the P&L. So I'm glad you brought up books, actually, because the books is where the sausage is made. That's where the real information is on how this business runs. What's being expensed where? Looking at different registers is something that everybody is going to do when they're looking to purchase a business. Like, oh, I spent $100,000 on marketing. Okay, let's go look in the marketing. And it's all expenses that... you know, Dave and Buster's, that's going to affect the valuation. So having really, really clean books is important.

[00:14:28] Jay: That'd be quite an interesting clientele base, I suppose, right?

[00:14:32] Owen: I mean, I wouldn't have brought it up if I hadn't seen it.

[00:14:36] Jay: That's scary enough, right?

[00:14:38] Owen: Yeah.

[00:14:39] Jen: Okay. So Owen. Jay gave us the example of a solo attorney wanting to sell to another firm or perhaps a young attorney is coming in interested in acquiring that practice. How do you look at valuation? What are the methods for valuing that firm?

[00:14:56] Owen: So generally speaking, there are three methods generally. of how to value any business. The first is the income approach, which is mostly what law firms are valued by. The second is a market approach. And the third is an asset-based approach. Asset-based approach is most of the time the least valuable way of evaluating a business because law firms don't tend to have tremendous amounts of assets outside of cash. Construction companies, you might use an asset-based approach because they have tons of equipment. For the most part, for listeners here, we can throw the asset-based approach away. Income is going to be the normal way that law firm assets are evaluated because what, again, going back to what I had mentioned earlier, whenever you're purchasing a law firm, you're purchasing cash flow. And what does that mean? You're purchasing cash you can extract from the business over time. The market-based approach though is important. So if you are going to have your business, your law firm evaluated, what you want to do is you want to use the income approach. to do an initial valuation. And then you want to check your valuation against the market because in the market, there are buyers and sellers. And there's information out there of what buyers are paying for specific types of law firms. If your income approach comes up with a valuation, but the market approach doesn't support that valuation, then you have to adjust the valuation so that you get to somewhere where it's actually sellable. So using Jay's example, the gentleman or lady who is selling their firm has $1 million in revenue. We have a 25% attrition rate, and now we have a $750,000 annual revenue assumed to be coming into the firm after the owner leaves. we're going to one, make a valuation based on that $750,000 worth of income, but then two, make sure that that valuation is something that the market actually will buy. Because currently, the current way things are, there are more sellers in the market than buyers because we have an aging population. We haven't talked about the great resignation yet, but we have more people selling their firms than buying their firms. And when you have more sellers than buyers, is a buyer's market. And so the valuation has to match what people are willing to pay.

[00:17:16] Jay: Let's stick with that for a moment. You mentioned the great resignation. Let's talk about that because it's something that I think it's on the minds of a lot of practitioners who are looking to exit. And frankly, I think it should also be on the minds for younger attorneys who are looking to build a practice. And I don't necessarily want to overly emphasize that point, but I really do genuinely believe that there is more opportunity right now for young attorneys to build a practice than at least in my lifetime. So can you talk a little bit more about what the market looks like? right now.

[00:17:53] Owen: Firstly, you're 100% correct. For younger attorneys who are looking to acquire a book of business, this is the best time ever to acquire a book of business. You're going to get the best price. You're going to get the best book of business that you can possibly get. Because as I mentioned earlier, there are going to be more sellers than there are buyers. People looking to exit their business, looking to retire and annuitize, if you will, their business or get a cash payout for their business. It's a reality check right now, because if you've just been running your business the way you run your business, you don't have clean financials. You haven't taken the steps to get the valuation, the highest valuation to deliver the most value. to the person buying your book or that you want to sell your book to. They're not going to buy it from you because the guy who did do that is going to win the sale at the end of the day. And that's the reality of the market right now, for sure. There are more sellers than buyers. It's a buyer's market.

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[00:19:37] Jay: You mentioned a cash buyout, and I think we talked about, perhaps we did, or maybe it was something that we talked about before we got started, that the cash buyout method, and correct me if I'm wrong, I'm kind of speaking out of pocket here for a moment. The cash buyout method is often... more of an option for larger firms, whereas an earn-out structure is often more appropriate for smaller firms. Do I have that right?

[00:20:07] Owen: Sort of a no.

[00:20:09] Jay: Sort of a no. That's why you're here.

[00:20:12] Owen: Here's the reason. It really depends. And this goes back to the SDE and EBITDA, the way we look at the financials, right? And let's go again back to Jay's analogy of the person who has a $1 million year revenue firm and 25% attrition. And that person says, you know, What I want for my firm is $600,000, right? Again, we're making up numbers, but just making up numbers, it's probably worth $600,000. And so paying the $600,000 in cash with a few small contingencies to make sure the business doesn't walk out the door, that's a good deal. right? That's a reasonable offer because you can reasonably assume that that $600,000 is going to be there next year. You're going to be able to, and I keep saying this, extract that cash, some of that cash after the operations from that firm, from that book of business. Now, if you have, again, using the same example, million dollar firm and 25% attrition after the seller leaves or the principal leaves, and that guy wants $2 million. Well, we're going to need to do an earn out because you're going to have to show me that your firm's worth $2 million. So you're going to work for the next three years and make sure that every single penny is transitioned over. Every single operational advantage that you have is transitioned over. It's much less about size than it is about operations and how your business functions.

[00:21:42] Jay: So would it be fair? I think a lot of times in the sale of a business, a lot of people are familiar with the concept of a multiplier.

[00:21:49] Owen: Sure.

[00:21:50] Jay: Correct me if I'm wrong, but is it fair to say with the analysis that you just went through that a cash out offer may be more likely if... we're using a low multiplier where an earn out may be more appropriate with a higher multiplier. Does that make sense?

[00:22:09] Owen: Yes and no. I'm sorry.

[00:22:10] Jay: 0 for 2.

[00:22:11] Owen: You know, it's like, and I'm not the lawyer, right? So I don't recall. But essentially what matters is the predictability of the revenue. And that's what matters. If I buy this, how much money, how much... profit am I going to get from it? It's not about size or structure. It's about predictability. It's about de-risking the asset, making it not a risky bet. So the more I can show the buyer, or if I'm the buyer, the more I can see that the risk is minimized, the more I'm willing to pay for it.

[00:22:45] Jay: So in our analogy, we have a million dollars gross revenue every year. And let's just say that our profit every year is 250,000. So that means our margin is 25%. And I have that for 10 years straight and it is super predictable. So I know that hopefully after 10 years, if I pay a number, let's say 750,000, I know that I need to basically for three years, the next three years, and I'm taking $250,000 out every year, that's going to take me three years at that predictable model to recoup my investment of 750,000. That's probably what you do and how you advise your clients, right?

[00:23:22] Owen: Absolutely. We advise on two different ways. So one is what you just mentioned, but the other is also yield, right? So when you buy a business, you're looking to extract cash. Just like whenever you buy a rental property, you're looking at how much cash am I going to extract net at the end of this? purchase. It's not just about the asset itself. It's also about what it's yielding. So let's say an opportunity cost, which we had mentioned earlier, or opportunity cost is I have this $750,000 to buy this business. If I put this $750,000 into the stock market, what percentage am I going to make year over year, depending on the asset allocation, right? If I put it all into really safe bonds, okay, I'm going to make 4%. Now, if I put $750,000 into this business and I make profit yield $250,000 in cash a year, it's much better than 4%, but the risk is higher. So that's the opportunity cost, right? Did that answer your question, Jay?

[00:24:24] Jay: Yeah, I get it. And that's one of the analysis that you probably have to conduct with your client, especially probably with sellers, right? Because once again, it's like if I get this cash on the table now, right? And then I do take that investment and throw it into my stock market for my retirement. Am I deleveraging my risk because I don't have to practice law anymore? And all the stress and malpractice and nonsense is gone.

[00:24:44] Owen: Well, and that's a great way to approach it. But also the problem with sellers is the ego, right? They think their business is worth more than it is. And they haven't done best practices, best financial practices, best operational practices. Instead, they are like, oh, I have a million dollars a year firm. It's worth $3 million. Well, why do you think that? You need to answer certain questions like how long, to your point, how long is it going to take me to recoup? my initial investment and break even on this thing? Or how much cash am I going to be able to take home from this to support my family, to invest in other opportunities, etc.? Those are the questions we're trying to answer.

[00:25:24] Jay: So you've touched on that. I want to go specific. So we talked a little bit about this theory of the different valuations, the different analogies. Can you tell us whenever you, and I know that you advise many law firms across multi-jurisdictions, specifically what value drivers, if I want to maximize the value of my business, what value drivers do you see whenever you're valuing and advising clients in a business?

[00:25:47] Owen: Number one, when you're valuating a business is We're going to look at the financials, obviously. So having strong financials, being able to report your financials on not just cash, but also an accrual level because cash-based accounting is great. Cash-based accounting doesn't reflect work. It reflects cash flow, which cash flow is very important, but you need to be able to also see how the business performs on a matter level. When it comes to law firms, being able to look at each type of case. and be able to say, this is repeatable. This... type of case has this much margin. This type of case has this much margin. And also being able to explain why you maybe loss lead with certain types of cases, why you take on lower margin cases and don't get rid of them, how these things connect to each other.

[00:26:38] Jay: So let's back up a little bit once again. So let's break this down to our audience. When you talk about mattering, what you're saying is if I'm an estate and trust attorney, I can say if I do estate and trust planning, the average will-based plan is this. revenue plus this margin. The average trust-based plan is this. If I do a probate case, it's this. If I do trust administration, this. If I do elder law crisis, it's this. That's what you're talking about, the granularity of breaking it down, even in the realm of estates and trusts, just per discipline, per actual thing that we do. That's what the granularity you're talking about, right?

[00:27:10] Owen: Yep. A hundred percent. You need to be able to, as a business owner, that's the business of what you're doing.

[00:27:15] Jay: Right. Got you. And you're also, once again, you as a professional do this and we do it all the time to our clients, loss leaders. What are you talking about? It doesn't make sense. I don't know. It doesn't sound good to me.

[00:27:25] Owen: Yeah. A loss leader is essentially a service that you provide where you don't necessarily make money or might even, that's what's called a loss leader, lose money, but you do it in order to get the people into the door.

[00:27:36] Jay: So in our profession, would that be, would a loss leader hypothetically say, it's like the Gillette model for simple wills. I write $100 simple will for well knowing that at some point in my... career, hopefully, I outlive the decedent and their executor comes to probate the estate with me, which then I can make money on the estate administration. Is that a fair analysis?

[00:27:56] Owen: 100%. And then to sort of further your analogy, if you were to purchase a book that was valuated at a certain price, we would take into account the clients that have wills and trust with that book, because those might come your way as well.

[00:28:11] Jen: You hit the nail on the head there, Owen, because for, I think, a decade and a half that I've been practicing law now, I've had mentors and attorneys that I've worked for that were really big on, I have a will file, that's my future business right now, that's my firm, that's the value. How would you even go about valuing a will file? You know, wills that we prepared for somebody, whether it's the simple will Gillette method that Jay mentioned, or whether it is a sophisticated plan, how do you look at those and project forward revenue to be given to you? are made from those?

[00:28:44] Owen: That's an excellent question. And one, frankly, I wasn't necessarily expecting. Quite simple. In some senses, it's very simple. The more complex that the estate plan is, the stickier it's going to be. Okay. So if I am Joe client and I've come to you for my simple $100 will, it's unlikely that I'm going to have tremendous amounts of assets later on in life, right? At least statistically. And remember, this isn't about emotions or ego. This is just statistics and numbers. So if you have $500, $100 wills, much less valuable than $500, $5,000 estate plans with a million or more or 10 million inside the estate. So you really have to be looking at those plans. What assets were brought forth during that? discussion when those documents were made, how often have those clients come back to update their documents would also be another important factor that you'd want to look at. And then you therefore would assign some attrition to that. There also is broad general data out there about how many, let's again, go back with our 500 wills or 100 wills. There's going to be general statistical data of how sticky those $100 wills are. So we would apply that data to those wills and say, okay, you can likely expect this many are going to return when a person passes. We just have to use data, available data, which is imperfect in order to attempt to determine what that's worth. But also with the understanding, and I think it sort of tracks, you guys can tell me, but the more sophisticated the estate, the more time that's been spent on building out the estate plan. clearly is going to be stickier because a tremendous amount of trust has been placed into the people that have made the plan.

[00:30:33] Jen: One thing you mentioned there, and I think it ties into best practices and things we can do operationally speaking. You spoke about operations several times now. As an estate planning attorney, reaching out to the client, encouraging them to maybe come back and update their documents and having that as a standard operating procedure, would that factor into your evaluation?

[00:30:53] Owen: 100%. And especially if it's documented that you do that. more that you can track that these people over the past 10 years or 20 years, these clients have come in four times and updated their documents. While they were updating those documents, by the way, we produced this amount of revenue. So that's stickier money. That's going to be incredibly, incredibly important in the analysis. What we need to understand and the takeaway for your audience regarding this conversation, it's not about the revenue. It's about the operations. It's about the repeatable processes that prove out your revenue and de-risk the asset. That's what's important to the buyer.

[00:31:27] Jay: You know, one thing that that... raises in my mind, and I don't mean to generalize, but I think there are a lot of small practices where those operations, as people get older, they're not thinking about improving their operations. They may be using outdated software, technology, processes. They're just not thinking about that. They're thinking about their retirement. And maybe at least in my mind, what I'm taking away from this conversation is that people probably should be thinking about those processes. And so is there anything, tips right off the bat, someone calls you and says, hey, Owen, I need to kind of get things in order. What are some low hanging fruit that people could take a look at and potentially improve?

[00:32:09] Owen: Okay. So one of the biggest, again, depends on the firm, is client concentration. If your firm relies, if 50% of its revenue is from three clients, it's a problem. You need to branch out and bring in more clients so that you're not dependent on one specific client. Number two is especially if you're thinking about retiring, maybe start retiring now and building leadership within your firm and delegating roles and responsibilities and operations so that the business isn't dependent on you. That would be a huge low-hanging fruit. Start delegating now. And a lot of this is setting ego aside and saying, maybe we will do $100,000 less because I'm not going to be involved this much. But how much does that matter in the valuation? Not that much. Because at the end of the day, we're going to assign attrition anyway, right? And so set aside the ego. It's time to say, okay, let's delegate some of these tasks now. Bring on another attorney into your firm so that maybe that person becomes the buyer. If you're thinking about your retirement, mentor someone and teach them. And then you can get a good deal for 10, 20 years if you need it, depending on how you want to structure that deal. The other one that's, I think, pretty easy is treat your business like a business. Even if you are the CEO and the CFO and the CMO, Chief Marketing Officer, do treat each of those departments separately because they're different things. And you need to be able, again, operationally to say, well, from a marketing standpoint, this is how we market. This is how we get clients. If we want to talk about KPIs, this is how much it costs for us to get one client. If you're thinking, bring someone in, don't make the mistake of trying to do everything on your own. Bring someone in to help you. Because again, if you remember way back in the beginning of this conversation, I said that it doesn't matter if you're selling or not. What matters is that when you do a valuation, it's a reality check on how operationally your business is functioning. I think those three would be good starts. Delegate now. bring someone else in and just improve generally your operations. If you have bad financials, fix your financials, really important stuff to do.

[00:34:19] Jen: Oh, and obviously the sooner the better is probably the answer. But if I am looking to sell my million dollar business, my law firm business, when should I start contacting you to come in and do this valuation? What's optimal timing for you to value a law firm?

[00:34:33] Owen: Well, I mean, I'm brought in a lot of times like right when the person decides they want to sell, which is a mistake. It also depends on who I'm working. for, right? Because I do buy side and sell side. And so if I'm working for the buyer and then I go to a seller and then they give me their very bad financials and I will find every mistake in there and I will beat them up because I'm working for the buyer. So I'm going to find all the bad stuff. And I'm going to say, you think it's worth this, but it's worth this. Now, when I'm working for the seller, I do obviously the opposite. I defend the valuation. But it makes it a whole lot easier to defend the valuation if I've been there a year or two beforehand so that I can clean up the operational issues. My firm can clean up the operational issues. clean up the bad books. You'd be shocked. Maybe not because you're lawyers, but you'd be shocked how bad some people's books are. And they don't fix them because they're embarrassed to fix them. But I mean, just fix them. I've seen it all. Nothing surprises me anymore. Just like nothing surprises you all.

[00:35:32] Jay: So in the sell side, Owen, we call that, at least in my world, we call that kind of a runway, right? Because once again, you're talking about... recurring, predictable revenue with operations, all the good stuff in a good soup. Jen asked, when should someone bring you in if they're looking to sell? We call that kind of a runway. And I think that I heard you say around two to three years gives that runway some legs so that your company can do, or someone like you can do what you do, absolutely maximize that predictable model so that someone like you can defend the ultimate valuation when you strike that date of sale.

[00:36:05] Owen: 100%. Three years, really, I would say is optimal. If you were going to pick the perfect amount of time, it would be three years. We can fix a lot of stuff pretty quickly, but three years would be optimal. build the runway, make sure the business is optimized. You can then prove out repeatable processes, specifically on the management side, the marketing and sales pipeline side. Those are really going to increase your value. And then the other thing is not to look at it as a cost center. So people think like, oh, this is going to cost a lot of money. Well, it's going to cost money because nobody works for free. But two, if you spend $60,000 or $120,000 or even $250,000, thousand dollars [wording uncertain in supplied transcript] on optimizing your business and you increase your valuation by two million dollars, then not really a cost, is it?

[00:36:52] Jay: So, Owen, just in kind of closing, before we go [unclear word] key takeaways, can you give us some examples of some things that kill valuations? Obviously, we talked about bad books, non-predictable valuations, just anything else, either things that kill that or things you have to.

[00:37:07] Owen: Weak financials.

[00:37:08] Jay: Is that number one?

[00:37:09] Owen: A hundred percent. Yes, 100% weak financials is number one, because if you can't read the financials, then you can trust nothing. So number one is weak financials. So what does weak financials mean? It doesn't just mean you're a total mess. It means you have no accounts collections discipline. You don't really know when money is going to hit. You only track cash basis accounting. You don't do accrual. You should be doing both, right? Everyone should be doing both. No systems is number two. Like you have no systems. You don't actually know where. And again, this is why financials are number one, because you can see bad systems in financials. So for example, if your law firm every month does 500,000 a month, or I guess we're doing the million dollar example, but just for the sake of simplicity, let's call it 1.2. So you do $100,000 a month. Okay, that's great because now we can see you're doing $100,000 a month. Where's that $100,000? Well, we do this for marketing and that's how we get our clients. That's how we get our $100,000. That's excellent. So it's all logical and easy to understand. But what you'll see in financials when there are bad processes is peaks and valleys. You'll see revenue up, revenue down, revenue up, revenue down. And that's because everything's owner dependent. The owner was busy this month going out and making new clients up, but this month he had to do all the fulfillment. That's where you see the peaks and valleys. So that's the lack of processes. So that's number two is lack of processes. Number three is not having a bench and having no succession planning. So you have no other associates, which is okay. I mean, some people decide that's how they want to run their business. We want to make this amount of money and that's okay. There's nothing wrong with that. But if you want to increase your valuation. Having some associates is going to be very helpful because you can transfer that over to the new owner. That infrastructure, that fulfillment, if you will, infrastructure is critical in increasing valuation. I would say those are the top three.

[00:39:01] Jay: I think it's pretty clear that we could probably go on for another hour or two, which I'm sure that our listeners would love that as they drive to or from work or wherever they may be going. I also know, having known you for a while, that you and I could talk for ages about anything we probably could come up with. But I think that that is a great takeaway with learning a little bit about that. Thank you for telling us as instead of practicing law, we are now business owners. And thank you for telling us about how that works. I guess, once again, I'm going to put a plug in for Owen. Once again, he handles specifically law firms and other types of businesses, but he works with law firms. And I know law firms he works with in Pennsylvania, in Florida as well. I've met the principals. I've seen the good work. If you even are interested in contacting. Owen's Group, if you have any questions, I'm sure that they will field it. I'm shamelessly going to say that he is our second season sponsor, so I'm allowed to do this. The phone number is 786-922-0326. That's 786-922-0326.

[00:40:05] [speaker unclear]: Business Optimization Group with the brand new website, bizoptimizers, B-I-Z-O-P-T-I-M-I-Z-E-R-S, bizoptimizers.com. Owen, thank you so much for being here tonight.

[00:40:16] Owen: Thank you all. Thank you for your questions. I hope it's been fruitful and educational for everyone listening.

[00:40:23] Jay: And folks, with that, as I always say, don't let them throw dirt in your face until you're dead. See you next time.

[00:40:31] Announcer: The opinions expressed are those of the host and the podcast guests and don't necessarily represent those of the Pennsylvania Bar Association.