Law firm transition planning is trying enough to firms. The process is often further complicated when determining the value of a firm as a going-concern. Senior partners are often dismayed at the unwillingness of junior partners to attribute any value to the firm beyond asset value, including AR and WIP, less any debt.
Most transitions are dependent upon keeping a retiring partner’s clients and on having junior partners willing to share a portion of future profits of any transitioned clients. Beyond future income sharing, going-concern value, if any, is typically limited to the amount it would cost the remaining partners to start a new firm and possibly a convenience factor.
It is helpful to organize the valuation process into components as follows:
- Net realizable value of the firm’s assets less liabilities;
- A convenience factor related to a functioning firm;
- The value of ongoing client relationships;
- “Going-concern value” which is the value of a firm’s intellectual property, systems, processes, procedures, and trained staff, reputation, surviving panel counsel appointments, and any unique distinctions*.
*Adapted from http://www.businessdictionary.com/definition/going-concern-value.html
Valuation techniques are discussed separately in the valuation section and our purpose now is to answer the following question:
What can a law firm do to create more going-concern value?
To start, a law firm can build repeatable processes that encourage consistent client service and practice efficiency. As an example, a client of ours is adapting a popular cloud-based application and related plugins to manage client case communications and internal case management. Using this automated communication workflow, the firm’s lawyers and staff communicate significant case developments in real time and simultaneously enable a consistent case handling and client communication process.
Marketing automation software is another example of how a firm can lessen its reliance on the relatively few lawyers who develop business. Good marketing automation software contains built-in best practices and marketing tools that can raise the level of the firm’s marketing competence.
These systems enable all lawyers to contribute to the firm’s marketing effort. A junior lawyer can increase her visibility by developing content that is relevant to a target audience. This audience can eventually become followers and contacts.
Dedicating a portion of the firm’s resources to building a competent marketing and business development system is another important step in creating going concern value.
Creating going concern value requires modernizing the firm’s business processes to the point that they become a platform. Many firms suffer from business processes, procedures, and systems that are ad hoc and intermittently efficient. Most firms struggle to invest the time and money to create any real institutional value.
Firms who fail to invest in building repeatable processes can only claim minimal going concern value. In instances where technology, process and personnel skills are outdated, negative going concern value is indicated.
If the company can create a platform with a value that extends beyond any one client relationship, institutionalizing many of the current administrative processes is necessary. Adopting cloud-based technologies and software applications that can provide needed structure are recommended.
We recommend the following applications for consideration:
- Client case management and engagement software;
- Cloud-based email and Office;
- Automated Forms and Electronic Signature Application;
- Integrated Document Management with Secure Email Transfer;
- Web Development;
- Automated Planning Software;
- CRM Software; and
- Marketing Automation Software.
Each of these applications can transform the companies ad hoc process and create going concern value. Building a perpetuating firm will require institutionalizing many of the manual processes and procedures. It will also require a substantial knowledge transfer from the senior partners. The idea is to institutionalize as much of this knowledge as possible. Combined with talented lawyers and staff, a firm can significantly increase the chances of a successful leadership transition.
The right software applications can capture best practices and turn them into repeatable processes. Building going concern value that transcends the reputation and referral network of the senior partners is an essential element in the creation of going concern value (something worth buying).
- Client engagement applications, when adapted, are designed to create a consistent interface for clients, lawyers, and staff. Creating service levels and tracking performance can lead to insightful performance metrics. Automated workflows can provide clear and timely communication. Escalation workflows ensure that service levels remain high.
Combined with competent lawyering, a firm can become an easier choice for clients, which is a deterrent to switching to another law firm.
- Cloud-based email and Office (Work, Excel, PowerPoint, Skype, etc.) applications ensure that the firm’s licensing and software versions are all up to date. Additionally, as all email is in the cloud, a much simpler disaster recovery process is available.
Many firms have already converted to cloud-based email and Office applications. Firms that are using non-Microsoft applications can enjoy the same benefits. Lawyers and staff benefit from the most current versions of the most popular office applications. Once fully converted, a firm can redirect resources into higher impact areas.
- Automated forms, templates, and electronic signature applications create consistent processes where they to do not presently exist. Uniform document templates, forms, and electronic signatures will significantly reduce paper filing and enable fast and efficient workflows
Once created, this collection of forms, templates, and document signature workflows will create a compelling reason to maintain the current firm. Recreating these processes during a new law firm start-up or lateralling to another firm could require a prohibitive amount of time and cost.
- Integrated document management and secure email applications provide encrypted email, robust document storage, advanced file sharing and basic to complex document management. Cloud-based systems eliminate the need for most in-house servers, which can improve functionality and reduce IT expense and downtime.
Integrating a fully functional document management system with the firm’s other client service applications also creates a strong argument for enhanced going concern value. It also increases the risk and complexity of starting a new firm.
Bootstrapping or recreating these processes, assuming they are competitively superior, is expensive and challenging. Clients would likely notice a negative difference, which can create an opportunity for competitors.
- Web development is necessary to improve the company’s website and online presence. Creating a website that is a resource for clients and prospective clients can lead to more business and can keep the firm competitive in an increasingly more digital market. Successful web development requires an ongoing commitment.
Building value in a website is a primary consideration in going concern value. Building out a great website takes hundreds of hours of time and significant monetary resources. An effective website can solidify a firm’s competitive position in search relevance, elevate the visibility of the lawyers and draw prospective client traffic. It also serves as a strong reassurance to current clients that their buying decision is a correct one.
- Automated planning software, especially in sales and marketing can enable a consistent planning process. It can also improve the effectiveness of the sales and marketing personnel. Firm-wide planning software is most useful.
An automated planning process the promotes collaboration among the firm’s lawyers, and management can ensure the efficient application of marketing resources. A well-formed plan that includes clear goals and actions is more likely to receive funding and other resources. Management can then gauge the plan’s effectiveness recommend improvements.
Firms that can add to a lawyer’s personal marketing success can demonstrate a higher going concern value. Alternatively, creating or plugging into a new planning process is disruptive and can stall momentum.
- CRM (Client Relationship Management) software ensures the consistent maintenance of client and prospective client relationships. Automated workflows are available to provide regular communication. A detailed mailing list, buyer personas, indications of client interests, important dates, and contact histories are all components of an efficient marketing process and add to going concern value.
Many law firms are uncomfortable with the active pursuit of new clients. For good reasons, law firms are careful with any direct solicitation. Creating a way of engaging prospective clients on a level dictated by them is most effective.
For example, if a firm creates informative content and experiences high-interest levels (tracked by the marketing automation software), it may decide to create a seminar or webinar and invite the interested prospective clients to participate.
Again, much trial and error are necessary to perfect a procurement strategy, but once completed, the addition to going concern value is significant.
- Marketing automation software (MAS) is a powerful tool for lifting a company’s image and raising awareness among a larger group of prospective clients. MAS applications are the heart of a digital marketing strategy and management of a company’s web presence, social media, client communications, and marketing cost effectiveness.
The right application can provide the best practices, training, support, functionality, workflows and analytics that can transform a firm’s marketing. A properly implemented and well-maintained marketing automation system can lift the performance of the average lawyer.
Firms that can offer their lawyers an automated and perfected marketing process coupled with an equally good procurement system will have the highest going concern value.
Cloud-based technologies that enable advanced workflow and document management, marketing automation, and practice specific applications are improving at a rapid pace. Technology can allow a firm to expand to virtually any place in the world with an internet connection. A distributed workforce enabled by technology can expand a firm’s reach and reduce overhead at the same time. New technologies can improve client service and enhance competitiveness.
Generating more going-concern value requires focusing on repeatable processes and institutionalizing as much knowledge as possible. Creatively adapting presently available cloud-based applications can transform a firm and increase going concern value. Firm’s that rely solely on the relationships and talents of their lawyers and staff have no real going concern value beyond a relatively minimal convenience factor.