Insight #6 Measuring ‘Sweat Equity’: How to Shape Your Law Firm Legacy
Insight #6 Objective
Generate awareness for your intangible assets, which comprise roughly 90% of the value your law practice. Share a foundational framework to help assess your current situation and set a roadmap for building a sustainable value-creation mindset and culture. Evolve from a transactional practice to a transformational, strategic one that earns month-month traction, equity creation and a generational paradigm shift for your clients, your team and yourself.
~Enjoy the journey…
The true harvest of my life is intangible - a little star dust caught, a portion of the rainbow I have clutched.
-Henry David Thoreau
Creator: RomoloTavani Credit:Getty Images/iStockphoto
At the beginning of this series of Insights articles, which spotlights the crucial question “What’s your endgame as the owner of your law firm?”, we discussed asset valuation as one part of “estate planning” for your law firm. That is, asset valuation is one factor in planning an exit strategy while doing good and positioning a younger attorney to succeed you after you sell.
Our ongoing business estate planning discussion is of vital importance. Roughly two-thirds of all attorneys in the U.S. run a solo practice, according to the American Bar Association. Take the risk-reward curve of running a law practice and now expound it to the next level. That makes building, tracking, and determining your value over time, and avoiding what we call the “delusion of permanence,” essential.
We’re not just talking about office space or fancy copy machines, though. As we listed then, there are also your “intangible assets.” The research firm Ocean Tomo intangibles asset market valuation study estimates that 90 percent of the market value of S&P 500-listed companies springs from their portfolio of intangible assets. Between 1995 and 2015, the share of intangible asset market value increased from 68% to 84%. In July, Ocean Tomo updated the IAMV Study to investigate the economic effects of the novel coronavirus. We find that COVID-19 has accelerated the trend of increasing IAMV share, with intangible assets now commanding over 90% of the S&P500 market value. The growth in the value of Intellectual Capital Equity® can be seen when evaluating the market capitalization of the S&P 500 as shown in the chart below.
INTANGIBLE ASSETS REFLECT THE TRUE VALUE OF YOUR LAW BUSINESS
An intangible asset is an asset that lacks physical substance; in contrast to physical assets, such as machinery. Examples include the Reputation, Skilled learning team culture, Entrepreneurial spirit, Loyal customer base, Backlog, Contract and affiliate relationships, Website and domain, Brand name recognition, Know-how, Process onboarding and training manuals, Systems and procedures, Process and technologies, Client relationship management database, Case management database, Marketing campaigns, Copyrights, Trademarks, Supplier and partner base, Growing demographic trends, Total addressable market, Locations local economy …
For a solo attorney with years of refined craftsmanship under his or her belt, intangible valuation is arguably even higher. Much like we find in our cultural canon—Moby Dick, the Bible, Star Wars, a David Blaine magic trick, Wayne Gretsky ahead of the puck—what is unseen should be seen as more awesome than what is seen.
In other words, your “sweat equity” is worth a lot. Even though historically, most solo and small firm attorneys consider themselves successful, haste, it turns out, really can make waste if your eyes are too focused on the next career move and not on the present. We have talked about this before. Law schools just are not good at teaching the skills of entrepreneurship that produce substantial reward.
How, then, can you best account for these unseen “intangible assets?” Can your firm serve as a model for accruing real value for other attorneys, or potential buyers of your firm, to emulate? Think of this valuation as a dynamic process, one driven by a crucial question: Once you remove yourself and your legacy from the equation, how much is the “stuff” you leave behind really worth? Start accruing=this intangible value now into any succession planning you do..
FRAMEWORK for assessing and building your law firm’s intangible assets
Type of law firm that can take advantage of this framework include: Estate Planning, Family Law, Business Law, Corporate Law, Civil Practice/Litigation, Employment Law, Environmental Law, Tax Law, Patent Law …
1. Talent and leadership Culture
Assemble a collective of attractive mentees and affiliates. Without top talent in place, succession that generates a high-multiple return on investment may be difficult to achieve. Your expertise, toolbox of skills and ability as a mentor matters.
To that end, evaluate the affiliate counsel you use now, how to improve the quality of their work and ways to expand that roster. Be sure as well to continually pay attention to young attorneys circulating within your legal community and to ambitious local law students entering a legal job market that’s gained a measure of flexibility as a result of the COVID-19 pandemic.
You have the opportunity, starting now, to recruit, curate and mentor apprentices, to transfer your knowledge. By association, you make your young’ns more effective practitioners and agents of your firm who can generate business of their own. Here, talent plus time can equal power.
Consequently, there is incentive to build as broad a stable of affiliates and mentees as possible to find that “one percenter” ace to become your successor.
That succession, however, may arguably be only as good as your abilities as a leader. Your firm's culture is a reflection of how well you practice the art of leadership: a self-reinforcing web of beliefs, practices, patterns, and behaviors. Transformational leadership is focused on empowerment and continuous improvement that aligns with your goal of passing your legacy to the next generation seamlessly.
Management is doing things right; leadership is doing the right things.
-Peter Drucker
2. Systems and processes
Being unique and competitive. Practice efficiencies and best practices take time to build. Once capability is maturely established, they become an engine vital to the daily operational practice of the firm. In addition, contributes to the knowledge and preparation you exhibit in court on behalf of clients. To accomplish this optimally, focus and iterate on a narrow set of Key Performance Indicators (KPIs) that tell the story of that efficiency. Think spending-to-budget ratios, caseload vs. case lifecycle, historical profit margin growth, client acquisition cost, motion and case win rates, and other “success” variables,
This could be as simple as an indexed case research file that covers your practice area thoroughly and creatively, something that builds a jurisprudence for a newbie to access the rule of nearly any case at any time. These days, this should also include the technology (database, applications, automation…) you’ve implemented to run the firm, enable client communication, case life cycle management and data-driven insights that inform your legal business strategies.
Can someone step in and “plug-and-play” with what you’ve built? Being smarter, more resourceful and more current than the other guy counts for something. It sets you apart and may be a prime example of your value creation as a position of strength in negotiations.
3. Relationships: Networks and happy clients = Retention and Referral
Generally speaking, solo law practice is a game for entrepreneurs with strong stomachs who hustle. To succeed, you need to put yourself out there. Build collaborative relationships, win respect and trust, follow up, build networks. Then tap into those resources as you carve out your legal niche.
The relationship network effects have considerable value, of course. Yet the true value goes well beyond that. As you seek your next chapter, look back. Think about how those relationships helped bring clients in the door via referral from other attorneys, inspired those clients to give you repeat business and led to new client referral business, thanks to the service level built on the foundation of a repeatable process and technology.
Your ability to leverage all those relationships to generate revenue over the years is something that can be measured through metrics, including KPIs. For example, keeping customer acquisition costs low should be a driver. Demonstrating such a strong percentage will likely be attractive to your suitors. Start with a thousand clients serviced within a given time period. One hundred of those clients do not hesitate to direct new prospects your way, Retain them, and you’ve generated an additional 10 percent in revenue organically.
Additionally, your data will demonstrate the KPIs of when your reached escape velocity on the entrepreneur journey with the help of your network and reputation Did you reach a point of sustainable growth based on client returned attention and referrals, thanks to the strength of your personal and professional networks and systems?
Ultimately, your goal should be to replace someone else’s price with your own value that defines how, and how well, you can exit your practice with confidence. Assess and build your value aggressively You must begin today. Your intangible assets will distinguish you as you proceed.
3. Goodwill: Assigning a number to your good name
Goodwill is an accounting term meant to capture the value of reputation in driving projected earnings and the purchase price. Essentially, this is the primary numerical representation of your intangibles.
Think about and quantify, to the best of your ability, the goodwill have you built up over the years. Are you seen as the “go-to” resource in your community for a particular practice area or type of case? Do your clients and peers hold you in high regard? Have you consistently grown your practice, in terms of local reach, referral pipeline, steady increases in clients and caseload, and profit? Has your ingenuity and professionalism put you in a position of local leadership? Is professional association with you something that is highly sought?
Speaking of which, keep that goodwill front of mind as you nurture your underlings, make investments in technology and perform other tasks as part of your roadmap to succession. Anything that extends or transfers the quality of your “brand” to the people you train and the systems you build keeps your value needle inching forward.
4. Recognition and reporting of intangible assets
Recognition and reporting of your law firm's intangible assets is a necessary part of the firm’s financial valuation. The assistance of a Certified Public Accountant (CPA) and Mergers & Acquisitions (M&A) firm may be of great benefit in normalizing and determining an accurate valuation. Starting with the current inventory of the unique law firm’s intangibles and to help develop a 3-5 year roadmap and plans for specific areas of improvements to maximize your law firm potential. Always ask: 'What's my endgame here as the owner?' Ask that question every day."
Insight call to action to shape your law firm legacy
Practice building and nurturing your sweat equity valuation as the owner of your practice. Evolve from a transactional practice to a transformational, strategic one. Inform your ultimate “exit strategy” and transition with your successor as a result.
Let PrivyCounsel be a trusted partner in realizing your sweat equity. Contact us today
~Enjoy the journey.
2020 INSIGHTS FOR SOLO AND BOUTIQUE LAW FIRMS
To inspire you to imagine, create, enhance, recognize and preserve the intrinsic value in your law business, throughout the journey of practicing law, and as an entrepreneur, student, mentor and leader.
Insight #1: Estate Planning for Your Law Practice - What's your end Game?
“Imagination is everything. It is the preview of life's coming attractions.” - Albert Einstein
Insight #2: Measuring the Health of a Law Firm
“Most people use statistics like a drunk man uses a lamppost; more for support than illumination” -Mark Twain
Insight #5 The Golden Age to Start - Reboot Your Law Practice
“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us.” -Charles Dickens 1812 – 1870
2020 has forced the world to pause, to reimagine, to adapt, and to innovate toward a better future.
~Enjoy the journey in 2021.