Posts Tagged ‘build net worth’

Monitor and Build Your Net Worth

Thursday, October 2nd, 2014

Copyright: <a href=''> / 123RF Stock Photo</a>My experience has been that the partners of contingent-fee law firms consistently overestimate the market value of their law firm. They are often content having all of their net worth tied up in the firm. But the reality is that a typical contingent-fee law firm has very little equity value in and of itself. The balance sheet typically shows little in the way of assets. So the net value of a law firm – (also referred to as book value), which is the difference between the assets and the liabilities – is extremely low. Often the book value is zero, or even a negative number.

Of course it’s natural for the partners in the firm to think they have a very valuable entity. It is financially valuable to them because it generates cash flow and provides a living for its employees and its partners. But that does not mean it has a lot of market value because the market value of anything is the price at which the asset would trade in a competitive auction environment. Realistically, what would a contingent-fee law firm sell for in an auction environment? The continuing presence of the named partners in the firm is so important to the brand that I think most firms have a minimal market value if the partners are try to sell out.  The firm might be able to sell its cases to another law firm, or transfer them, but the value of the cases would be very subjective and open to interpretation.  Most likely the payments made by the new firm to the old firm would be made over time and would be based upon the actual success of the cases themselves.

Therefore…build net worth outside of your law firm. Get professional investment advice and then put in place a system of saving money and investing in assets in outside ofyour firm (but ideally not in assets that take your time away from your firm, such as other businesses). Create a realistic personal financial statement at least once a year.  Simply list everything you own (based upon current market values) and subtract out everything you owe.  Is it a positive number?  Is it growing from year to year?  You want to accumulate liquid, tangible net worth that can be easily valued in the marketplace. Later in life you’ll be glad you did. And your access to future capital will be greatly enhanced.

You can learn more about this and other law firm finance topics in my book, How David Beats Goliath – Access to Capital for Contingent-Fee Law Firms.

The above material is excerpted from How David Beats Goliath – Access to Capital for Contingent-Fee Law Firms and is subject to copyright protection © by Michael J. Swanson, all rights reserved.


Photo Credit: 123RF Stock Photo

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