The following Practice Management guidance note Produced in partnership with Pathways Management LLP provides comprehensive and up to date legal information covering:
This Practice Note explores the ways law firms can be valued and expands on the factors most likely to influence this valuation.
While there are a number of traditional ways of valuing firms, this Practice Note contains a worked example of an earnings based valuation (discounted economic income). This tends to be the way investors will value a business and, as such is a key calculation to complete before you begin any discussions. It may produce a result lower than you expected but will give you an insight into what an investor or buyer may be willing to pay.
In simple terms, the discounted economic value model takes the future net cash earnings of a business and brings them back to a present value. In doing so, the model attempts to place a value (discount percentage) on the various risks faced by the business in delivering the net earnings stream over a period of years. Most law firms have similar risks, though their scale and impact will vary, as follows:
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