Law Firm & Legal Services Business Valuation Benchmarks

Business owners, prospective buyers, and industry investors rely on a diverse set of financial benchmarks to assess the value of a business. We have compiled data from comparable sold businesses to provide insight into the business for sale market and important benchmarks for pricing and evaluating law firms and legal services businesses relative to industry standards.

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Overview of Law Firms & Legal Services Businesses Sold on BizBuySell

Law firms and legal services businesses listed and sold on BizBuySell are primarily smaller solo practices and firms with one to five attorneys. These law firms engage in all manner of legal service and practice areas, ranging from employment law and personal injury, business and corporate law, estate planning, family law and divorce, immigration, criminal defense, and more. Far fewer legal services businesses are also sold and included in this data, primarily legal document preparation services and legal support services.

Law Firm & Legal Services Business Sale & Asking Prices

80% of law firms sold on BizBuySell between $135k and $1.8MM, with a median sale price of $250k and an average sale price of 763k. The disparity between median and average sales price is indicative of the wide range of law firm sizes and relatively small number of much larger firms being sold, skewing the average.

Law Firm & Legal Services Business Valuation Multiples

Valuation, or pricing, multiples are financial tools that allow for comparisons between businesses that have different levels of sales and financial performance. They represent the sales price of a business relative to its revenue or earnings, and given enough individual business sales data, they represent what the market is willing to pay for a business given its revenue and earnings.

Valuation Ranges

Business values and associated multiples are influenced by a variety of macroeconomic factors such as interest rates, inflation, consumer spending, and overall economic growth. However, among businesses in a particular industry, size often matters most, with larger businesses fetching higher valuation multiples. Valuation multiples of law firm businesses typically range from 1.3- to 2.3-times annual owner's earnings, and 0.5- to 0.8-times annual revenue.

Revenue & Earnings Multiples

Earnings multiples represent the value of a business relative to its owner's discretionary earnings or "cash flow". Arguably the most important valuation tool - as seller's discretionary earnings will often dictate how much a buyer is able to borrow to finance the business acquisition - business valuations tend to hinge on a reasonable earnings multiple.

Revenue multiples represent the value of a business relative to its overall sales or revenue. In conjunction with an earnings analysis, revenue multiples are often used as a secondary calculation to validate a valuation.

How to Interpret These Multiples

We calculate and provide valuation multiples from our database of "comparable" businesses sold on BizBuySell. Multiples based on comparable businesses - "comps" in business broker parlance - are useful for valuing businesses for sale. They represent the values at which similar businesses sold, and provide a way to calculate prices based on market values. Business brokers and valuation professionals will always turn to local comps when pricing businesses for sale or evaluating businesses for acquisition. We provide national level data for general purposes.

Quartiles, Median, and Average

No two businesses are identical, and as such, valuation multiples exist in a range. We have carved out four common values within this range: Bottom 25% is the lower quartile, and represents the value under which the lowest 25% of valuation multiples fell. Top 25% is the upper quartile, and represents the value above which the highest 25% of multiples fell. Median is the middle of the range, and average is the mean of the set. Mean is usually higher than the median, because a small number of high value businesses sold at multiples above the upper quartile will skew the average up.

Businesses with consistent financial performance, above average revenue and earnings, demonstrable growth potential, low owner involvement, unique competitive advantages, and a seller willing to finance will command a multiple at or above the upper quartile. Lower volume businesses with lower profit margins, full-time owner involvement, and many direct competitors will trade at or below the lower quartile. Most businesses will fall somewhere in the middle.

Based on this data, half of law firm and legal services businesses are valued and sold between 1.3- and 2.3-times their annual seller discretionary earnings, with 25% of well-run, larger firms trading above this range, and 25% of smaller, less desirable businesses trading below.

Financial Benchmarks

To determine how a business compares in terms of sales volume and financial performance relative to industry peers, it's necessary to have some insight into industry standards. "Benchmarking" describes the practice of comparing a business's financial performance to typical industry standards to determine where a business falls relative to other businesses in the same industry. These benchmarks can help guide business owners and buyers towards appropriate valuation multiples from the range above.

To that end, we have aggregated financial performance of law firms and legal services businesses sold on BizBuySell that can be useful for comparing a given practice to the market.

Discretionary earnings (used interchangeably with the terms "cash flow" and seller's discretionary earnings or SDE) is often the crux of business valuations, so it is important to benchmark it relative to other similar businesses traded on the business for sale market. Revenue volume plays a large role in business valuation, as it measures the size of the potential income opportunity for new ownership. It's not uncommon for buyers to select an earnings multiple range based on overall revenue volume.

The table and chart below include revenue and earnings ranges of law firms and legal services businesses sold on BizBuySell over the past five years.

How Revenue and Earnings Level Affects Business Values

Obviously, higher levels of earnings lead to higher valuations, even given the same multiple. However, valuation multiples also tend to rise with business sales volume. Law firms that consistently generate higher revenue (and maintain benchmark profit margins) tend to sell for earnings multiples on the higher end. So, a law firm generating over $1.3MM in annual revenue may sell for an earnings multiple over 2.25, while a smaller practice with revenues below $220k may trade just above 1 time its owner's discretionary earnings.

This tendency for higher revenue businesses to fetch higher valuation multiples is largely driven by the economics of business acquisition financing. Businesses with greater revenue and earnings give buyers more cushion to cover debt service obligations and still have enough left over to pay the new owner a reasonable income.

Sector Comparisons

For a more complete understanding of the business-for-sale market and valuation standards, consider comparisons within the services sector when benchmarking law firms and legal services businesses. The chart and table below include key metrics from sales of select service businesses on BizBuySell.

Law firm and legal practices are largely sold by retiring lawyers to younger attorneys, and as such, the pool of buyers is much smaller. Additionally, law firm financial performance is often tied to the managing attorney, and when he or she passes the baton, the business can suffer financially. The net result of these dynamics is lower valuations relative to other types of businesses in the service industry.

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