A Wall Street Methodology for Valuing Law Firms
In today’s competitive legal environment, law firms are focused on revenue growth and profit generation. They are raising lawyer rates, increasing attorney headcount, controlling expenses, improving their internal processes, acquiring lateral partners, offering alternative fee arrangements, merging with other law firms, increasing productivity, reducing office space and taking other decisive managerial actions. All of these help drive short-term increases in revenue and net income. They also enhance the prospects for long-term profitable growth. Law firms naturally engage in such efforts with a notional goal of enhancing the strength of the partnership - and indirectly the value of the law firm as an enterprise.
How can the results of a law firm’s managerial actions be numerically evaluated? While current revenue and profits are certainly indicators, the value of a law firm - which captures the law firm’s expected future results – can be the ultimate scorecard of all such strategies and business decisions. If a firm has a high value, or if its value is increasing over time, it is likely that firm strategies are working well. Conversely, if a firm has a low value or value is declining over time, leadership actions are perhaps not that successful. The magnitude of value creation is the cumulative financial end-result of all the underlying operational drivers. Further, analyzing findings from the valuation exercise; and contrasting value drivers with peer firms can help select the best avenue to increase the enterprise value of the organization.