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Law Firm Valuations

NOTE: This is available only through Legal Compass. Contact our Sales team at 888-770-5647 or by email [email protected] for information.

This is available only through Legal Compass. Contact our Sales team at 888-770-5647 or by email [email protected] for information.

Law Firm Valuations

December 2012 TAL

After discussions with more than 50 private equity and otherinvestment professionals, merger and strategic consultants, and senior law firmpersonnel, including managing partners, chief financial officers, and treasurers,we developed a method for valuing a law firm.

Our procedure is based on the classic investment-bankingtechnique of developing cash flow multiples to value companies. We started witheach firm’s net, made deductions by assigning equity partners with a notionalsalary, then applied a multiple that varied depending on the firm’s size, itsaverage growth rates in revenue and profits, and its brand strength. We thenused this formula to calculate values for our Global 100 list of the world’shighest-grossing law firms.

Firm valuation Glossary

Our process for valuing the world’s top firms involveddetermining each firm’s cash flow and applying a series of multiples. Expressedas an equation, it would be:

Value = Cash Flow x(Size Multiple + Revenue Growth Multiple + Profit Growth Multiple + Brand StrengthMultiple)

Here is how we defined those terms:

Cash Flow: The profit generated by a law firm,once the cost of providing all equity partners with a fixed salary wasdeducted. For our ranking, this equates to half of the firm’s “net income”—thetotal profit currently distributed among equity partners each year.

Size Multiple: This varies, depending on a firm’s annualrevenue. Firms were given a multiple of 4 for revenues of less than $500million; 4.5 for $500 million to $1 billion; 5 for more than $1 billion.

Revenue and Profit Growth Multiple: The size ofthis multiple varies, depending on average annual growth in revenue and netincome since the 2009 fiscal year. Firms received multiples of 0.5 for growthin either revenue or net income of between 0–5 percent; 1 for increases of 5–10percent; 1.5 for increases of 10–20 percent; and 2 for increases of over 20percent. Average declines in either profit or revenue of more than 5 percenteach resulted in a 0.5 multiple deduction. Years in which mergers resulted inextraordinary increases were not included.

Brand Strength Multiple: Firms that wereincluded in either the 2011 U.S. or global legal brand indexes compiled byresearch company Acritas received a 0.5 multiple boost. Firms that wereincluded in both indexes did not receive the multiple twice.

 A note about debt: Ideally, any valuation created using ourmethodology would then be altered to take into account any debt on the firm’sbooks, including working capital. We did not have access to this informationfor all 100 firms, however, so we were forced to exclude it from our formula. AlthoughU.K. firms have to file annual reports disclosing this information, firms from theU.S., Canada, and much of Europe are under no obligation to disclose any oftheir financial information. Generally, most top law firms operate with low levelsof debt, and some are debt-free.

Value and earnings figures were rounded to nearest $500,000.Value per partner figures were rounded to nearest $5,000.

Three Global 100 firms (Fidal, J&A Garrigues, andMcCarthy Tétrault) did not disclose the required profit data, so valuations arenot provided for them.

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