“Lawyers never quite want to resolve buy-sell agreements because they want to keep their options open,” according to Ron Seigneur (Seigneur Gustafson) in his Law Firm Valuation Checklist, appearing in the most recent (July 2011) BVUpdate. Law firms are also in a state of transition and their partners are used to litigation, Seigneur pointed out, two current facts that create more opportunities for business appraisers and financial consultants in the buy-out context.
A new case out of the California Court of Appeals proves many of Seigneur’s points true. In Rappaport v. Gelfland, 2011 WL 3215379 (Cal. App) (July 28, 2011), a 31% percent partner in a 3-partnerfirm decided that after five years, he wanted to dissociate. (“We’re finding that if you have a book of business as a lawyer, you can get cash offers to jump firms,” Seigneur noted.) The partners couldn’t agree on a buy-out price under the state’s partnership statute, which essentially provided for the greater of the going concern or liquidation value. The BV expert for the departing partner helped convinced the trial court that, “because of the peculiar relationship between dissociation and the wind-up process when applied in the law firm context, a construct is created to calculate a value [as of the stipulated valuation date] based upon individual assets being liquidated over time, and then bringing the value ‘back’ to the date of dissociation.”
These assets included accounts receivable, a large contingency-fee lawsuit, and litigation for one “unmanageable” client. The trial court “fully credited” the partner’s expert for the values for all three asset categories and the appellate court affirmed, altering nothing but a slight math error. Read the complete case digest in the October 2011 Business Valuation Update; the court’s decision will be posted soon at BVLaw.
Download update. Given the trickier aspects of law firm valuation, we’ve also added Seigneur’s comprehensive checklist of financial documentation and discovery in these cases to our popular download site: get your free copy here.