A recent report from Europa Partners—which values the top 10 U.K. law firms between $711 million and $4.1 billion—prompted U.S. legal consultant Jerome Kowalski (Kowalski & Assoc.) to wonder, “Is there a willing buyer out there for any of these firms?” At those values—wouldn’t the equity partners be scrambling to “cash in their chips”?
“We have all learned the hard way that lawyers, trusted business advisers to the global markets, have concocted the silliest business model” for their own firms, Kowalski observes in an online article. Any other business owner can build a viable enterprise and then look forward to selling it or leaving it to family, he says. “Lawyers can do neither.” The most they get on exit is a return of capital. “More painfully, a large commercial law firm has less than zero value on liquidation or winding down.” Even under an FMV standard, a commercial law firm is worth “nothing, really,” Kowalski believes, primarily because its most valuable assets—its working partners—are free agents, whose professional code of ethics prohibits covenants not to compete. (U.K. rules are slightly different.)
Most attorneys and their business appraisers—especially those who value law firms in divorce, under an FMV or FV standard—may beg to differ. But that's not to say that the equity appreciation aspect of professional practices is suspect, as Kowalski acknowledges.