Acquisitions Anonymous - #1 for business buying, selling and operating - A law firm for sale?! - Acquisitions Anonymous episode 169

Starting point is 00:00:00 Welcome back, everybody, to another episode of Acquisitions Anonymous. I'm Mill Snell, one of your co-host. We have an awesome episode today. We talk about a fractional ownership in a law firm in Colorado. It is very atypical. You almost never see these things hit the market. And so it's really unique. It's a very difficult deal to do if you're not a lawyer and you're not in this practice area. But we talk about a lot of the nuances for buying and selling ownership in professional services firms. We talk about kind of where the centers of value are. Are they at the individual? or the brand kind of slash firm level. And we banter a lot about some similar industries where you see those types of dynamics. So even if you've never thought about buying a law firm or owning a piece of a law firm or a professional services practice, I do think there's some helpful nuggets in here.

Starting point is 00:00:45 And Bill and I have fun talking about it. So I think you'll enjoy. Big thanks for tuning in. Today's sponsor is aquaer.com. And Acquira is your acquisition and a box service. They offer training to help you find, evaluate and close on buying a small business, all usually done within a year. And their team has bought over 30 businesses across three different portfolios. Whether you're just beginning your

Starting point is 00:01:08 business search, actively pursuing a specific deal, or looking to grow your existing company, acquireist training, and team of experts can help. Their M&A advisors provide individualized support throughout the entire process. They will provide guidance towards your offer structure, drafting your LOI, helping with due diligence planning, and securing funding for your deal. they will even fly out and do on-site visits with you as you look at the business to consider. Once you acquire your business, they can also help you grow it as well. They use a proprietary framework called the ACE framework that will help you transition that business you buy from owner-operated to management-led, increasing your profits and allow you to step

Starting point is 00:01:43 away from the daily operations and enjoy more of what you love. And if more of what you love is buying and growing more businesses, they can help you build a portfolio business and eventually get liquidity from that portfolio by selling it to a financial buyer or selling it to your employees. They run cohorts each month, so space is limited. So if you're looking to acquire a cash flowing business this year, sign up now at Acquira.com slash pod-hyphen lander. And again, that's Acquira, ui-R-a.com slash pod-hyphen lander, and tell them that the Acquisitions Anonymous folks sent you. Welcome back, everybody to another episode of Acquisitions Anonymous. I'm Mills Snell. Join today by Bill D.E.

Starting point is 00:02:25 Alessandro, what's up, Bill? What's up, man? I'm excited for another episode. I think today's is different than most other ones we do. It is. And also, we talked trash while Gerdley was gone last time. And then he and I recorded an episode after that. And he's like, what did you guys mean when you said? You know, you do whatever you want. You do whatever you want when I'm here, too. I'm not in charge. So today's just a normal episode. Gertley's not here. We're not going to talk trash about him. But we are going to talk about a fun deal. I do have to say I ran into a business broker friend of mine outside of Starbucks this morning, and it was awesome. I'm just going to call him by his first name to not incriminate him. Warren, he's a local business broker, but we've known each other

Starting point is 00:03:05 for a long time. He was in sweats. And I was like, dude, what are you doing? He was like, no, it's P&L day. I'm digging through the P&L. I'm going through adjustments. I got to get my Starbucks on. And we started talking about wild adjustments and, you know, things that he has to talk sellers off the ledge. So we usually will, like, throw stones at brokers. But, you know, they also are trying to do their job and manage their client. And so today was a good reminder of that when I saw my buddy outside of Starbucks. The deal business is really messy, right? Because it's so hard to paint with broad brushes. Like, there are terrible brokers out there. But there are also terrible sellers, right? And terrible buyers. And, you know, you're just lucky in your deal if you don't have at least one of those

Starting point is 00:03:47 parties being terrible. And if all those parties are good, you'll probably have a terrible lawyer or a terrible account, right? So it's just such like a crapshoot. Like, this is a messy end of the market. Yeah. Yeah. It was, it was interesting because I was telling him about like some of the people in our audience. And he was like, man, it's just so hard to sell businesses that are like slightly bigger than Main Street, kind of in that like million and slightly higher in EBITDA or SD. And I was like, dude, you got to like, you got to realign to the right audience because I know that there's plenty of people who will buy like $200 SDE, $200,000 SDE, you know, like HVAC businesses or home cleaning businesses or whatever. But there's a lot of frequency in those transactions.

Starting point is 00:04:34 But if you're primarily like a local broker and kind of like, you know, regionally centric in what you do, it can be really hard to actually like find, I think, the, the ETA and the search community. And it's interesting to hear from that perspective because like when I talk to searchers, they're like, I just feel like I'm like knocking down the door to all these, you know, brokers who kind of play in this segment and they feel like maybe they're, you know, doing too much. But all that to say, this guy's like, no, I haven't really dealt with many of those people. And like he's at like a big name firm and like does plenty of volume. So yeah, yeah. If you're searching, keep searching. Despite, you know, biz buy sell and this

Starting point is 00:05:12 podcast and so much other content out there, this market is still super inefficient. matching buyers and sellers even now in 2023. It blows me at life. Yeah. Well, we got a little bit of a different deal today. You're going to take us away and read it. And this is, there's not a ton of detail, but I feel like there's some interesting things to say. This is a biz by sell listing.

Starting point is 00:05:34 And yeah, take us away, Bill. All right. So this one's cool. We have never done a deal like this before. This is an 8% minority interest in a 26 lawyer law. firm. So this is a partner, a retiring shareholder who owns 8% of the firm of the law firm, and he would like to sell his stake to you. They're not selling the whole firm, just this guy's stake so he can retire. So it says the cash flow, and it's hard to tell, let's tease out whether

Starting point is 00:06:08 this is the cash flow for the whole business or for this stake. It says the cash flow is $1.3 million, but that's also the gross revenue. So I don't know. So the gross. So the gross Revenue 1.3, EBITDA, $560,000, and FF&E, 150,000. I want to unpack that in a minute. And it says the firm was established in 1989. So this is an equity position in a 10-partner firm with established high income. So it says the retiring shareholder owns 8% is selling an interest in a 26 attorney-slash-10 shareholders, so not all attorneys or shareholders, 26-attorney, 10-sharholder firm with four offices in the front range of Colorado.

Starting point is 00:06:48 They are modern and nicely furnished offices in Denver, Broomfield, Longmont, and Loveland, Colorado. So if you're not familiar with Colorado, that is like the busy part of Colorado. It's all centered around Denver. 55 total employees, 26 of which are attorneys, and 10 million a year of firm yearly gross. So that tells me that that 1.3 million of revenue is 8% of the firm. It's not, though. Oh, it's not.

Starting point is 00:07:12 This is the weird thing. It's so weird. I'm like the math on this thing is all wonky. It doesn't even pencil, Mills. It doesn't even pencil. These guys are not, this is not like strength with numbers. You can tell they don't do M&A work. So, yeah, please proceed, Bill.

Starting point is 00:07:28 So, well, they tell you they don't. So it says the practice focuses on construction defect and real estate flipper fraud cases. It is construction defect, meaning someone built you a building and it's a lemon. And real estate flipper fraud cases. It is a semi-Eat-What-you-kill format firm, immediately manage a large book of business, and make margin on four associates and three paralegals. The website address is available to serious inquiries, which is hilarious because it's at the bottom of the listing. I'll get to in just a minute. It says the buy-sell retirement value of shares is $150,000, but he's asking $385,000.

Starting point is 00:08:15 So there's a lot of numbers flying around. Other important things to know here at the bottom, it has four leased facilities. It's a growing business, a general mix of practice, unique reputation of retiring members. This is the worst list thing ever. The retiring member has a unique reputation in the construction defect litigation representing groups of homeowners and distressed subdivisions. The gross in 2019 was $2.1 million, and you take home 42% plus benefits. Like this is, I guess, what this guy just hunted and killed? Yeah, that's exactly what it is.

Starting point is 00:08:49 So he only owns 8% of the firm, but he makes up like 20% of the revenue. Yep, that's what it is. So he is a higher performer, and he's eating what he kills to some degree. Join a group of young, parentheses, on average, driven shareholders with commitment to substantial advertising budgets of $65,000 monthly with an additional 50% new client, referral business reputation, whatever that is. He said he is also willing, this is interesting, to finance this on a 20-year note with 5% interest and to support and train you for up to six months, reason for selling is I am 69

Starting point is 00:09:28 years old and my partners are too busy to absorb my division. And then business website is jbplegal.com. Right here, we did not sign an NDA. This is just in the listing. So if you pull up jbplegal.com, you will see, you know, what these guys do. I'll put it on the, put it on the YouTube here. So they are full service law firm in greater Denver and northern Colorado. Looks like a real deal. Law firm, I mean, practice areas like, you know, DUI, criminal defense, construction. It sounds like they do other things besides what he mentioned in the listing.

Starting point is 00:10:03 So I wonder if this guy's practice is just in that construction defect and real estate fix and flip fraud. JBP is Jorgensen, Brown Allen, Pepin. And Mills, the thing that blows me away, this guy just aired all of his partner's financial information on bizby-sell with no NDA. It's pretty crazy. Yeah, yeah. And, I mean, when you look at the website,

Starting point is 00:10:27 he's also the founding shareholder. Like, there's somebody else who has the same last name as him, a female, who is the managing shareholder. So, like, is this husband and wife, and he's retiring and she's not? There's a whole lot of, there's a whole lot to say about this. This is, this is fascinating. So is this, okay, so this is an 8% interest.

Starting point is 00:10:47 Let's just get this out of way. Mills, what is your take here? Like, is, what's going on? Well, I, like, when we first were messaging about doing this one, all my alarm bells were going off because ownership in law firms is this very, like, exclusive, tenure-based thing. these never hit the market. You know, typically, like the law firm model is, you go to work, you go to law school, and while you're in law school, you, you know, you intern or you clerk different places,

Starting point is 00:11:19 but you get your foot in the door at firms that you think you might want to work for. Then you go work there as an associate, and depending on where you are, I mean, you're making over $100,000 a year out of law school, almost always. But you're billing, you know, 2,000 to 2,200 hours a year, and you just grind it out, and you kind of slowly work your way up the ranks. And typically, at least in the Carolinas and where I'm familiar with it, you work for kind of seven years and you slowly work your way up. You kind of build a book of business because you usually are supporting other attorneys.

Starting point is 00:11:50 You kind of find your niche and you work on a team. But after seven-ish years, you're able to make partner. And the way it works is you've done the time. And, you know, you've largely been paid based on your billable hours, but you don't have access to the overall kind of profit share of the firm. But after you do your time, there's a buy-in. And usually the way it works from the attorneys that I know is it's a flat dollar amount. You buy in for like $100,000 and you get bought out for $100,000. It's just a bond and you get access to a stream of cash flow. And what all these attorneys will do is

Starting point is 00:12:23 they just go to the bank and they're like, hey, look, I'm going to be a partner at so-and-so firm. I need $100,000. And lenders love it because they're like, one, I can see your W-2 income is fantastic. and you're also going to have a benefit stream of cash live from this thing. Like, yeah, what else do you want to finance? You know, beyond just the buy-in. Yeah, a car, a house, what else do you want? Yeah, exactly. Like, how many boats do you want?

Starting point is 00:12:45 But they never hit the market because it's like very earned. It's almost like this fraternal order that you have to. And it's kind of clicky, right? Certain firms have certain cultures. And, you know, they never just put these out on the street and say, who wants to buy in? you have to earn it. So the fact that this was publicly available and just out there on the street to be acquired is interesting. And it was a red flag for me. One of the last things, though, in the

Starting point is 00:13:17 listing that actually made it, I think, a little bit more cohesive and makes sense to me, is that really the firm is just kind of a sum of parts. And it's probably not really worth much more than the sum of its parts because you have this eat what you kill model. And everybody has their own type of focus and book of business. Like you said, there's other attorneys at this firm who might deal like DUI and criminal defense. This guy's focus, his practice area is, you know, the real estate defects and house flipper fraud. So it makes a little bit more sense that he would say, hey, I want somebody to buy me out and my partners aren't going to buy me out because I immediately would have thought, why aren't the other lawyers buying his ownership interest? And it's because

Starting point is 00:14:03 his ownership interest isn't really worth anything unless somebody's there to actually perform the work. Well, right, because if he retires, right, or if you bought his interest, right, as a purely financial investor, all of the case work that he's doing goes away, right? And it sounds like he, while he only owns 8% of the firm, he's doing 20% of the output. So what's interesting to me is this actually reads a little bit more like a very elaborate recruiting. advertisement. He needs a lawyer to come in and take over his practice. He needs an air, right?

Starting point is 00:14:37 You come in and buy into the firm, take over his area of specialty, these construction defect and real estate flipper fraud cases. The thing, though, the huge miss on his part is he should have been, as you said, Mills, developing an associate for the last seven years, right? That was working on all these cases with him. And so when he stepped aside, all of the clients wouldn't be like, well, who the hell is this guy. You know, and they should have gone to that associate and said, now it's time to buy in. It's still be $150,000. The $150,000 go straight to the retiring partner and they swap places, right?

Starting point is 00:15:10 But clearly he's not, I sense that he's not done that. He doesn't have an heir, a parent at the firm. And so he needs to bring in like a partner for somewhere else to take this over. I though, like, it's too bad. Like if this were a like purely financial 8% interest in in like the partnership and you didn't have to go there and be a lawyer, I think it could be super interesting. And those things I don't think ever hit the market because that's not how these firms are really structured that you can be. No, usually usually the problem that these firms have is, you know, you are kind of the older folks are benefiting from. all the labor and work and billable hours of the younger folks. And the dilemma that they get into is like, hey, we have some older attorneys who are not

Starting point is 00:15:58 really carrying their weight anymore, but they're still getting like a really nice profit share, essentially, even though like we can't get them to retire. We can't get them to actually sell their interests so that we can continue to kind of recycle this, you know, access to this benefit stream. But it's basically, it's basically not sellable. to anybody other than the person who's going to go perform the work. It's like the dentist dilemma. Dentists aren't making money unless their hands are in somebody's mouth. And you can't, like, phone it in. And, you know, it's literally like he's saying, you eat what you kill, you self-perform

Starting point is 00:16:35 this work. And it seems like he's got a great thing. I actually, like, kudos to him because I think he's thinking about it the right way. This is going to take some transition. He's willing to kind of pass the baton. He's willing to finance it over 20 years. I mean, you could reverse. engineer this and do the math, but you're making money day one. If you're an attorney who has some grit and has some hustle and you think you'd be comfortable doing this kind of practice area, it's net positive, like day one, month one, because this guy's willing to stretch the financing out on this thing for so long. It almost makes the price, like, inconsequential because you're stepping into such a significant cash flow stream if you can migrate it, if it actually doesn't,

Starting point is 00:17:15 you know, doesn't die when he leaves. Right. Well, that's the key. And it's so funny because down the listing, he says the retiring member has a unique reputation in the specific practice of law, which is another way to say there is no way that you can step into this guy's shoes. And it's like saying, you know, Michael Jordan has a unique reputation for playing basketball. You can't just buy his shoes and become Michael Jordan, right? And produce like Michael Jordan did. It's the visible expert dilemma, which is, you know, when your brand and your name and your likeness are all one and the same, great. you did really good, but you look at the number of brands that are actually able to do that,

Starting point is 00:17:53 like Kate Spade, right, or Ralph Lauren or things like that, where all the sudden, like, people don't know what Kate Spade is or what she looks like. The brand has kind of emerged more than just her likeness and her persona. But there's plenty, plenty. I mean, you see it in e-commerce all the time. There's plenty of people who build a, you know, it's like an influencer brand. And then all of a sudden, the influencer starts selling products and they kind of become known for that. And then they're like, hey, I think I want to sell.

Starting point is 00:18:19 But, like, it's your face is on everything. Your name is on everything. You can't migrate away from it. And so that's the, that's the visible expert dilemma here. It's like, you go to the conferences, man. You speak, you know, at the like Home Builders Association of Colorado about these things. And that's why your phone rings. The new guy can't do that, you know, 30 days in, 60 days in.

Starting point is 00:18:41 He doesn't have the body of work that you do. And nobody's going to, you know, ask him to be the keynote speaker on this. Which is, which is why you, the way you, the way you translate. these businesses is with like the associate model and a seven-year apprenticeship and you introduce the clients, right? Let's talk a little bit, you know, about there's two things I want to mention here. And the first one is sort of how I'll call this sort of professional business partnerships are structured.

Starting point is 00:19:07 You touched on it earlier, Mills, because I've always thought it was fascinating and maddening. So my first exposure to this is that my dad is an orthopedic surgeon. And he joined, you know, at the beginning of his career. career in his 30s, a new practice here in Charlotte. And, you know, same thing. Like probably paid $100,000 to buy in, you know, essentially become a doctor, a partner, right? He worked there for his entire career and the firm is now massive. I mean, it's got 20 to 30 times more docs, maybe 50 times more docs than it did when he started. They're the main regional orthopedics player, a juggernaut, right? And it has created, there is insane equity value in this thing.

Starting point is 00:19:53 And these medical practices get bought all the time by private equity and all that stuff, right? Hospitals. And also by them. Yeah. Yeah. There's a huge amount of equity value that is created. And the insane thing is, so my dad retired like three years ago. When you retire, you just hand your shares back. Like, you're just done. And I'm not exaggerating if they sell the business for a billion dollars the day after you retire, you get nothing. And all of the proceeds go to the guys who just happen to be working there when it sells. And it creates this, like, extremely messed up incentive system. But the bananas thing is the doctors don't even really get it. Like, my dad was not even that bothered by this. He's just like, yeah, that's like how it's been for the last

Starting point is 00:20:42 50 years or whatever. It's nuts. there's a lot of things in the healthcare space like this. The big one that you see is the ASCs, ambulatory surgery centers, where you kind of have, it's like a small club, you know, and you'll see it for like ophthalmology, ear, nose and throat, you know, some of these like outpatient surgery centers that are not necessarily affiliated with the hospital. And it's a building where they have surgical rooms and they have staff,

Starting point is 00:21:10 but the physicians who are actually doing work there and kind of renting the room, so to speak and renting the capacity of the building, that they are the owners. And those things are absolute cash cows because it's kind of self-dealing, not even in a bad way, but just, hey, we're going to set the prices and we know what insurance will reimburse and, you know, we're the ones who are generating the revenue. And so what you see is, you know, physicians in particular want to get in on ownership on these ambulatory surgery centers because the buy-in, like I looked at the numbers for somebody one time. They recouped their investment in like less than 12 months. The initial buy-in was recouped that fast. I'm like, the pricing is so bad. My dad did this. Yeah.

Starting point is 00:21:51 Yeah, my dad did this. So like along the way during his career, he invested in quite a few new buildings and surgery centers and things like that that their group was building. And what was weird is the equity in the surgery centers, he still owns and is worth something, right? The equity in the practice, which is like the engine that builds the surgery centers and directs all the surgeries there, and creates all the cash flow is not worth anything. It's just totally bizarre. But it was really interesting. They opened the surgery center, right?

Starting point is 00:22:22 His practice. They built their own surgery center. And then they just went to the hospital and they were like, yeah, we're not doing surgery in your hospital anymore. See you later. And they just moved all their surgeries to their own surgery center. It's crazy. Yeah, it definitely happens.

Starting point is 00:22:34 And you go through these big swings in healthcare where hospital systems like buying certain practices and like trying to consolidate. and then they, you know, it ebbs and flows and it cycles pretty hard. Physicians want to be their own boss and they want to own their practice and then they go and become hospital staff and then they realize they don't like it. And they're big kind of multi-decade swings, but there's certain practice areas that hospitals are more natural acquirers of. One thing, Bill, I know you said you had another thing you want to talk about with this,

Starting point is 00:23:06 but one thing that I think is interesting is the actual practice area here. the construction defect, I know a little bit about, I don't really know that much about house flip or fraud, although it just sounds like, it sounds like hard money lending gone wrong and he's like going to try and collect money, you know, but the construction defect thing is fascinating because in certain states, and I don't know this about Colorado, but the statute of limitations on some of these is pretty long. And so you have these guys, us in the construction industry, we loathe them because what they'll do is they'll go to HOAs that are chronically underfunded, and they'll go like seven, eight, nine years, like right before the statute of limitations

Starting point is 00:23:48 ends. And they'll say, hey, let us do a free analysis for you and just see, you know, what, like, you're about to be outside of the statute of limitations. Let's see how your building envelope is doing. Let's see how your windows are doing, your HVAC systems. And they bring somebody in. There's a huge, you know, bias present here. But they are like, hey, look, congratulations. We think, you know, we think you could go to a lawsuit. We think there's a case here and you're underfunded, but you could get, you know, eight million bucks if we go after and they sue everybody who ever touched the building in any way, shape, or form. The GC, the engineers, the architect, all the different trades. And then everybody's like, look, it's so old, you know,

Starting point is 00:24:27 they find, like, little things that are wrong with it. And really all the attorney is doing is just, like, lead generation and pushing paperwork and finding kind of third-party vendors to help sub this out. And it's it's a terrible, terrible thing for the construction industry because of how long the tail of liability is. We're doing some repair work on some of these jobs right now that we didn't install. And it is just a nightmare because of all the litigation that's tied up in it. I think he mentions or something on their website mentions like track home development. These are things that get built really big, really fast, you know, at a budget. And then they start to fall apart like five years later and the shine comes off the penny. And they're like, hey, look,

Starting point is 00:25:07 we'll find you some money. It's just a, it's an interesting, uh, strategy in terms of practice area. How do you, so how do you, if you're building these buildings or doing these roofs or whatever, how you defend against this besides, I mean, you can't just say do perfect work, right? Um, is there insurance? Like, do you have a reserve that you set aside? There's a few different things. I mean, one, everybody tries to absolve themselves from design responsibility. So, like, we as the roofer are not designing the roof system. You know, the building envelope, people, the waterproofers are like, look, there's an architect. And there's also usually, like for us, there's a building envelope consultant who writes the spec and designs the roof.

Starting point is 00:25:46 And so then if it fails, you know, there's also manufacturers, warranties, and a bunch of different things. So there's just finger pointing like crazy on it. There's basically enough people on the hook that they know we can go and get some money. And, you know, there's a lot of different things that can go wrong. And before I got involved, the business that I'm involved in now, they had an issue where, you know, just one little thing that really was not incriminating and didn't create fault or whatever created enough of it, you know, an issue to the forensic architects and, you know, the people who come after the fact to pick these things apart, that, you know, you just end up having to settle out. That's the, that's the scam or kind

Starting point is 00:26:25 of the racket about it, is that everybody's like, could we go defend ourselves? Yes, but it's just cheaper just to just to settle and, you know, to make it go away. And sometimes it is hitting your insurance, but it's all about who you do business with. I mean, this is like the whole scam in like the American financial, you know, capital legal system is that it's always cheaper to settle. So you've got a ton of these lawyers who basically just do lead gen. And it's everything from product liability to advertising to ADA compliance to, I mean, anything, right? There's these whole classes of law firms that just run around and basically frivolously threatened to sue people or even.

Starting point is 00:27:04 even do sue them and then be like, well, to respond to this suit and, like, go through discovery is going to cost you several hundred thousand dollars or we'll settle for $75,000 right now and withdraw the suit because it costs them nothing to file it. So it's the only people making money are the lawyers. Yeah. So, I mean, what it makes me say about this particular deal is, you know, I, like, philosophically, I hate the practice area, but like if this is, if you want to practice law, this is, There's constant demand, short of some major regulatory change in the state of Colorado that is

Starting point is 00:27:41 probably never going to happen, you know, or the law itself changing about when the statute of limitations is. But if you're if you're kind of in a like consumer friendly owner, owner friendly versus like contractor friendly state, those things don't don't change usually in a big way. I think there's very, very stable demand is what I'm trying to say. I also like that he gives credence to the fact that, like, hey, there's firm marketing spend, like $65,000 a month. That is probably more tailored to the, like, DUI defense, criminal defense, like, you know, slip and fall kind of things that, you know, those are the people who have billboards up everywhere, and, you know, they're just trying to generate, you know, call volume.

Starting point is 00:28:23 I don't know that it really helps if you buy this guy's book, but it seems like there's at least kind of some communal aspect to this firm that is probably worth something. Yep. So last thing I want to mention, so he says that the buy-sell retirement value of the shares is $150,000. But he's got, he's asking $385,000. So why? Like, it's, I just can't believe how upfront he is that he's going to have to pay his partner as $150,000, but he expects you to pay him $385,000. So there's a $235,000 spread here for what?

Starting point is 00:29:02 Like just for thanks for doing business with you? No, I think it's, I think it's him trying to say, look, this is my ownership, right, is worth one thing. But my cash flow is worth another because the two aren't linked. It's not like, it's not like, hey, you own 8% of the business and you get 8% of the cash flow. Because of the eat what you kill model, you can own 8%, but not all of it is actually hitting the bottom line. it's all being kind of commissioned out on a on a revenue generation kind of commission basis. So because he's generating, you know, like we said, at the very least, it looks like he's generating about 20% of the revenue.

Starting point is 00:29:42 So he's saying his partners can buy him out for $150,000, but you have to buy him out for $385,000. Yeah, I think, I think so mechanically, I think the way that it would work is, you know, I don't know. I guess if you're paying in $3.85, is he having to, you know, I'm not really sure exactly how that would work. I mean, it really depends on their operating agreement and their buy-sell agreement. But the way I'm taking it is that, you know, he's saying, look, what I have here, my book of business, fundamentally, his book of business is worth more than 8%. And you, what's nice about it is that, like, at the very minimum, your ownership, you're like, you're not going to go to zero on this. your ownership is worth $150,000 as a floor.

Starting point is 00:30:30 The issue with businesses like this is that because of all the non-transferable goodwill, like the other side of the coin on that is that if half the law firm leaves, like half the law firm leaves and everything goes with it, all the revenue generation that those people have, it goes with them. It stands the reason that this guy's book of business could stand on its own, theoretically. Like if he doesn't really need the billboards and the back office and all that, it could be one lawyer, four associates and three paralegals, and they could do the same thing without this kind of banner, you know, and without the firm being the rapper around it with all the

Starting point is 00:31:09 other people. So it's a very kind of tricky situation. And I can only imagine all the politics and everything that would go along with this. You think it's difficult to buy a business from one person. Imagine buying into a partnership where there's nine other shareholders. and you've got to, you know. And they're all lawyers. Yes, exactly. Even if you can get all of the paperwork buttoned up, can you imagine showing up to your first partner meeting?

Starting point is 00:31:37 And like, the other guys are all buds. And you're like, hey, I'm the guy that jumped the line for $385,000. Everybody else here has been here for 20 years and earned their way into it and has their name on the door. And like, what's up? You need to respect me as an 8% partner and a 20% producer. I mean, and then worse, imagine if you turn out to only be a, 14% producer and you're costing everybody else money effectively because you don't produce as well

Starting point is 00:32:01 as the old guy. Like, oh, man, this is complicated. It's, it's really, it's really complicated. I'm just telling you, it's, it's hard enough to do a deal with, with one person or like, or two partners, right? You're buying out founders or sellers. If you're buying out one person and then you're stepping into a partnership that's more than just like you and one other person, I mean, man, it's just very, it seems. It's tough. I just, I respect this guy, though. I really respect his effort because, you know, he's putting himself out there and he, I think, you know, is trying to capture some of what he's built. He just needs to go to the local law school, though, and just get to know a bunch of like third year law students and find somebody who can be his

Starting point is 00:32:38 protege. And maybe he's tried that. I don't know. But it, this seems like, again, I kudos to this guy and respect to him, but I can't imagine getting the kind of, you know, quality candidate that you want from biz by cell. But maybe. Good luck to him. Oh, I, I got to imagine he's desperate, right? Like, this comes back to, I'll bring it back to my trademark phrase, buyer business fit, right? Like, there is a buyer here who's perfect for this. Like, if you practice in this area, you know, this practice, this law practice area and maybe even physical area as well, this is an awesome opportunity for an associate at another firm that, you know, doesn't necessarily

Starting point is 00:33:16 wants to skip the route, make partner, et cetera, as a hustler. The thing, though, this guy probably already knows the names of all of those people. Right. Like they're in a defined geographic area within 200 miles around Denver. Like how they know all their competitive law firms, right? So just figure out all the partners at those firms and all the associates at those firms. That's your buyer set. Like odds of turning up a buyer on biz by sell that can actually execute this transaction, I would think have got to be zero. Well, and, you know, it's not like, it's not like his counterpart. Like the guy who is like him, maybe 10, 15, 20 years prior in Texas, can't buy this thing. It's not like, oh, I already have this.

Starting point is 00:33:54 this book of business in Texas and now I really want to go establish it in Colorado because you're a member of a law firm already and now you're going to go be a minority member in a different law firm. He doesn't work that way. So, you know, unfortunately, like probably what he should have done if he really wanted transferability is carve this thing out, you know, five years ago and say, I'm, you know, sufficient, autonomous. I have this book of business. I, you know, separated from another law firm years ago in anticipation of this. it's just it's inherently very problematic to transfer and doing deals with lawyers, like we said,

Starting point is 00:34:30 is just incredibly difficult. Yep. Yep. So if you fit exactly, this is actually really interesting. The guy's going to finance it for 20 years. You can step right into an established brand. There's a ton of value there. A ton of value there.

Starting point is 00:34:42 Man, but I would love, if you're listening to this and you have ever seen a deal that is a pure financial interest in one of these partnerships where you, you know, even if it's doctors, dentists, you know, lawyers, engineers, architects. If you have ever seen a purely financial interest in a professional services firm that is lucrative, we would love to review it on the pod. So send it over. I have not seen very many publicly. They don't. They're not public. They're just not public because if it's worth, if it's worth like anything at all, it doesn't leave the partnership. I mean, most operating agreements are written, right? Where it's like actually you're prohibited from going to sell this in public until I've passed on it. And so if the other

Starting point is 00:35:25 partners have passed on it, why in the world would somebody else want to do it? You know? Yep, that's tough. And then also, like, let's say you end up owning 20% of some guys law firm. I mean, how salty are they going to be? Like, the other six guys, like that you're just reaping 20% tax on them? You know what's going to happen eventually? They're all going to quit. They're going to walk next door, hang their own shingle, cut you out, and be like, sue me. I dare you. you. That's going to happen eventually. Yeah. And I mean, this, this happens all the time in the, like, real estate brokers, lawyers, CPAs, like, you can leave and all the professional goodwill leaves with them. And so it's, it's really a special thing when somebody builds a brand around

Starting point is 00:36:09 professional services that is kind of larger than the operators, like larger than the practitioners, because it's usually so personality and kind of individual. dual driven. Yeah, it's very hard to build something that is what I'll call securitizable, right? That can become a purely financial interest and can be bought and sold between third parties without affecting the operation of the business. And most brands, by the way, equity interests are securitizable by default, right? You know, like Mills, you bought your roofing business. You know, I bought my dog brand. You know, most businesses by default are securitizable and transferable if you have good SOPs in place and whatnot. But weirdly,

Starting point is 00:36:49 professional services businesses are by default not securitizable and transferable. So you got to do a lot of work to get on there. This was a fun one. Thanks to the listener who sent it in and for reaching out on Twitter to tell us to talk about it. I think you also said maybe you would try and talk about it. I'm trying to remember who it was who sent it to us. But they were saying, hey, I may talk about it. So if you do let us know because we'd love to hear all the things we got wrong. Big thanks too, to our sponsor again, Acquira. Appreciate you helping out in the and do us a favor and like, review, give us five stars on your podcast, preferred podcast app because it helps more people find out about us.

Starting point is 00:37:28 Well, you know, Mills, Mirko told me the thing that we really need people to do is to subscribe in their podcast app because it really helps our download numbers because just transparently all, when you subscribe, your phone downloads every episode we put out, helps our download numbers and makes you more likely to listen to us chat a couple times a week. So subscribe and hit the five star. Thanks so much. See you guys next time.

Acquisitions Anonymous - #1 for business buying, selling and operating - A law firm for sale?! - Acquisitions Anonymous episode 169

There aren't comments yet for this episode. Click on any sentence in the transcript to leave a comment.