Valuations 101: How Not to Screw Up!

Valuing a business is part art, part science, and part avoiding really expensive mistakes. Law firms? Even trickier—thanks to weird revenue models, intangible assets, and lawyers who love arguing. Here’s how to get it right.

Why Bother?

A good valuation keeps you from making bad deals, planning your exit poorly, or misjudging a lawsuit settlement. You need it for:

• Mergers & Acquisitions – Don’t overpay (or get underpaid).

• Investments – Because nobody wants a money pit.

• Succession Planning – Figure out what your firm is worth before passing the baton.

• Legal Disputes – Avoid courtroom surprises.

Mess it up, and you could be sitting on a financial ticking time bomb.

1. Know Why You’re Valuing

Different situations need different valuation methods:

• Market Valuation – What someone would actually pay.

• Intrinsic Valuation – The “true” worth (aka, the nerdy way).

• Asset-Based Valuation – Adding up all your stuff.

Pick the right one, or risk getting a number that makes no sense.

2. Choose a Valuation Method (Wisely)

Income Approach – What will this firm make in the future? Great, if your predictions aren’t wild guesses.

Market Approach – Compare to similar firms. Hope you have good data.

Asset-Based Approach – Good for firms with lots of assets. Bad for firms that rely on reputation and relationships.

3. Get Real Data (Not Just Vibes)

You need:

• Financial Statements – Actual, up-to-date numbers.

• Client Lists – Because law firms are worth more with actual clients.

• Industry Benchmarks – Helps prevent fantasyland projections.

Garbage data = garbage valuation.

4. Look at the Financials Like a Hawk

Revenue Trends – Is the money going up or down? Why?

Profit Margins – Big swings = possible red flags.

Cash Flow – Profits don’t mean much if the firm is drowning in debt.

5. Don’t Ignore the Invisible Stuff

Some of a law firm’s biggest assets aren’t tangible:

• Brand Reputation – Fancy name, bigger price tag.

• Client Relationships – Long-term clients = stability.

• Intellectual Property – Proprietary methods or software? Jackpot.

Ignoring these can lead to a major undervaluation.

6. Keep Projections Realistic

Wishful thinking inflates valuations. Instead:

• Use conservative estimates.

• Consider market risks (recessions, law changes).

• Run worst-case scenarios (because things go wrong).

7. Don’t Forget the Market

Valuation isn’t just about the firm—it’s also about the world around it. Consider:

• Economic Trends – A downturn can tank client spending.

• Interest Rates – High rates = tougher borrowing.

• Competition – Are new firms eating your lunch?

8. Call in the Experts

Unless you love making costly mistakes, bring in professionals—valuation experts, financial advisors, and people who do this for a living.

9. Watch Out for Biases

Your brain might sabotage you. Common traps:

• Anchoring – Getting fixated on one number.

• Confirmation Bias – Only looking at data that supports your assumptions.

Reality check yourself early and often.

10. Write Everything Down

Keep records of:

• Your assumptions – So you don’t have to guess later.

• Your data sources – So people believe you.

• Your process – So mistakes don’t repeat.

The Bottom Line

Valuing a law firm isn’t rocket science, but it’s close. Avoid common traps, use the right methods, and don’t trust gut feelings over actual data. And when in doubt? Get a pro to double-check your math.