What You Need to Know Before Selling Your Law Firm with Michael DiGennaro

Melissa: Hey, everyone. Today, I have a conversation. It's part one of a conversation with Michael DiGennaro of Law Practice Exchange. I was introduced to him by a client who was utilizing his services, and I had some really specific questions I wanted answered. So what you're hearing is just the beginning. I want to have him back. Yes, he's here for part two, but I want to have him back again.

But here's what I want to say. Soak up every word you hear from this man. Because all the things that I harp on and talk about and want you to do, and that here at Velocity Work, we're really passionate about helping you do, it is so that when it's time, someone like them can help you usher yourself into an experience beyond your firm.

So, sit back, listen up, take notes. If you have any questions at all that you want me to ask him next time he's on, we will put a place in the show notes that you can submit questions. This is the real deal, guys. This is why we're doing it. You know, you want to enjoy the journey of building your firm, but you also want to have a plan, and you want to know what it looks like. You want to learn as much as you can before you get to the place where you are going to have some sort of transition out. Enjoy this episode.

Welcome to The Law Firm Owner Podcast, powered by Velocity Work, for owners who want to grow a firm that gives them the life they want. Get crystal clear on where you're going, take planning seriously, and honor your plan like a pro. This is the work that creates Velocity. 

Melissa: Welcome, everyone, to The Law Firm Owner Podcast. Today, I have a special guest who I'm especially excited to talk to for a bunch of reasons that we'll get uncovered. Michael DiGennaro, welcome to our podcast.

Michael: Thank you, Melissa. Thank you for having me. I'm glad to be here. My first podcast, and I'm glad it's with you.

Melissa: I love that this is your first podcast. Also, it feels like a tragedy that this is your first podcast because what we're talking about today is so important and should be on shows all the time. So, yeah, maybe first, if you just want to say a little bit about yourself and the company that you're representing today, and that you work for, and about your role there.

Michael: Sure. Great. Thanks. I am Michael DiGennaro, and I used to be a practicing attorney with the Federal Reserve System for the Board of Governors of the Federal Reserve in DC, and that was right up into the financial crisis that occurred in 2008.

And so I did a bunch of banking mergers and acquisitions there. One of the better-known ones that I worked on was the TD Bank acquisition of Commerce Bank on the East Coast of the United States. But that's the type of work I did there, but large banks really aren't my thing. I guess that's why I work with entrepreneurs and small law firm owners, because I kind of enjoy that environment a lot more. 

Melissa: Oh, that's great. Okay, and you work for Law Practice Exchange, correct?

Michael: That's correct. I am the Law Practice Exchange's chief strategy officer.

Melissa: I want to tell everybody, I'm learning too. I mean, we had an email introduction, which I'll say, you know, not a lot about, but I'll give you some context for. And I jumped at the chance to have a conversation with you, but so really, as I'm asking you questions, I am learning about you too, with the audience. So, yes, so Law Practice Exchange is the company you're currently at, and you're the chief strategy officer, is that what you said?

Michael: Yeah, and I do a lot of other things. I have a lot of client-facing roles at the company. I do sales, a significant amount of sales, and new business development, client relationship management. I pull point consulting clients on brokerage assignments, a number of other things. I review letters of intent, for instance. So I have hour-long sessions, and we also have monthly engagements where our entire advisory team is involved in consulting with our clients, both on the buy side and on the sell side. 

As far as what we do, so the Law Practice Exchange, I'll back up. After I left practice, I went into attorney recruitment and was doing that for nearly a decade. And one of the last stints I found myself in was working for an Am Law 200 firm in their Charlotte, North Carolina office.

The first few days I was at or the first few months I was at that job, Tom Lenfestey, our founder, presented a South Carolina law firm to me for acquisition, and our firm indeed wound up acquiring it, and part of my duties there around that was staffing up the acquisition. Basically, it was going to be the succession plan for an elderly but well elderly and well regarded attorney in South Carolina, and he would need staff, he would need a successor, a designated successor, and so I was I helped staff that up around that acquisition.

I really liked Tom's work. It was completely new to me. It was something I had never seen as a recruiter. I had always worked in this world of just conventional mergers. Hey, come, you know, come to us, let's join forces, and your comp will be so much bigger because we'll have cross marketing opportunities and, bigger, better, etcetera. That's not much of the succession play for a law firm owner. It doesn't really exactly monetize what they've built.

And so what Tom does is he focuses on true sale of law firms as a succession plan. And by true sale, I mean cash down, earnout sale. So the purchase of equity in the law firm, just the way you would purchase a business in any other sort of service industry. And Tom's mission in founding the Law Practice Exchange was to normalize that. It had been normalized in other many other service industries, but it hadn't been normalized in the law firm space for some time.

And part of that was due to ABA rule restrictions on sale of practice. I think it was around 1990 that the ABA came out with their guidance that it was okay to sell your law firm as a means of succession and is now, you know, actively encouraging that law firm owners form succession plans, namely because first and foremost, the clients, they, you know, just being left out in the cold, if an owner should pass or an owner wants to suddenly retire, the clients needed some place to to to go.

So, as far as this true sale, I really liked his work, and I came over to Law Practice Exchange about nearly three years ago. It'll be three years in February. When I got here, we were pretty much a conventional sell-side brokerage. We worked with small law firms, nearly representing fully representing nearly all of them that came through the door.

About Tom, our founder. So Tom is a deal lawyer of 25-plus years. As I mentioned, he's worked on succession plans for dental practices and medical practices, etc., and did that, you know, while practicing. He's also a small law firm owner. So Tom owns a law firm called NC Planning in the Research Triangle of North Carolina, where we're headquartered. and that law firm does both estate planning work and business succession planning work. And again, most of the business succession planning work is for businesses outside of the legal services industry. Tom really saw a need for a dedicated platform for the legal services industry, and that's how he founded the Law Practice Exchange 14 years ago.

I mentioned that we were a sell-side brokerage when I came in. We radically transformed in the last three years, and part of our transformation was engendered because of the new entrance into the marketplace on the buy side. So we now have non-lawyer owners entering the marketplace. We have private equity, we have alternative business structures, we have private capital-backed lawyers that are, you know, they went to law school simply to own law firms as a business. It's a whole new, whole new class of buyers, and that really made us think about what we were doing, and we have now transformed over the last few years into two things.

So we are one, a law firm transactions deal advisory service, meaning we counsel both law firm buyers and law firm sellers in affecting mutually beneficial transactions. And second, secondarily, we run an actual exchange now. So it's an electronic exchange where law firm buyers and sellers can transact directly with each other on a 24/7, 365 basis. And it is, if you will, sort of a cross between a dating app and eBay for law firms. 

Melissa: That is great. How many firms are on the exchange? 

Michael: I think last count as of a few days ago, we crossed the 1,700 mark, which is pretty impressive in that we launched only in May of 2024 and started with zero participants by then.

Melissa: Wow. That's great. I mean, obviously, this is something people are interested in, and there's not many places to turn when you're considering a deal like this. And so, it's I think it's really great that you guys exist. Thank you for that intro. That gives some color for me about a little bit about your background, for one, but also just about the structure of Law Practice Exchange and what you guys offer.

I will say, one of the reasons I really wanted to talk to you was because all the work that I try to do with firms is to really help the firm increase in value, because we're removing the need for the owner to be in the center of everything. So a lot of the work that we do lends itself to that.

But I am certainly not an expert on how to exit. And I think there's a lot of people out in this space that say that they use that as a marketing ploy, you know, exit strategy, like opt in for this thing. And I find that there's actually not that many people that know what they're talking about. It's more of just the same, how to set yourself up so that you can have a good exit from a firm structure. 

I think there's such a gap in knowledge here, and generally, I feel a little blind when I'm helping, when I'm talking to my clients about this, and they are considering, how do I like what is my succession plan? And so that's first. So we all know that, yes, the work that I have the privilege of doing with people is in their best interest. But beyond that, I'm blind in a way that doesn't help or serve them, and I need to number one, educate myself better, and understand where to send these people when they have needs like this.

So I put together some questions, and then you sent over some questions that you could answer that I thought were fantastic. And so I may just get into those if that's okay with you.

Michael: Yeah, happy to answer questions.

Melissa: The first one that you sent over that I think is a really great starting place, what is my firm actually worth, and how is that calculated for law firms specifically? 

Michael: So, the first point is that your law firm does have value. It's interesting how many prospective clients I get that think my law firm doesn't have any value. They just saw our Facebook ad or our Instagram ad, and they had to click on it, but they wanted me to kind of verify their instinct that their law firm doesn't have value.

Melissa: That's interesting.

Michael: Law firm value can come from a variety of different components. For instance, in a personal injury law firm, one of the components of value is its case portfolio. That case portfolio is an asset, and it could be sold off to another law firm. We use an asset methodology when we value law firms, and we assign that, a weighting in the case of personal injury law firms.

But what about law firms that don't have these liquid case assets? Where is the, you know, where is the value? Well, stuff as basic as the desks and, well, your staff, right? So if I'm going to go out and your law firm has three paralegals and I need to hire three paralegals myself, as a former recruiter, I can tell you, you know, you're recruiting a, you know, recruiting a paralegal that you're going to pay a hundred thousand dollars a year, you know, your recruiter's fee for that paralegal could be fifteen thousand dollars alone just for that to make that hire. And so, having an operation that has, you know, seasoned staff that's, you know, with, you know, performance metrics, there's value there.

But the biggest value really comes from the goodwill of the practice, and that is the client base that the law firm has. And basically, you know, the services that you're providing to that client base. Now the client base could look like a variety of different things. The client base could be high-net-worth clients that come in. And those clients are very, very tethered to the owner, personal relationships, being on the golf course, the tennis courts, the country club, whatever, wherever you develop those types of clients.

It could be a consumer base, and you might be doing a lot of advertising, dancing on a truck, or whatever, to advertise to get that client base in. That comes in a different way, and those clients aren't as tethered to the owner. They come in through measurable marketing and advertising sources, which is actually a really good thing and makes your law firm a lot more like a business than in the former instance that I mentioned.

Your clients could be corporations, simply, you know, developed through your, you know, your connections, your past work, etc. But it's really the goodwill that you've generated with your firm, the law firm's name, its website, its art marketing and advertising means by which really generates the value, the core amount of value for your law firm. 

Melissa: I'm trying to think of an example of a firm that has a harder time, or you know, where people are in and then out. I mean, maybe they cycle back in, but criminal law, for example. Can you explain to me how would they think about their value if it feels more of it feels more like a churn? And so how do you evaluate that?

Michael: So that churn actually can be good for a number of reasons. So if I invest X amount of dollars into advertising per month and that produces a Y amount of leads, and of those Y leads, I can convert them. That's something that's measurable and quantifiable, and I can do a historic look back and see, like, you know, if I, you know, if I dial up advertising here or I redeploy it from, you know, PPC to SEO to traditional media, etc. These are the results I have. That's traditional performance.

And so, that's good because when let's say an investor-type buyer comes in, they look at these things and they look at these performance metrics and say, wow, you know, you have a healthy business here that's steadily provides this level of client base at this cost.

The second reason why it's great is because of owner exit. So I mentioned before that there's no law firm deal is an all-cash at close deal. It's always a percentage of cash down with the remainder earned out over a period of time. And that time period is the time in which it's estimated that it will take the former owner to transfer the goodwill and client base over to the new ownership. And that could span six months or it could span five-plus years. But when you have, like in the example, that you have with the criminal, criminal law firm that does advertising for say, to get its client base, those clients aren't tethered specifically to that lawyer. They come through a marketing and advertising channel, and so that lawyer may have an easier time to, you know, a more abbreviated time to exit the firm since the goodwill of the firm is not specifically tethered to them.

Now, it could be if that lawyer is the one who's doing all the high-profile trials that gets these clients in, but that's then it's not really just the media advertising that's doing it. It's that attorney-specific trial performance that's gaining new clients. But, you know, with the appropriate talent in there, that owner could be effectively earned out and have the goodwill transferred over to new ownership in that instance.

Melissa: And then I guess this may be similar to something you've already referenced, um, a client base that's been built over time on relationship and but I have another one that comes to mind is it seems like where the value is is the portfolio of clients and someone they just stay and they keep paying and so I think about for example, IP or trademark work for like global portfolios, that is they're making money every month, every year off of these same companies. And so I'm just wondering, is there anything you haven't said yet that would apply to someone where it's more the portfolio of clients?

Michael: Sure. So that's a different type of monetization effort there. So, one of the great plays with a corporate client base is the cross-marketing play, and it's a fairly conventional play. It's when, you know, when a law firm is trying to court, like let's say a solo practitioner or a small law firm that has these types of clients, it's typically for the cross-marketing play.

Cross-marketing play is you offer, you know, you, small law firm owner, offer service A to your corporate clients, and you're making this money. But anytime your clients want service B or C, you're referring them out and probably not monetizing that. You probably don't have a referral relationship where you're monetizing B and C. Plus there's ethical restrictions on being able to monetize those relationships. 

But, you know, if you, small law firm owner, come to my firm, I offer services B and C. And so really, where the money comes in is that I'm now bringing all of those clients under one shop, and I can offer all three of those services. So that's instant value that's created there.

The trick is in the sort of um, true sale scenario where you're transferring it from one owner to another owner, like how to get those corporate clients to stick with the new owner. And that takes a lot of careful introduction of the client base, really getting them comfortable, and that seller willing to stick with the clients until they're really comfortable that they're in the hands of the new ownership. So, again, it's a bit trickier hand off there, but there's you're right, there is value there.

Melissa: How soon or long before you'd like to be done with your firm should you start this process of learning and maybe getting out there to try to find the right match of a buyer?

Michael: That's a good question. Learning now, that's always the best time to learn, is right now. Learn. Especially if, you know, I were an owner of a law firm, there were there's a lot of different parameters that go into sale. And I think the one thing that the owner could do, especially now to learn is really understand themselves.

And I get a lot of lawyers that come to me that really don't know what make what makes them tick. In the sense that every time I have a prospective client, at least on the sell side, I always ask them three questions. What are your personal goals? What are your professional goals? And what are your financial goals? I need to know those three things in order to structure a brilliant exit for them. And every deal can be structured in a different way, but if a lawyer doesn't know what their own personal goals are, professional goals are, and financial goals are, it's very hard to craft a deal that will work for them. So getting comfortable with that.

And things like, am I a transactional individual? Do I look at my law firm as a business? Is this one asset in my broader retirement portfolio? And will I, when it comes time to rebalancing that portfolio, which isn't necessarily at the time of retirement, because sale of practice and retirement are two very different things, which is another common misconception.

I encourage owners to look at it like, I'm of this age profile now in my retirement arc, how much, how much of my net worth do I have invested in a privately held business with this risk profile? And, you know, if you have 50 to 75% of your net worth tied up in your law firm and you're in your 60s, well, I don't know any financial advisor worth their salt that would say if this was just a privately held company that you owned with no emotional attachment to it, that you should be in that much equity of a privately held, a single privately held company. And so I encourage owners to look at it that way and be a bit more transactional, but they're not.

There are a lot of owners out there that really, you know, they dip into the sales process, but they're not going to sell. Like in the back of their minds, they would rather burn their law firm to the ground than have it owned by someone else.

Melissa: What?

Michael: That's exactly it. You heard me right.

Melissa: Say more. And if you are listening to this and you're like, yep, that's me, I want to understand. Why is that?

Michael: Ego. There is a lot of ego in the legal profession.

Melissa: Oh, gosh.

Michael: You owning something that I have, yeah. The idea of you're, I control this. This is a thing that I've created, and I control it. And that in and of itself is an end for me. Like the ability to control something that I've created, not looking at it in a more detached way saying, I can monetize this. I could take care of my entire family from selling this as a business, and they're not detached from it. And they'll go into the sales process thinking they are, but they're not. There's a lot of attachment.

And I've had sales where they've had great offers made to them that would have really met a lot of, you know, an individual's needs in retirement from this, the sale, and they've done everything in their power to tank their deals. I would say that of our deals that are scorched, you know, at least 80% of the time, it's the seller doing the scorching of their own deal.

Melissa: Well, that's, you know, zero details being given right now, but that was the experience that I watched play out, and I just was shocked. Hearing you say this, this is psychologically, this is more of an event for many people than what they might realize it is. And as silly as it sounds, you know, learning, I think is super smart, but getting to know yourself.

I like the way that you put that, and if you need to, as silly as it might sound, start going to explore your own self, like get a good therapist, do something where you have people on your side to help you unpack some of the things that would sabotage a real opportunity for yourself. That is, I didn't expect you to say that, even though I know it exists out there, the fact that you brought it up, because it is such a thing, that is, I'm surprised that it's that much of a thing.

Michael: Yeah, I mean, lawyers sabotage themselves all the time. 

Melissa: And they can justify it.

Michael: You know, there's no secret also that, you know, the legal profession has some of the highest instances of mental health and substance abuse issues of any profession. And just knowing those odds from a statistical standpoint is odds are that you should have a therapist. And even if you don't regularly go to a therapist for your own needs as a lawyer, coming up to the time of retirement, that's a big life change. You know, you have life changes, their marriages, divorces, etc. And retirement's one of those large life changes. That causes stress, and what better way to handle that stressor than having someone that you can talk it out with. And so I think you're right on point there, Melissa. You know, we've been looking for a deal therapist, literally, to be like, you know, great, you want to sell your firm. Let's talk about why you want to sell your firm.

Melissa: Oh, that'd be so cool if you guys did that. I mean, I mean, it would be beneficial to the buyers and sellers, but also it will help your it will probably help the probability of deals go through. So it's a good business move as well.

Michael: True. But it it's it's also, um, what deal goes through. So let's, you know, we can move beyond the like actually getting a deal done. But then it's like what deal gets done. And so the deal, again, has to meet these goals that I mentioned before. And that is handled through deal structure. And so what I mean by that, again, no law firm deal, uh, or almost no law firm deal is an all-cash at close deals. Most cash at close deals are sales of asset, like a case portfolio sale. It's not the sale of the goodwill and the name and the telephone numbers and the IP and all of that.

Most of our sellers, ironically enough, money is not the number one goal in sale, maximizing the amount of proceeds that they have from the sale. There's other factors involved. And, um, usually what I typically hear as the number one goal is, I want to make sure my clients are handled as well or better than I've handled them in the past. And part of that goes into legacy protection. Like, hey, I I may be selling my law firm, but I'm not leaving this community, right? So, you know, who I pass this law firm off to really is going to matter. It's going to be very impactful on how I'm viewed in the community.

I would say the second thing and most important thing is deal structure. So, how much cash I close, what is the length of the earnout period and what do I specifically as, you know, as a seller, what do I have to do in that earnout period. And so, typically, law firm owners and as as you know, will have three main roles. One, they operate and manage a business. That's a business role. Second thing they do is practice law, which is a lawyer's role. And the third thing they do is originate clients and do business development and that's a business role that only lawyers can do at a law firm.

And so after sale, we calculate replacement costs for legal production. So that attorney does not have to practice law the day after consummation of the transaction. They will not be managing or operating the firm, and they no longer need to practice law after that unless they're compensated separate and apart from the proceeds of the transaction.

So, a market-based rate for the legal work that they actually do, if they do it. And they may want to do that. Part of what I mean by structure is, you know, “Oh my God, sell my law firm, I'm not ready to retire.” Well, no one said you had to. You can have an employment or an of counsel arrangement at your law firm in perpetuity after you sell the law firm.

It just needs that ownership has been transferred in an orderly manner to someone else, that you've taken care of your retirement in an appropriate fashion. You've balanced your portfolio in an appropriate fashion. That's what selling your law firm means.

Structure is where your goals are met. And that's where the that's where the seller's goals are met. So structuring the deal is very important such that those goals are met. And I would say the third thing after that is the actual amount of consideration that's paid for the firm, is the third goal that a law firm sellers have. So very unique in terms of business sales.

Melissa: I've had a few people bring up that when it's time to make a deal, like to actually get going, they care that their team is taken care of, which sort of falls in line with what the clients being taken care of really well. That these people have been with them for a while, they do good work, the firm is proud of the work they do, and so I'm wondering if you hear that as well, the team.

Michael: Yes, the team and the team, you're exactly right, Melissa, the team is usually part of that goal number one. They don't want buyers coming in there going scorched earth, and just trying to squeeze every penny from, you know, every spot.

It's actually not really in buyer's interest to do that either. You know, creating lots of instability at a law firm where the ability to transfer the full value really hinges on the client base staying. The last thing you want to do is come in and just go scorched earth on the whole operation. You're likely to lose a lot of business in that.

But it's also, it's not necessarily just the scorched earth, it's like how the employees will be treated by the new ownership. And that's part of the reason why we've like put the dating process between buyer and seller at the forefront of this. It's probably one of the single most important things getting that fit correct between buyer and seller in making for a successful transaction.

Melissa: This is probably a hard question to answer, but what percentage of the time does it seem impossible to find the right match? Does that happen a lot to firms, or eventually they will, they just need to stay the course?

Michael: They, okay, that's a great question. A lot of people ask me. It is, it's a question that a lot of our prospective clients have. Like, how long is it going to take to get this thing done? And it's not an easy answer. I mean, it can vary, the answer can vary a lot by, well, what type of practice do you have? Like, how long is the goodwill going to take to transfer? What geographic area do you live in? Because like younger attorneys don't want to live in the middle of nowhere, potentially, not at early stages in their career.

So there are a lot of variables that go into it, but on average, it can take between six and 18 months to get a law firm transaction affected. I think like rural mountains of North Carolina, like, you know, at the 18-month mark. Six months, it's that machine that we talked about earlier, where like, the firm is, you know, it's an advertising machine. Let's say it's a personal injury law firm. Everything is done by advertising. They never litigate anything. All the litigation is referred out. Paralegals run the entire show. The owner won a few cases in their mid to late 20s; they check in every few months, but it's, the whole law firm is essentially run like a business. That's a very easy exit and easy transfer, and a very desirable, quite desirable practice as well. So.

Melissa: Are there any practice areas that just have a harder time, period, just by nature of the work, and so may take longer?

Michael: Yeah, good, great question. There are practice areas that take a longer time in sale, and those were are ones that require in-person litigation. Interesting, we're in a world where we say in-person litigation because there are lots of litigations post-COVID that go on via Zoom. But there are practices that are very courtroom intensive, and they will require boots on the ground, and because of that, you know, an owner knows that, you know, I'm not just committing to buying a firm, I'm committing my life to being and living and eating and breathing in this geographic location for the foreseeable future. And so that can make it a much more challenging practice to sell because you're now narrowed the pool of folks that actually want to live in this place where you operate your business.

Melissa: Okay, guys, that's where we'll pause for today. In part two of my conversation with Michael, we will continue to dig into what it really takes to prepare your firm for transition and how to make decisions today that protect the value you are building. See you then.

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