Wondering What Your Law Firm is Worth? Here’s What Really Drives Its Value
If you’ve ever found yourself asking, “What’s the value of my law firm?” you’ve likely also thought about how to increase it. The answer comes down to two key drivers that determine how much your firm could fetch on the market.
A few decades ago, most lawyers didn’t give much thought to the value of their firms. Typically, they’d build a practice, work it until retirement, and then simply close the doors. Others would buy into a partnership, earn from it for years, and eventually hope to recoup their investment by passing it on to a younger lawyer.
But times — and mindsets — have shifted.
Today, more attorneys recognize that law firms are not just practices, but legitimate businesses. And like any business, they can be bought, sold, and strategically grown in value over time, potentially generating a strong return at the end of a career.
So what determines your firm’s worth?
Most Law Firms Are Valued Using a ‘Multiple’ of a Key Financial Metric
Law firm valuations typically hinge on two primary elements:
- Seller’s Discretionary Earnings (SDE)
- Owner Dependency
In essence, the firm’s value is calculated as a multiple (typically between 2.5x and 4x) of its SDE. The higher your SDE and the less reliant the firm is on you, the higher the firm’s market value.
Let’s break those two factors down.
1. The “Number”: Seller’s Discretionary Earnings (SDE)
SDE refers to the total financial benefit the firm’s owner receives. When someone is considering buying your firm, the first question they’ll ask is, “How much money does the owner actually take home?”
They want to know if the business generates enough income to repay any acquisition loans and still be financially viable. SDE includes:
- The firm’s net profit
- Your salary
- Owner benefits (like insurance or retirement contributions)
- Personal expenses run through the firm (like your car, phone, travel, family salaries, etc.)
Before you put your firm on the market, it’s important to normalize your earnings by gathering all these components into one clear picture. The more complete your SDE, the higher the potential valuation.
2. The “Multiple”: How Much the Firm Depends on You
Think of your firm like a house: if it’s a fixer-upper that requires a lot of hands-on involvement from the current owner, buyers will expect to pay less. If the firm runs smoothly without you, the value goes up.
Here are six areas that affect how reliant the firm is on you — and how you can improve them to increase your multiple:
- Marketing: Is your brand too tied to your personal name? Are you the only one generating leads? That can drag the value down.
- Sales: Who’s closing the business? If you’ve built a team — especially if you have trained sales professionals — you’re adding serious value.
- Operations: Do your staff have clear responsibilities and procedures? Can they function without you micromanaging? If yes, that’s a major plus.
- People: High turnover, poor onboarding, and weak culture all lower your value. A strong, stable team with a defined culture boosts your multiple.
- Production: Are billing goals set and tracked? Do you understand team capacity and workflows? A productive, accountable team raises your firm’s worth.
- Technology: Tech alone won’t increase value dramatically, but it supports everything else. Solid systems (practice management, document sharing, data tracking) prove your firm’s capabilities — and buyers love proof.
Three Eye-Opening Insights About Your Law Firm’s Value
- Improving these areas often increases your SDE.
- Fixing them also reduces owner dependency — increasing the multiple.
- A highly valuable firm doesn’t mean you have to sell — it’s also a better firm to own and operate.
