image [cc] KevinLouage

Answer: Zero

An old economics adage is that the value of anything is the price someone will pay to purchase it. Therefore the market value of any large law firm will be zero.

When valuing a company for a potential purchase, buyers will determine the various assets held by the target,along with their brand value, customer base and revenues. Depending on the type of industry, each factor will carry a different weight. However, revenue tends to carry the most weight since that factor has a direct monetary value. So how would a buyer value a large law firm?

Office Equipment: Fire sale value
A/R: Maybe 75% of face value
(Although this reflects a hard value, the cost will equal the value and therefore it is just the purchase of receivables and not of a functioning firm. The only way this might have value to a buyer is if they think they can collect more than the firm would have.)
IP: Knowledge base is poorly organized and partially owned by clients. Knowledge assets walk out the door every night.
Offsetting Liabilities: Expensive long-term office leases. Possible short-term debt.

A large firm’s brand may have some value, but since any one player owns such a small piece of the market, law firm brands are not that distinct. So the real brand value comes from being classified as an AmLaw 100 firm, versus the specific law firm brand. Most clients these days view a firm as Top Tier or not. So the brand has value only in that classification and not as a separately valuable commodity. Result: BigLaw brands will not have much, if any, market value

Customer Base:
Definite value here.
Problem #1: Per ethics rules, the firm does not own the relationship, the individual lawyers do and the client has full authority to move its business at will.
Problem #2: A customer base is specific to the individual partners, and therefore ‘owned’ by the individual to a greater degree than the firm. Therefore these are not easily transferred in a sale.

Revenue (or multiples of revenue):
Per the customer base note, revenues are tied to individual lawyers, so a buyer would be valuing the revenue based on whether the lawyers with the relationships will remain as part of the entity. And why would they? They were just bought-out of the partnership.

When valuing a business on multiples (or fractions) of annual revenue, an obvious issue is how sustainable is the revenue stream? If only a portion of annual revenue will recur year-over-year, then the multiple is reduced. The problem for large firms is that a significant portion of revenue is episodic. Large cases or mergers come and go. Therefore not much of the revenue is reproducible year-over-year on a per client basis. Typically, the on-going revenue comes from other clients having large matters appear. Accounting practices, in contrast, have very sustainable revenue, since much of the work they perform is recurring. This suggests firms that strive for Tier One work will suffer in a valuation, since Tier One work is episodic and only sustainable over a larger client base. Or in other words, BigLaw’s phobia towards ‘commodity’ work reduces their market value, since commodity work is typically repeatable and therefore sustainable.

So on a good day, the best valuation of a large law firm will be a shrinking portion of their annual revenue. I say shrinking, since the market is currently redefining Tier One work and the competition for that work is increasing significantly.

But all of this analysis is for naught. Even if you could determine a reasonable purchase value, the only potential buyers will be other law firms, since ethics rules (in the US) prohibit ownership by non-lawyers. And other law firms have no capital or a real ability to raise capital to make such a purchase. So back to our economics adage – there is no one willing or able to pay any price for a large law firm, therefore they are worth zero dollars in the market.

Imagine a company with a billion dollars in annual revenue having a market value of zero. This might be one reason why large firms struggle to act like a business.