COMMENT

Achieving tangible market value

Why do so many successful law firms dismiss the value of ownership as 'too difficult to assess'? Robin Fry argues that expertise is a quantifiable asset with a recognisable capital value

Discussions regarding limited liability partnerships have focused principally (and understandably) on the protection that can be given to anxious partners from the time bomb of uninsured claims.

But anxiety should not be the only emotion propelling law firms into this new structure.

The prospect now in view is that of solicitors' firms operating as limited companies, with partners involved variously as paid employees, shareholders, and bankers to the business.It has always seemed incredible that the element of ownership of solicitors' practices has been neglected; in any valuation of a law firm, whether in the accounts or on merger, the question of value has typically been dismissed, except when buying up the business of a one or two-partner high street practice where some modest goodwill figure may sometimes be negotiated.Paradoxically, once a firm appears to have some real worth, its capital value to others is abandoned and the ownership of the firm passes seamlessly - and rarely with any payment - from the founding or older partners to the young bloods taking over.

Of course, there are the partners' capital accounts; but these represent only accrued undrawn profits or capital injections made.

Both look at only the historic position of the firm rather than at value attaching to the business going forward.

The equivalent situation is valuing a commercial business purely on the basis of the directors' loan accounts rather than as a multiple of forward earnings.

In almost every other sphere of commercial activity - from the local pharmacy to a FTSE 100 company - there is a recognisable forward value to the company.

Why are lawyers - the intellectual lite, we would like to think - last in line yet again? The traditional response to this anomaly is twofold: first, it is 'too difficult' to assess such a valuation, and second, a law firm's value resides in its fee earners individual managers rather than in anything more tangible.

Neither of these arguments stands up.

Partnerships from Goldman Sachs to London estate agencies and accountancy practices can and do achieve a market value once their structure changes and equity partners become shareholders.

However, there is one impediment: if a solicitors' firm has value, it is because of the expertise that it can offer.

It is that which gives it its reputation and thereby attracts premium work.

But such expertise rests within the brains of the lawyers and rarely becomes tangible.

At 6pm, when the key fee earners (trained so diligently at the expense of the firm) leave, their knowledge leaves with them.

How then can the value in the firm be captured?All of us have appreciated words of wisdom from our principal when training, or profited from the throw-away lines of a highly experienced partner.

This is the knowledge that is key - but how to seize it?

There is a way: the accurate, systematic and comprehensive recording in as many ways possible - audio, video, and text - of key fee earners' insight and expertise, together with its widespread availability within the firm.

Once in-house seminars, one-to-one mentoring and departmental tutoring are recorded and made available as a firm's resource, rather than a private one of the lawyer, then at last a solicitors' firm will begin to have some capital value which detaches itself from that of the individuals within it.

With that capture, the installation of a company structure and some strategic positioning, equity partners will have within their grasp very substantial capital rewards and lawyers will no longer be the poor men at the table of commerce.

Robin Fry is a solicitor and director of the on-line training company 2Ends