Erin Guthrie: Turning Your Law Firm into a Valuable, Exit-Ready Asset

Voiceover: John, welcome to the 1958 Lawyer, the show for attorneys who know the old model isn’t working anymore. The billable hour, the 12 hour day, the expensive office no one visits. Your host, John and Rebecca Bockstahler, are here to question all of that and more by exploring smarter, healthier, more flexible ways to run a law firm. No more burnout, no more outdated expectations, just real conversations with attorneys who are proving there’s a better way. If you’re ready to build a law firm that’s profitable and livable, you’re in the right place. Now, here are your hosts, Ron and Rebecca.

Ron Bockstahler: Welcome to the 1958 lawyer, the podcast about the business of law. I’m the co-host, Ron Bockstahler, with my partner, Rebecca. In 1958 the ABA published an article that sparked the birth of the billable hour, and the legal profession hasn’t looked back since. This show is about what comes next. Each episode, we sit down with attorneys, business leaders, and the people who support them to talk honestly about what it takes to build a law practice that’s not just success, but is sustainable. Let’s get into it. Well, alright, we move over. We got an amazing, really amazing guest today with us. Erin, is it okay? I’m gonna say this wrong. I should ask you before the show. Erin Braddock Guthrie,

Erin Guthrie: yes. Spot on.

Ron Bockstahler: Right on. The owner of Exit Factory, managing partner, I guess, and owner, is that right?

Erin Guthrie: Yes, that’s right.

Ron Bockstahler: Right, Exit Factor of Chicago downtown, where she helps business owners, including law firms, principals, build companies that are worth more and ready to sell on their own terms, and Erin brings a serious, serious resume to that work. She spent years at a strategy consultant at McKinsey, ran Uber’s Midwest operations here in Chicago, and helped leadership roles and held leadership roles at Microsoft and Dell. She also served as director of the Illinois Department of Commerce and Economic Opportunity, where her job was essentially to grow and sell the entire state’s economy. She’s a Stanford grad with an MBA from the University of Michigan, two schools very hard to get into, and Crain’s Chicago Business named her to their 40 under 40. Today, she’s taken all of that Fortune 500 strategy operations real real deal experience and pointed it at something more personal, helping local business owners maximize their value and plan a successful exit, and that’s exactly why we wanted her on the show. Most attorneys never stop to think about what their practice is actually worth and what happens to it when they’re ready to step away. Erin does. Erin, welcome to the 1958

Erin Guthrie: lawyer. Hi, thanks for having me. Happy to be here.

Ron Bockstahler: I’m like, I don’t even feel like I’m royalty. It’s all that. That’s quite the resume you got going.

Rebecca Bockstahler: It’s impressive. I feel like we should have just done a standing ovation.

Erin Guthrie: Wow, I’m so flattered. Thank

Ron Bockstahler: you. You know, tell us about the journey. What drew you to exit planning and why exit factor?

Erin Guthrie: Well, yeah, I mean, you read my background. I have always worked in strategy. I like solving problems. I like working on business acquisitions, but I think more personally, I’ve had a family member who, over the years, tried to sell a business and really struggled because of having some customer concentration issues, meaning had one large customer that really dominated their business, and so even though there were multiple offers, multiple suitors that wanted to buy the business, they just could never sell it, and it was really frustrating, really difficult, and over the years I think caused a lot of, you know, consternation for them, and so it made me just have a lot of empathy for business owners, because this family member, super smart, super talented, they know how to run this business, but there’s something blocking it, and I think a lot of business owners can relate to that, because if you’re not planning ahead on what to do at your exit, sometimes something that seems like a great way to run your business might actually be the thing standing in your way, so that’s kind of one of the reasons that I got into this space is looking at this one family member and learning about that, and then looking, I think, more broadly at all the people in this generation who are getting ready to maybe retire, thinking about handing off their business, or maybe just sell their business, and go on to start a new one. So, there’s just a lot of opportunity there to help folks understand what it means to sell a business, what it means to transition, and got really passionate about it. Yeah,

Rebecca Bockstahler: well, for listeners who maybe haven’t heard of Exit Factor, what do you do, and who do you typically work with?

Erin Guthrie: Yeah, so exit factor started out of this idea that eight out of 10 businesses never sell, which is actually kind of a shocking statistic. It’s actually 87% and the reason for that is most of them close their doors, most of them don’t ever, you know. Hand off to somebody that’s profitable, and it started by a woman who was a business broker. She would get a lot of companies coming to her saying, “Hey, I really want to sell my business, but they really couldn’t be taken to market. So she founded this business in 2018 It’s now scaled. We’re 40 offices globally. We are across four countries. We have almost 200 consultants, and we’ve covered every single industry. We’ve served 2000 businesses. We mostly work with companies for 50 million in revenue, and we really focus on helping them become exit ready. So, whatever that means for them, that could mean handing it off to a family member, it could mean turning it into an employee-owned business, it could mean selling it outright to a private buyer, a private equity firm, a strategic buyer, whatever that looks like for them, but what it really means is helping them understand their business today and how they can take it to be that great value to sell it in the future,

Ron Bockstahler: so most attorneys never think eventually selling the practice. It doesn’t really cross their mind, at least that’s my experience. And so, how early should they start planning their exit? Like, what are they calling you?

Erin Guthrie: Yeah, so I actually was just working with a law practice there, a smaller practice, and they were thinking about it pretty close to the transition time, it was just about a quarter away, and they’re like, “What can we do? We really want to get top dollar for this. I’ll say that’s a little bit late, right, because you want to get increase your value before you sell one quarter or two quarters away is going to be really hard to add a lot of value, so I’ll start by this. Most buyers are going to look at three years of your financials, they’re going to look back and see how is your profit doing, what’s your client base look like, are you getting, depending on your, you know, space in the legal field, are you getting return clients, are you getting referrals, do you have a good hold on your market? Do you have a good reviews, things like that? They’re going to really look at that, and if you’re trending in all the right directions with your revenue, with your profit, that’s going to make it easier for you to make that sale. So, if you have a profit that’s kind of going up and down year over year, it might make sense for you to wait a little longer till you can get that nice straight up into the right line and spend a little time preparing, so three years is a good place to have in the back of your mind if you’re thinking about an exit

Rebecca Bockstahler: that’s interesting. So, is a law firm actually sellable? I think a lot of attorneys probably think that their practice is going to end when they stop practicing. So, what’s the reality?

Erin Guthrie: Yeah, absolutely. Law firms of all sizes are completely sellable. When you think about what is sellable, it comes down to clients, it comes down to IP, it comes down to anything that can be sold. So, really, that comes down to return recurring revenue. Reputation is a piece of IP in a way, anything that’s trademarked, any sort of processes or talent that’s in house, so all of those things are absolutely sellable, and they’re assets, and even the brand itself can be sellable asset.

Ron Bockstahler: Let’s talk real quick about that process piece, because I just actually wrote an article yesterday, and we talked about five key processes. There’s something specific gear going in, and you’re looking at and saying, make sure these are in place, because when that founding partner walks away, quite a bit can potentially walk away if there’s not processes.

Erin Guthrie: Yeah, great point. Processes are really key. It’s something we work on with all clients in all industries, but especially in professional services and legal. You want to make sure that you have documented really well things like client onboarding, business development, anything that’s going to be a repeatable process for your whole firm, so that if a new owner were to come in and you weren’t there, they could kind of pick up that process and do it themselves without you having to coach them through each and every step, similar to like if you hired a new associate in your team, how are they going to come in and learn the ropes around how you onboard clients or find new clients or do research or document things, making sure you have all robust processes recorded, and that you’re training your staff on those. That’s going to make your business really sellable, because buyers really want to see that as well. It makes them feel reassured that you’ve taken the time to make your infrastructure really strong, and it feels like you’ve really invested, and it’s a sellable asset. Yeah,

Ron Bockstahler: are there any key factors that you would tell a law firm or lawyer, you’re talking to a lawyer right now that says, hey, these are like three top factors that is really going to raise the value significantly of your firm.

Erin Guthrie: Yeah, so one really important thing is going to be reputation, right? That’s something I know a lot of lawyers think about, and it’s. A tricky sort of squishy one to measure, but if you’re going out and measuring reputation, obviously online reviews are a big one, or other forums in which clients can publicly review you through testimonials, other places that you can gather, you know, evidence of positive reviews. Reputation really matters when it comes to buyers buying a company, and you can do that through, you know, testimonials that are sort of behind the scenes, where customers are doing it just to the buyer or online in a public forum. So that’s extremely important. A second is continued profitability, so showing that year over year you’re having that steady margin management, and that you’re beating sort of the industry standard, that your margins are not only predictable, but they’re also above an industry average. And then the third thing is that you have good client development, repeatable client development, and that’s again going to different by type of law firm, because some law firms will have recurring revenue, some won’t, just given the type of industry that they’re in, but knowing that you have that engine that’s going to keep giving you more clients, so that you have predictable revenue coming in, because any buyer wants to know if I have my main owner go away, that’s probably a rainmaker for me, so will it be easy for me to keep getting clients and keep them coming back.

Rebecca Bockstahler: You mentioned having positive reviews or testimonials. You also mentioned development, so I’m going to kind of take a little spin maybe into the marketing a little bit, but can you maybe expand on or connect for us how the day by day marketing, the brand, the online presidents, the reviews, all of that come into effect the worth when it’s time to sell. And do you need to look at a three year window for that information as well, or sort of, what’s the timeline?

Erin Guthrie: Yeah, so probably not three full years for a brand, but I would certainly leave at least 12 months. One of the unique things about law firms, and maybe accounting firms have this as well, but law firms are very strong in having the person’s name on the door, that’s pretty common that we see in the law industry, as most listeners will know, and that can be a double-edged sword, obviously, can be a really great reputation driver if that person has a long, you know, 40 year history of running the firm, of course, if that person leaves, then that name is going to change, so it’s just something to think about. If your firm is branded under a specific individual’s name, and perhaps thinking about, do you want to still have that brand if you’re thinking about a sale, so if that brand is an individual’s name, the runway to changing it may be longer than a year, right? If it’s not a person’s name, it’s a little bit of a shorter time frame, right. But so, in the picture of marketing, you’re really going to want to do an assessment of what’s my reputation compared to other firms like me. How do other firms like me stand up in terms of their marketing presence, their online presence. Am I winning against them in head to head bake offs against winning clients? And how do I do when it happens when I’m sort of competing for the same types of clients? How does that go? Do I track those win rates? So when a buyer comes to me and asks, hey, you know, let’s say it’s a law firm that serves corporate clients, what’s your win rate in this certain corporate space? You should be able to tell them approximately your win rate, especially against your top competitors. So those are some of the marketing and sales metrics that you can start to track, and especially if you have that name on the door, really thinking about how you’re going to manage that in navigating handing it off to new buyer.

Ron Bockstahler: So, if you’re three years out, I know I’m going to retire, I’m going to sell my firm. Is there anything in specific, specifically, I mean, and I’m.. if I got to change my name, you know, a great example. I don’t know if you know Kenneth J. Allen, but I’ve watched over the last 18 months Ken change the name of his firm to the Allen Law Group, very slow and methodical. So, you see him on TV, you see him on billboards, you see him on busses. It’s still him with this fedora hat on, but the names changed, and ironically, I didn’t notice it for the first probably eight to 12 months until he said something to me, but anyways, and that’s kind of him thinking to himself, like I’m gonna step away, so you know how, where’s gonna go. So I’m wondering if there’s like, if we’re three years out, should I be.. what, what are some key marketing things that I need to start thinking about today, marketing or on and or onboarding of new clients that I need to make sure is in place, and do you have some kind of, maybe I’d ask this question, let me back up, when do you want to start working with me if I’m going to sell in three years?

Erin Guthrie: Yeah, so a couple things to think about, if you’re you’re thinking about changing your name, start it as early as. Possible, if you can start sooner than three years, you really want to start getting your name and reputation out there as soon as you can, because clients, if you’ve been around for 1020, 30 years, they’re going to know you as that name on the door. So, the more you can start to gradually phase that in, that’s important, but also think about how you’re running your sales process. One of the top issues we see in exits is that the owner is running the majority of client development, business development, and that’s not just in legal space, that’s in every space. So think of it this way, is if your friend Ken walks out the door and 50% of the revenue goes with him, that’s a problem for a buyer. So what he needs to do, or anyone like that needs to do, is think about how do I continue to make this client development engine run without me. Does that mean I need to bring in a couple of other rainmakers? Does that mean I need to get some more recurring revenue in house? What does that look like to bring in my business development, so that I’m not the main person driving sales, or you know, business development, and so that’s a really important thing to start phasing out over your three year plan. So that’s that’s a really, and then the second thing is making sure that your clients are being serviced by people other than just that main owner, so you as the owner are going to be the face of the firm, but that they’re also being addressed by other start to feel that of it’s not just you being the main kind of front and center lawyer with them, because again, if you go away, you don’t want your clients to feel like the rug was pulled out from under them. You want to have that really natural handoff when the new owner comes in and say, oh, I’ve already got this continuity of someone I’ve been working with, this lawyer that I trust. Yeah, there’s a new owner, but that’s not really impacting me as a client from a day to day. I’m still getting the same amazing service, amazing talent, right? So you really want to think about how do you make yourself basically a little more expendable. Okay, well,

Rebecca Bockstahler: they’ve made some of our listeners a little bit nervous, so let’s say we have some listeners who are maybe hoping to sell sooner than in two or three years, but the attorney is still the brand. How are you then able to separate that personal reputation and that brand from the business value, so that you don’t scare buyers off, but you don’t think that not every attorney who wants to sell an ear thinks that there’s no hope for them.

Erin Guthrie: Yeah, it’s not, I mean, definitely not a problem if you’re not doing this right. So, I have a client that is a solopreneur, they’re a single lawyer that sold to another business. It was a great handoff. So, there may be just some things you need to do a little bit creatively. For example, in that case, they stayed on for a while, helped manage those clients, didn’t mission for about nine months into those clients were comfortable, and then they exited a little bit later. So, you may have to be a little more flexible in terms of saying, as soon as I hand over the business, I might not just walk out the door. But things to start thinking about, you don’t have to rebrand, that’s not a requirement, it’s just something to consider is, how can you then start making the business as value as possible. So, going back to those three dimensions we talked about, reputation, how can I continue to improve that, continue to win lots of great testimonials, reviews? That’s always something to invest in, making sure you’re getting that feedback from your clients, continuing to strengthen the fundamentals of your business, your profitability, and then thinking about that client retention piece. So, even if you don’t have a long runway, what are some of those recurring revenue elements you can make with your clients? So, let’s say, if you are thinking about a year away, can you start kind of phasing yourself out, or maybe working tag team with some of the lawyers in your business, if you’re a smaller practice, or thinking about how to pass those relationships off, so that you’re not just the single person billing to that client, especially if you know you’re going to list the business, if you, because if you are the only one billing to that client, that does pose a risk, and that client might feel surprised if you suddenly leave, so you can start gently phasing it out, even if you only have 12 months,

Ron Bockstahler: you know. Being the rainmaker used to be that was the greatest thing, I’m the rain maker, but now it all of a sudden, as you’re kind of phasing out, it’s like that’s not such a great thing anymore. You gotta start bringing people in. I think we’ve seen a lot of big firms where attorneys are afraid to do that, or they’re reluctant to do that, and we’ve seen a lot of failures, I think, because of that very reason, because there’s no transition into leadership.

Erin Guthrie: Yeah, yeah, it’s, it’s hard, it’s hard, because you know, running a business and selling a business are two totally different muscles, and in every industry, it’s.. I see it, so. So it’s just being really disciplined and figuring out how do you establish that succession plan, who’s the next kind of folks in line, and being the owner is really hard to replace by one individual in your staff, so you may have to think about dividing up some of the responsibilities that you do as an owner to multiple people and delegating some of your client development to one, some of like your service to another, some of your operations to another, because if you’re the entrepreneur, you may have worn a lot of hats, but not everyone is maybe good at multitasking as you, or ambitious as you, so think about, you know, who are those rock stars in your team that have specific strengths that you can hand off some of those elements to that are really going to do well and be able to carry on the torch in those different dimensions.

Ron Bockstahler: Erin, in the legal industry, since you got to be an attorney, unless you live in Nevada or Utah, you got to be an attorney to own or have ownership in a law firm. Are we going to be looking at, or majority of our listeners going to be looking at a burnout of some sort versus a cash buyout, is, I mean, I guess there’s, you could structure it anyway, right? Are you going to help them make those decisions as what it looks like?

Erin Guthrie: Yeah, and just in case folks don’t know, the difference between an earn out and a cash buyout is, earn out means you get paid, but then you stay on for a little while with the hopes of getting some upside for performance. Cash means you take cash, and so it really depends on the type of buyer. I would say that because of the nature of legal industry and client relationships, you will see a lot of folks staying on for a time. It’s very hard to just pull the plug if you’re an owner and completely leave the moment that the money changes hands, just because of the nature of the ingrained relationships. So, you are going to probably see some, some transition time. The thing, then, and we do help our clients navigate the earn out decision versus the cash decision the things to think about, and maybe consider if you’re an owner evaluating those two things? Is your comfort level with risk, and what I mean by that is, are you comfortable knowing that, as you know, as a non-owner, you’re not going to be at the helm anymore, you’re not the CEO, you’re not the tech part managing partner anymore, I should say, but you will maybe not be calling all the shots, so somebody else may be making the decisions, you might still get a chance to get some upside, but there’s a little risk there, versus in an all cash buyout, you’re getting cash, right,

Voiceover: yeah,

Erin Guthrie: so there’s different risk profiles that people are comfortable with. Burnouts usually have a higher total dollar amount that comes with it, but less control, more risk. Cash is cash, so it’s just a risk tolerance, a risk tolerance game. And then also it depends on who you’re selling to. If you’re selling to, like, a private equity firm, they’re going to do more of an earn-out structure. If you’re selling to an individual lawyer, they’re usually going to do more of a cash structure, maybe with a little bit of an earn out. So that’s that’s a pretty typical, but we do help our clients think about that, and we also try to help them think about what are the right structures of earn outs, so that they can minimize their risk, so that you’re not taking on so much risk when you, when you walk

Rebecca Bockstahler: into that next, that next phase.

Ron Bockstahler: All right, big red flag, law firm, anything that makes them hard to sell, or anything that kind of stands out, it could be a law firm earning business. I know you’ve done kind of across the board.

Erin Guthrie: Yeah, one really big red flag is is not having repeatable business, that’s really hard, or having all the way at the other end of the spectrum one or two clients that make up all your business, and that can happen a lot in professional services is that you get a whale that’s a really exciting, you know, contract, but then they make up 50% of your revenue, so that can be a scary thing for buyers, because if they see that you don’t have a lot of diversity in your revenue, if that one or two clients were to go away suddenly. Well, then a huge portion of the business went away, and same thing with the repeatable piece. And again, not every law firm is going to be eligible for repeatability, but certainly there should be some element of being able to show consistent revenue, kind of less lumpy revenue growth, and if you’re not able to show that you’re consistently able to grow your client base, that can be a little bit scary for buyers, because it makes them wonder, well, how am I going to be able to do that if, if the owner can’t do that, so being able to show as steady as possible revenue growth is great, or even steady. Be even if it’s not, you know, growing really fast, but so either having some sort of, if it’s, if you’re eligible for this, multi year contracts are great, repeat clients are great client evidence of client referrals, so if you’re tracking that, clients who are referring other clients to you, that’s a great way to measure and show buyers that you’re doing that, so buyers really want to see that they can predict revenue in some way, and that it’s not too dependent on any one client

Rebecca Bockstahler: that makes sense. Well, if somebody wants to work with you, what does the process look like?

Erin Guthrie: Yeah, so someone wants to work with us, we do two things. We first kind of look comprehensively at their whole business, we’re going to help them look at all the dimensions I talked about, client repeatability, revenue, margin profile, operational risk, and so we look at 62 different things and help them pick the five or six ones that we think are the highest risk, and that’s really important, because you don’t want to spend your time working on 62 things, you really only want to work on the ones that are the

Erin Guthrie: most, but the other, I think, more important and more human thing is thinking about what does your timeline look like, what does your number look like, and helping them separate, I like to say, the ego number from your real number. Sometimes people have a number in mind that sounds like a nice, beautiful, round number, but it’s not really based on anything. It’s not based on a valuation that’s realistic, or maybe it’s not based on what they need. So we work with our clients to help them assess what their real needs are, in terms of value, and also what their business is worth, so that they can predictably get to that number in the timeline that they’re trying to get to, so for example, I have a client that she wants to sell her business in two years. We have a roadmap now to get her there in two years, and we have some major growth initiatives to get there, but she had a number that was much higher than she wanted to initially exit at, and we, we really had to unpack that, and she realized that it’s kind of a number she just pulled out of thin air. So, after spending some time really analyzing what she needs, what’s her total goals financially for her and her family, and then also what her business is worth, and what we could reasonably grow it to, that’s how we came up with her exit number. So, with those two things together, we can put back together a really strong roadmap to help evolve the business where it needs to go.

Ron Bockstahler: Final question, I know we got kind of run out of time, but so are you acting as a coach at some level during this period, say it’s a two year period before the exit?

Erin Guthrie: Yeah, that’s right. So we advise clients, we work hand in hand on all these operational issues, all these financial issues. We’ll go really deep with clients on anything from business development to operations to finances, and then if it’s something that we don’t know, like the legal space, we’ll work with them to kind of bring in someone else who knows that expertise, but for the most part we’re working really entrenched in the, you know, with our clients day to day to help them make sure that they’re getting the business to where it needs to go.

Ron Bockstahler: Awesome. Last question, best piece of advice for your younger self.

Erin Guthrie: Oh, good question. Best piece of advice for my younger self is be more patient, don’t don’t worry about getting to the to the answer so quickly, and try to be more patient.

Ron Bockstahler: Nice, that’s good advice for all of us, even now. Right?

Erin Guthrie: Right. I should probably follow it more myself.

Ron Bockstahler: And it’s been a great show. Really, really appreciate you coming on, talking to our audience about what they need to be start thinking about. I think I think it’s really important they get out there to start changing out the way you’re building your practice with the end in mind, like, okay, here’s what I’m going to end up doing instead of just I’m going to close when I’m done. Yeah, think there’s a better way to do it. Anything, last minute thoughts you want to add? Comments you want to hear, tell our listeners.

Erin Guthrie: Yeah, well, thanks, Ron and Rebecca, for having me on. It’s been a treat, and I would say to your listeners, it’s never too early to start planning, because even if you think you’re 10 years away or five years away, starting with that end in mind is great, and just understanding that value. So, get started, start thinking about it. Don’t shy away from it, because you’ll be really happy you did.

Ron Bockstahler: And we will have your contact information in the show notes. You want to go ahead and give you, how do you want people to reach you?

Erin Guthrie: Yep, you can find us at Exit factor.com/chicago-downtown and our phone number is 312-600-5307 All

Ron Bockstahler: right, thanks for being on the show, Erin. We really appreciate it. Give her a call if you’re even just thinking about what you’re going to need to do. Get ready to sell your firm, she can give you some, take you in the right direction. That’s all we got for today. Big thank you to Erin for joining us. If today got you thinking about your own practice, what it’s worth down the road, take one step this week towards your exit plan. If you’ve enjoyed the show, please subscribe, leave us a review, and share it with your colleague who could use it. The 1958 lawyer is brought to you by Amata. For more than 30 years, Amata has helped law firms of all sizes do more with less fractional support staff, virtual office options, office space, and the legal community might want to throw in today. We’ve got the marketing lab, and they’re assisting all of their law firm clients with their marketing for free of service, so you know, call in and find out about that. Learn more about Amata at AmataOffices.com Until next time, keep building, you.

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