I was reading some statistics about the failure rate of small businesses. The numbers are brutal. 50% fail in their first year. 95% are out of business within five years.
It got me thinking about the survival rate for a new law practice. I don’t know what the actual numbers are but it wouldn’t surprise me if you told me that 95% are still going after five years.
Then I got to thinking about why. What is it about the business model of a small law practice that allows for such a high survival rate compared to other small businesses?
If you’re thinking about starting a law practice, here are the pros and cons I came up with:
THE PROS
- Lower start up costs. You have rent deposits, furniture and computers (which can be financed), but no inventory or expensive equipment, and you can start without any employees.
- Lower overhead. Your biggest fixed costs are rent and insurance. As you grow, you can hire employees or outsource, unlike a restaurant which cannot operate without employees.
- Lower marketing costs. You need a web site. You can bring in business by networking. You don’t need to advertise.
- Higher margins. You don’t sell a $10 product, you sell a $5,000 product. You can break even with just one or two new clients a month.
- Steady work (business clients). Business clients tend to have ongoing legal needs. (But see below.)
THE CONS
- Limited time. There are only so many hours in a day available for you to produce work product. If you have employees, you must supervise them. You have to reach a certain size before you can justify hiring staff to manage staff.
- Limited growth options. You can’t franchise. You can’t take on investors. Bank financing is more difficult without inventory or other assets as collateral. If you want to open additional offices, you must be willing to stretch your time even thinner.
- Competition. There are more lawyers today and fewer clients (with money). You also have competition with legal form companies, paralegals, and legal plan companies.
- Feast or famine. Business clients go out of business and take their legal work with them. Consumer clients hire you once and often never again.
- Limited retirement options. It’s difficult to sell a law practice for a decent multiple. You usually have to carry a note and depend on the buyer’s ability to pay (and many of your clients won’t stay with the buyer).
So, what do you think? Did I miss any? Does it look like a law practice is a sound business model? Please share your thoughts in the comments.
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