How do you finance buying a law firm?

The rules that shape every law firm sale

Selling a law practice is regulated by each state's rules of professional conduct, and most states follow the American Bar Association's model rule on the sale of a practice. Its conditions matter to a lender because they decide what the buyer is really getting:

• The seller must stop practicing, either entirely or in the area of practice being sold, in the jurisdiction or geographic area where the practice was conducted.
• The whole practice, or a whole area of practice, is sold; a seller cannot keep the best matters and sell the rest.
• Each client is notified in writing of the sale and of the right to hire another lawyer or take the file.
• Clients' fees cannot be increased because of the sale.

Ownership is the second constraint. In nearly every state only lawyers may own a law firm or share in its legal fees; a small number of jurisdictions have opened limited exceptions. For financing, that means the buyer, and every owner of the borrower, is almost always a licensed lawyer, and an outside investor cannot take equity in the firm itself. The SBA lending data for offices of lawyers shows how active SBA lenders are in the industry.

Clients are not assets that transfer with a signature. The buyer is paying for the chance to keep them, and the lender is lending against that chance.

The fee model decides the credit

Law firms with the same revenue can be entirely different credits. The first thing a lender asks is how the firm gets paid.

Within any model, lenders look for revenue that belongs to the firm rather than to one lawyer: clients who have worked with several lawyers there, matters that come in through the firm's website and referral sources, and associates who already do most of the work. A firm whose revenue is really the seller's personal reputation is a hard loan however profitable it is. The general treatment is in customer concentration in an acquisition.

Contingency cases in progress

In a plaintiff's practice, much of the value sits in open cases that have not settled. A lender cannot lend against those cases directly: the outcome, the timing and the fee are all uncertain, and costs advanced on them may never come back. Lenders instead underwrite the firm's record of settled fees over several years, how evenly those fees arrived, and how much the firm spends to advance case costs.

How the seller is paid for open cases is where SBA deals most often need restructuring. Sellers commonly ask for a share of the fee on each case when it settles. A price that depends on what the practice earns after closing is contingent consideration, and SBA prohibits an earnout to the seller in a change of ownership it finances. The workable alternative is a fixed price, with part of it carried as a seller note. A seller note on full standby for the life of the SBA loan can count for up to half of the equity injection; one that pays currently is allowed but counts in debt service. See earnouts and acquisition debt and seller notes and SBA's full-standby rule. Any division of fees between the seller and the buyer on continuing matters must also satisfy the state's rules on fee sharing between lawyers.

Trust money, work in progress and receivables

Law firm balance sheets confuse first-time buyers because a large amount of the cash in the firm's name is not the firm's. Client funds in trust accounts, including settlement proceeds awaiting distribution and advance fee deposits, belong to clients. They cannot be pledged to a lender, used for working capital or counted toward the buyer's equity, and a lender will want to see that the trust accounts reconcile before closing.

Unearned retainers are the related trap: money a client has paid in advance for work not yet done is a liability the buyer inherits along with the matter. The price or the working capital should reflect it.

The firm's own receivables and unbilled work in progress are real assets, but lenders read them through an aging report and the firm's collection history, because legal fees that sit unbilled or unpaid for a long time are often written down. In an asset purchase the seller commonly keeps receivables for work already done, and the buyer starts collecting only on new billing, so the first months after closing need working capital in the sources and uses. A line of credit sized to the billing cycle is covered in lines of credit for law firms.

The seller's exit and the transition

The ethics rule and the SBA rule point the same way here. The seller has to stop practicing in what was sold, and in an SBA-financed complete change of ownership the seller may not stay on as an owner, officer or employee. The seller may consult for up to 12 months after closing, and under SOP 50 10 8.1 from 1 October 2026 for up to 24 months. That consulting period is when the transition work happens: introducing the buyer to each significant client, co-signing the client notice, and handing over referral relationships with other lawyers, accountants and financial advisers.

An "of counsel" role, common in informal law firm successions, keeps the seller practicing at the firm. It does not fit inside an SBA deal for a complete purchase, and the ethics rule bars it in the practice area sold. Where the seller will genuinely keep working, a partial change of ownership, in which the seller remains a partner for a period, may be the better structure; see financing a partner buyout.

Two more items belong in the transition plan. Malpractice: the seller's prior work should be covered by an extended reporting (tail) endorsement on the seller's policy, and lenders ask how that is handled. Conflicts: a buyer who already practices must run conflict checks on every client being acquired, because a conflict that forces the firm to decline a matter removes that revenue.

Collateral and structure

A law firm owns little a lender can sell: furniture, computers and receivables. SBA does not let a lender decline a loan solely for lack of collateral, but on larger loans it expects the lender to take the collateral that is available, which commonly means a lien on the buyer's home or other personal real estate when there is meaningful equity in it. See SBA personal residence collateral and personal guarantee.

Coverage is measured after paying the buying lawyer a market salary for the work they will do. SBA requires at least 1.15x today; from 1 October 2026 a change of ownership must show 1.25x on historical results, which is the level banks commonly look for on conventional loans. Larger firms with institutional clients and several partners may qualify for conventional senior debt, commonly 2x to 3.5x EBITDA, without SBA's rules on the seller's role. The comparison is in SBA 7(a) vs a conventional acquisition loan.

What goes in the file

The standard acquisition documents come first, listed in what lenders need to finance an acquisition: two to three years of the firm's tax returns, P&L and balance sheet, the latest full year of figures (never an older year), a year-to-date P&L, the debt schedule, the letter of intent, and personal tax returns and a personal financial statement for each 20% owner. The buyer's resume and bar admissions support the management-experience questions on SBA Form 1919. For a law firm, add:

• Fee revenue by client, by practice area and by originating lawyer for each year.
• Receivables and unbilled work in progress, aged, with write-off history.
• For contingency practices, settled-case fees by year and a list of open cases with costs advanced.
• Trust account reconciliations and a schedule of unearned retainers.
• The malpractice policy, claims history and the tail coverage plan.
• Staff and associate roster, the lease, and the client notice the seller will send.

Once the documents are in, Transparent builds the financing model, lender presentation, blind teaser and underwriting memo in a day, and takes the file to the lenders in its book that finance professional-services firms. See the package.