The Valuation Calculation
Kirkland leads our list of the estimated market value of the world's highest-grossing law firms.
The Global 100 is collectively worth $97 billion, as calculated by our formula, which takes each firm's net profit, makes deductions by assigning equity partners with a notional salary, then applies a multiple based on the firms size, average growth rates in revenue and profits, and brand strength. Kirkland & Ellis narrowly edges out Latham & Watkins to head the list with a valuation just shy of $4 billion. In total, 33 firms have valuations exceeding $1 billion. In value per equity partner, Quinn Emanuel Urquhart & Sullivan is the clear leader. Its $1.96 billion valuation puts the effective stakes held by its 111 equity partners at an average worth of more than $17 million almost $5 million more than any other Global 100 firm. [See the glossary for valuation definitions.]
A FIRM VALUATION GLOSSARY
Our process for valuing the world's top firms involved determining each firm's cash flow and applying a series of multiples. Expressed as an equation, it would be:
Value = Cash flow x (Size multiple + Revenue growth multiple + Profit growth multiple + Brand strength multiple)
Here is how we defined those terms:
CASH FLOW: The profit generated by a law firm, once the cost of providing all equity partners with a fixed salary was deducted. For our ranking, this equates to half of the firm's "net income" -- the total profit currently distributed among equity partners each year.
SIZE MULTIPLE: This varies, depending on a firm's annual revenue. Firms were given a multiple of 4 for revenues of less than $500 million; 4.5 for $500 million to $1 billion; 5 for more than $1 billion.
REVENUE AND PROFIT GROWTH MULTIPLE: The size of this multiple varies, depending on average annual growth in revenue and net income since the 2009 fiscal year. Firms received multiples of 0.5 for growth in either revenue or net income of between 0-5 percent; 1 for increases of 5-10 percent; 1.5 for increases of 10-20 percent; and 2 for increases of over 20 percent. Average declines in either profit or revenue of more than 5 percent each resulted in a 0.5 multiple deduction. Years in which mergers resulted in extraordinary increases were not included.
BRAND STRENGTH MULTIPLE: Firms that were included in either the 2011 U.S. or global legal brand indexes compiled by research company Acritas received a 0.5 multiple boost. Firms that were included in both indexes did not receive the multiple twice.
A NOTE ABOUT DEBT: Ideally, any valuation created using our methodology would then be altered to take into account any debt on the firm's books, including working capital. We did not have access to this information for all 100 firms, however, so we were forced to exclude it from our formula. (Although U.K. firms have to file annual reports disclosing this information, firms from the U.S., Canada, and much of Europe are under no obligation to disclose any of their financial information.) Generally, most top law firms operate with low levels of debt, and some are debt-free.