Ten Percent Legal Recruitment

Selling your law firm - easier than you may think.

How to Sell a Small-Medium Sized Law Firm

Welcome to the Ten Percent Legal and Jonathan Fagan Business Brokers guide to selling a law firm, which is aimed at solicitors, legal executives, licensed conveyancers and anyone else with a financial interest in a law firm and looking to sell or exit. You can read the guide below in full.

Jonathan Fagan Managing Director Ten-Percent.co.uk Limited

“Hello and welcome to Jonathan Fagan Business Brokers. My name is Jonathan Fagan and I am a non-practising solicitor, legal recruitment consultant and specialist law & accountancy firm sales adviser. I founded the Ten Percent Group of websites in April 2000 and have been involved in buying and selling law & accountancy firms ever since. JonathanFagan.co.uk is our specialist broker site and we have over 50 law firms for sale at any time. We also provide full valuation services. Please feel free to drop me an email or give me a ring if you would like a confidential discussion – I am always happy to help.”

Our Law Firm Sales Guide

Below is our short guide containing advice that we very often give over the telephone to sole practitioners and partners in high street and niche commercial solicitors’ firms looking for an exit, or to sell or merge.

It contains advice and information you will hopefully find useful, but we start the article by saying we do not accept any liability if you read the article and rely on any of its contents. It is written solely for your information and if you require advice on the sale of a law firm, valuation or exit/merger, please get in touch with me personally at jf@jonathanfagan.co.uk, give me a ring on 01824 780937 or visit our specialist business broker website www.jonathanfagan.co.uk.

If you are reading this you are probably already considering selling or disposing of your law firm and have probably think you have thought long and hard about your options. However if we very often find that people really have thought through all the options when it comes to retirement or a sale and start the process somewhat ‘off the cuff’.

We provide full advisory services for anyone considering a sale, prior to commencement of the process. This can be done on either a bespoke basis or as part of our Gold or Platinum Seller services.

Why are you thinking about selling your law firm?

Are you looking to retire, get out of law, stop running a business, find partners, join a larger firm because you feel lonely on your own as a sole practitioner, failing to recruit successors or new staff so deciding to get out instead, suffering from an illness or running short of money and in need of a sale?

All of these are reasons we have come across for people looking to sell up, but they are not all valid reasons for seeking a sale or disposal above anything else.

Retirement

Firstly, consider retirement. If you are in your early fifties and looking for a sale then it is very possible that within 2 to 3 years of selling your law firm you will be back in law; either setting up a new practice, working as a locum or taking an employed position.

So many people get to what they think is retirement age, leave their job and then realise that actually they either don’t have enough money to do the things they want to do, or they are thoroughly bored, with most falling into the latter category! It is very hard to go from having a professional job to not doing much at all and a lot of people struggle with this. Spending 40 years working 8-10 hour days to then not doing anything is a very difficult transition..

Selling your business may not be the best option for you.

Illness

Similarly if you are not very well, and this could involve terminal illness, long term debilitating illnesses or a need for intensive treatment over a period of time, then again you may want to think carefully before you decide to sell because it is perfectly possible to run a business without necessarily being fully involved; it simply requires extra assistance and this may be something you need to consider carefully. After all, if you get better, or your circumstances change, you will have sold your interest in a perfectly functioning business that could have sustained you for some years to come. There are other options, including using a locum or stand-in lawyer to run your practice, work part-time, jettison some awkward and low paying clients or simply employ more staff to run and manage the business while you take a backseat and get treatment.

Profit

Some law firm sales are simply to benefit from the outstanding performance of a company and to cash in whilst the going is good. It should technically be the aim of every business, although this is easier said than done for law firms that have little or no evidence of standalone income generation.

Financial Difficulties

Running into financial difficulties and need a quick sale? We come across this fairly regularly, although probably not as often as you may think.

One of the first businesses we were involved some years ago was a law firm in the North West of England where the owner had run out of funding to keep a number of high value cases going. We sought a quick sale for him and achieved it. Whilst we did not get to know the details of the sale conditions (there tend to be confidentiality clauses for both parties and as we don’t charge a fee on the value of the sale we don’t necessarily need to know), I would imagine the seller made a considerable loss on the sale, as you would expect, but he did get to continue working and secure a home for his staff and files.

Selling quickly is not usually too difficult to achieve where time is of the essence. The purchasers will sense a bargain and seek to exploit the precarious position of the other party, which you may be content with in the circumstances. Provided you have gone into negotiations with your eyes wide open and know there is a good chance you are going to lose significant amounts of money from any sale, but will secure at least something, then there is no issue really. If you are in financial difficulty, explore all options very carefully before looking at the sale or merger option. Easier said than done of course. We have connections to finance professionals who can provide advice on sources of funding, restructuring and overcoming short term cashflow issues.

Recruitment Problems

Not being able to recruit staff is another reason for seeking a sale of a law firm and again our advice would be to look very carefully at this before deciding to take the nuclear option of getting out. I was recently speaking to a small solicitors’ practice in South Wales who are looking for a sale and the main reason for this is they think it would be impossible to recruit anybody to join the business when one of the partners retires. I asked them if they had looked at all and they advised me that they hadn’t bothered because they knew it would be impossible. So rather than even attempt to do something that is not going to cost any money to try, they were choosing the rather drastic option of closing the business down and getting out. Advertising your legal jobs is usually completely free of charge with recruitment agencies – you can register vacancies with Ten Percent Legal Recruitment here for example. You have nothing to lose, whereas if you sell your law firm you potentially have everything to lose.

Other Options rather than Sale

Always think about the other options that are there as well as a sale and consider these carefully before deciding to go down the sale route. Of course there is nothing to stop you putting your law firm up for sale and at the same time looking at other ways of developing your business interests. We have sellers of law firms who are not only trying to sell their own practice, they’re also looking to purchase other businesses at the same time and move into other lines of work. This is the right approach to take we think, because if you look around at different options it gives you ideas, and you just never know what is going to happen and who is going to come forward to express an interest in either working for or with your business, or purchasing it and at what price.

What about the cost of putting my business up for sale – surely this is prohibitive?

Not at all, although traditionally it has been a considerable expense to even think about putting your business up for sale because most business brokers expect you to pay them right at the start of the process. Jonathan Fagan Business Brokers offer three levels of service – Standard, Gold and Platinum. Standard is free forever – no fees to list your firm and no sale fees. We also provide higher levels of service at a very competitive price – for full details please click here.

If you look in the back of the Law Society Gazette there is usually at least one agent advertising to buy and sell law firms. This particular agent will expect you to pay him a fairly hefty sum of money just to consider assisting you in the sale of your law firm, and then further fees go on top if you progress. Large national business agents offer similar arrangements, and also charge the seller thousands of pounds if a sale is successful. There seems to be minimum fee of £10-12,000 plus VAT. Advertising only options start at £250 plus VAT per month.

Selling a business can be a long and time consuming activity and making sure as a broker you get some return for any effort put in requires a fee to be charged (ideally up front if you are the broker!). We charge the buyers a fixed fee to locate and introduce firms for sale with our fee only being payable if a deal occurs. We operate a bit like a reverse estate agent.

There is absolutely no risk at all to you as a potential seller looking for a sale or merger. You are not bound to us at all so you can put your firm up for sale in lots of different places (although we wouldn’t recommend it – you will almost inevitably get crossover and confusion at some point!). Naturally we are delighted if you sell or dispose of your business at any point whether utilising our service or not.

Sell or merge?

This is the most frequently asked question by small law firms and sole practitioners. Do we want to merge or do we want to sell and depart completely? Our advice is usually to consider both, but with the option to extract yourself in the short to medium term if you choose.

Firstly, unless you have something that the buyer wants specifically – for example you have a niche area that the buying business wants to expand into, such as debt recovery for media companies or specialist international family high net worth cases in the Bahamas – then achieving a reasonable amount of cash as a lump sum is a very difficult thing to do.

Most buyers will want you to stay with the business for a specified period of time as a minimum before you move on to other things and/or pay staggered amounts over time.

It is usually considered that the optimum way of selling a business is to extract yourself as quickly as possible and move on, because once you have sold it is no longer your business and risk is kept to a minimum. However it all depends on your individual circumstances.

Merging your company is slightly different because the merged entity will involve management from both the merger and the mergee. How you decide to be involved in the management of the new entity is a matter for yourself, but it is likely you will be merging because you are too small as you are and want to expand without too much risk, you want to still trade but get others involved, or you’ve simply decided to keep your hand in. Involvement in the management is going to be of vital importance to you. If you are merging because you see a way of getting out of your business without too much risk in terms of run-off insurance or not being able to sell up for years then you need some sort of contractual arrangement in place from the outset that enables you to jump at a specified or unspecified point in the future.

Every business sale is different, but our advice would be to consider very carefully from the outset what your aims are when it comes to the sale or merger of your company. If it is to stay in business and expand then look very carefully at the management of the new business and how much say you will have in it. Are you someone who can work with others or have you been on your own for too long and going to struggle with the concept of needing to allow others to make decisions, or take part in making decisions? Are potential buyers going to worry about this as well? If you are looking to get out on the other hand, have you got a date negotiated from the outset and is the package you have negotiated sufficient to support you and to value your goodwill or input in the merged business that will no longer be yours once you have departed?

We can assist at any point if you use our Gold or Platinum Services for Sellers. Both services include ongoing advice meetings with our specialist advisors.

What is my law firm worth?

Valuation Services

We offer a detailed valuation service with different options at very reasonable prices. For full details please click here or visit https://www.jonathanfagan.co.uk/law-firm-valuations-due-diligence-services/.

Please note that to get your firm listed for sale you do not necessarily need to put a value on it, although it really helps to have an idea of a potential value, your preferred structures for a sale price and also likely deals that will be available to you.

Valuing a Law Firm – Information Online

Valuing law firms is where quite a bit of randomness comes in. We have trawled the web and here are a list of websites with articles on for “what is my law firm worth?” We had a quick look online recently and found a number of articles have been written by investors who acquire law firms (advising that law firms have no value). Have a look at the articles below and see how many advisers give you numbers and specifics rather than vague statements:

Valuation Method Example

One method we have come across for valuing small law firms with a turnover of less than £500k is as follows (related to us by an accountant):

“The rule of thumb for valuing a high street solicitors firm, licensed conveyancers or ABS (Alternative Business Structures regulated by the SRA) with a turnover of less than £500k is to take your average net profit for the last 3 years and multiply it by 2.”

Our Extremely Rough Rule of Thumb

We have always worked on the basis of halving last year’s turnover for a rough idea as to a likely deal that will be offered.

Every Firm is Different – High Street Firm Example – Retiring Partners

Applying these formulae in reality is very different.

Take a typical small law firm on the high street. Looking for a sale, it has 2 partners both retiring, a turnover of £300k (all coming from the retiring partners), no fee earning staff other than the partners, leasehold premises, a PII (professional indemnity premium) of £25k, a website of very little content and no ongoing work being generated.

Assuming a net profit of £75k, this would make the value of the firm £150k, according to the accountant. Our rough rule of thumb would come up with the same figure.

And this is why virtually no rule of thumb can apply to law firms..

The practice above is not going to get anywhere near £150k. If you think about it from a buyer’s perspective, what do they get for their money? No partners, nervous support staff who have seen the owners leave, ongoing work potentially dependent on the retiring partners who have left, a commitment for a buyer to pay the lease and recruit lawyers to take over the work of the retiring partners. Where is the value?

In these circumstances the two partners would be lucky to get a buyer to give any cash at all – it is more likely a deal will be struck around paying a consultancy fee for a set period of time.

A business is worth the price a buyer will pay for it and the seller will sell at. Prices fluctuate depending on the strength of the market and buyer interest as well. Business sales depend very much on the value considered by the buyer and the value considered by the seller, and it is only when two minds meet on the sort of figure they believe a business is worth that a sale occurs. This will happen regardless of whether or not you have a figure in your mind as to what your business is worth as it really does depend on both parties in the equation.

Law Society Recommended Valuers

The Law Society seem to recommend, or have recommended in recent times a firm of accountants to undertake law firm valuations. We have never used them, we do not endorse them, but the Law Society clearly do (although whether this is a monetised click-through arrangement is another matter entirely!). The company is Armstrong Watson if you want to google them. They charge £3,000 plus VAT to provide a full valuation. By way of comparison our prices start at just £650 plus VAT. We base all our valuations on actual deals and offers made, rather than being based on specific formulae and calculations, which are also provided in our advanced valuation reports.

Valuation Summary

We think the better way of approaching a valuation is to think about your end game from the outset. What do you want or need to get out of any deal? What structure would suit you best? We strongly recommend using our specialist law firm valuation service, whether as part of our Gold or Platinum services or as a standalone valuation at the start of the process.

Setting a High Price – a good idea?

Buyers keep away if they see a very high price from the outset which has no justification. They can look at the figures and either conclude the seller is trying it on or is deluded! We usually advise sellers to have a good idea about a potential price, but to talk around the subject as much as possible to start rather than go straight in with a specific figure. It can be a better option to talk about what you seek to get out of the deal and also find out the aims of the buyer.

Buyers want Assets, Sellers want Cash

There is a large difference between the mindsets of buyers and sellers. Buyers always want assets (staff, premises, goodwill, work in progress (WIP) and clients) without paying any cash up front. Sellers invariably want cash up front. Getting the two parties into a middle ground between the two extremes during negotiations is one of the hardest tasks of the process. As business brokers we are very experienced at brokering deals in these circumstances.

What steps can I take to increase my chances of sale?

Firstly, make sure you have everything sorted out. By everything sorted out we mean the following:

  1. All your accounts in order and fully explanatory, without anything missing. Make sure you have prepared copies of accounts that you are able to give any potential purchasers, and do not rely on those submitted to Companies House as very often they contain very little information that a buyer will require.
  2. Make sure you have a copy of your professional indemnity insurance (PII) proposal in pdf format available for a buyer to see. PII proposal forms are considered to contain most information that buyers need and are viewed as being quite accurate.
  3. Get a price for run-off insurance from your PII broker – usually anything from 2.5 to 3.5 times your last premium.
  4. Ensure you have the consent of anyone who has an interest in your business, whether this is as a shareholder, equity partner or partner, and speak to senior management at some point to put them on notice. Only do the latter if you have a particularly close relationship with them, otherwise you could find they run to the hills and get out of your company as quickly as possible. Sometimes senior staff will entertain the thought of a management buyout (MBO), particularly if they can see the success you have enjoyed with the business.
  5. Make sure you are at arm’s length from the company wherever possible. Much easier said than done, but if you can recruit people to do the work you were doing on a daily basis this will help your chances of a sale considerably, because as stated above, buyers like to see a freestanding unit that runs itself and not something that is dependent on the goodwill of the owner. Extremely hard to do when you are running a small company.
  6. Make sure your internet presence is spotless. If you have any negative reviews, deal with them (obviously not by sending round the heavies but with carefully measured responses to offer to make contact, explain your company’s actions and suggest a resolution), make sure your website is up to date and contains useful and interesting information about your business and the fields of law you assist with. If you have not got a social media presence, think about getting one – Twitter in particular.
  7. Get a Linked In account for your company if you haven’t already got one. It is very easy to do, you simply need to register your company with Linked In and create a page, so that anybody searching for your company can find you on Linked In. Make sure you have a LinkedIn profile as well.
  8. Ensure that the information at Companies House is fully accurate and reflects your company’s position. Try to deal with anything outstanding that is not lodged with Companies House. So many times when we come to look at a sale of a company and go on to Companies House we discover there is information missing that could easily be added, and also easily adds questions to the potential buyers’ mind as to whether or not there are issues with the company they are seeking to purchase.
  9. Write user manuals for every process in your business. This might not make a lot of sense, but if you have written procedures for everything in your office it is very easy for a buyer to come in, take over management of the procedures and see exactly what is done, how and when. It is important to have these in place when you are seeking a sale of your law firm so that anyone with the requisite experience could walk into your business, take over your files and staff and make the business operate smoothly and effectively.

The Sale Process

Selling the business is extremely straightforward in a lot of different ways. This is how the process goes if you use us as your brokers.

  • Register with the Jonathan Fagan Law Firm Sales service by clicking the link here.
  • Consider which of our seller services to use – we recommend our Gold Service for most sellers – its extremely cost effective and includes a valuation report, suggested deal structure, initial consultation, pre-sale pack support and ongoing support sessions.
  • Sign a confidentiality undertaking.
  • We advertise your firm across a whole range of different media sites in strict confidence.
  • We deal with all queries from potential buyers. All contact is handled by us.
  • Buyers will sign a confidentiality undertaking and agree terms with us.
  • Buyers request full and further information on businesses we have for sale.
  • Once a buyer has agreed terms and signed a confidentiality undertaking we identify them to you. You consent (or otherwise) to us supplying the identity of your firm and the location to the buyer.
  • The buyers will very often reply to request copies of your last 3 years accounts, details of your professional indemnity insurance, details of any claims made against your business in the last 5 years, figures showing full information on turnover and net profit, figures showing sources of work, whether this is from referrals, word of mouth, street walk-ins or internet sources.
  • Once a buyer has satisfied themselves that they have sufficient information they will proceed to the next step which is to speak to you face to face about your business and the potential sale. Some sellers like to do this in a neutral venue but others like to get the buyer to come into the office to see for themselves what and how your business operates. We always recommend a neutral venue for the first meeting.
  • Although this might sound like a stressful experience, meeting someone who is going to be looking to haggle with you in the future, most buyers and sellers seem to find it quite enjoyable, because one party is looking to progress and expand and the other one is looking to make a deal happen. So provided you are open from the outset in your dealings with the buyers, this experience should run very smoothly for you.
  • Finally, if a buyer meets you and then decides to proceed to make an offer, they will conduct due diligence. Generally the key aim is to get all information out of the seller on just about everything and anything. Any buyer worth their salt will check you out thoroughly, including full background checks on you and your business.
  • Once due diligence has occurred you will proceed to the offer stage which invariably involves quite a bit of negotiation (something we assist all sellers and buyers with).

I hope this article has given you some advice on considering the sale or merger of your solicitors firm.

If you have any questions regarding our service or anything that crops up during a potential sale, please get in touch.

Jonathan Fagan LLM FIRP is Managing Director of Ten-Percent Legal Recruitment. He has been recruiting solicitors for law firms and in house legal departments for over 20 years and handles law & accountancy firm sales, mergers & purchases. A non-practising solicitor on the Roll since 2000, he is also the author of a number of legal career books. You can contact Jonathan regarding law firm sales and mergers by calling 01824 780937 or emailing jf@jonathanfagan.co.uk