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Keeping good accounts when selling a law firm

One of the key things to bear in mind when coming to sell your solicitors practice is to ensure that your company accounts are impeccably maintained for the last 5 years. So many law firms, it seems, do not have good quality accounts to produce to any prospective buyers, which means that when buyers come to look at the potential offerings of a law practice, they simply can’t find the information they need to make an informed decision. So few buyers actually appreciate just how important their accounts are that they don’t go to the trouble of ensuring that the accounts are well maintained/described and in a format that is easily understandable.

To give you an example, we recently had a look at a law firm’s accounts which have been supplied to us for the purposes of selling the practice. There was information there regarding written off bad debt, outstanding loans, bank interest paid and bank charges paid.

There was absolutely nothing to go with the accounts to explain exactly what these were. Was the bad debt something that the firm had arbitrarily decided was never going to be recovered and was it a one off, or something that was likely to carry on in the future? What steps had the law firm taken to recover the bad debt and why had it been written off? So far as the bank debts were concerned, how were they incurred, and what steps had been taken to ensure they were kept to a minimum in future? Why was the interest rate so high when looking at the accounts there was no obvious reason for bank interest to be paid in particularly large amounts in any event. Was there a loan outstanding that the accounts had not actually picked up?

There was also reference made to recruitment fees, a subject close to our own hearts, but again no explanation provided with the accounts to say why recruitment fees had been high in one year compared with another. Although this may be easily explained, there was nothing in the accounts to indicate this.

It is becoming fairly apparent as we do more of the business sale and purchase work that explaining your accounts can be immensely useful right from the outset, because if you do not provide a full explanation as to what detail is included in the accounts and what is missing, purchasers tend to draw their own conclusions, rightly or wrongly, from the information they have been provided with. This can of course present issues for you as the seller because the buyer may form a very negative opinion about your company which in the circumstances is unfair because they have wrongly interpreted the figures you have provided them with.

Try to include professional looking accounts as well. We have come across firms who have handwritten parts of their accounts, photocopied pages at wonky angles, missed out pages completely, accidentally or on purpose, and generally not provided professional looking and prepared accounts for consideration by the potential buyer. This leads me on to say again that professionally prepared accounts for law firm sales are of the utmost importance, and other than ensuring your law firm has no outstanding claims against it, it is probably the most important thing you could do to ensure a smooth sale of your business.

Finally, in the year that you are thinking of selling the practice, try and keep up to date management accounts on a quarterly basis. Recently we have come across a practice where there were not really any figures available following the previous set of accounts being prepared 10 months beforehand, and it seems to have scared a couple of potential buyers away from considering the practice further, as they are now suspicious as to why these accounts have not been kept. I suspect in the circumstances there is absolutely no reason other than the partners of the law firm have simply not needed accounts in the current year and so haven’t bothered keeping them up to date, but unfortunately buyers don’t see it that way. If you look at the sale from their perspective they are simply keen to see as much information as they can, and your lack of detail simply creates a black hole in the data, which they hold against you and get suspicious as to why detail has not been included.

Jonathan Fagan

Jonathan Fagan LLM FIRP is Managing Director of Ten-Percent Legal Recruitment. He has been recruiting solicitors and legal support staff for law firms and in house legal departments for over 17 years and handles roles from junior fee earners through to partners and law firm sales/purchases. A non-practising solicitor on the Roll since 2000, he is also the author of a number of legal career books, which are available at www.legalcareercoaching.co.uk. You can contact Jonathan at cv@ten-percent.co.uk