There are lots of different ways of valuing law firms. One is to put a finger in the air and see which way the wind is blowing, another is to calculate how much money it would take to persuade you to go into early retirement. Accountants and Business Brokers will all queue up to give you a figure and charge upwards of £2,500 plus VAT, others will apply rules of thumb to produce a more generalised valuation which will involve using an industry factor, but in our experience each law firm is different and the way each law firm is valued is usually completely different, so most of the valuations you will get will either be figures you want to hear or way off the reality if you were to sell.
There is a quick guide online to the different techniques used to value law firms here:
For those who like to see examples of values of law firm sales, here follows our very (very) guide for values for law firms.
Scenario 1 – Sole Practitioner £75k Turnover
A solicitors firm, sole practitioner, turnover £75,000, established 10 years, full claims history, no claims in the last five years, one member of staff, leased offices with five years left on the lease, subscriptions to a case management system and legal reference service (e.g. Lexus Nexus), full accounts available for the past three years and a PII premium of £5,000 per annum.
If you were to ask me to value this practice, I would say that chances are the practice would achieve a sale in the region of about £45-50,000 as a cash sum, or some kind of deal involving a cash sum of about £25,000 but with an arrangement involving either consultancy payments to the owner or a percentage split on cases coming in for a period of time, say 12 to 24 months. If you were set up as a limited company this can help if a buyer urgently needs to buy a law firm with limited company status (its easier to complete the transaction this way). If you have a specific work type – so for example in this case if most of the work was conveyancing and the practice was on as many lender panels as possible – this would add value to the overall price.
If this firm had claims against it in the last five years, it would probably have virtually no value at all other than the work in progress (WIP).
Scenario 2 – Three Partner LLP £400k Turnover
Three partner solicitors’ firm, set up as an LLP with a turnover of £400,000. High street practice undertaking conveyancing, wills and probate, commercial property, family and general civil and commercial litigation. One partner looking to retire, the others planning to remain as consultants, firm on all the lender panels, 10 year lease, five staff for TUPE, good claims history, 20 years established. PII premium of about £15,000.
We would expect a sale for this type of practice to be somewhere in the £200-250,000 bracket. This would invariably involve a consultancy arrangement with the remaining partners, on top of this going forward, all salaried senior roles, tied in for a period of either 24 or 36 months. The remaining partner would need to be bought out on top of the cash price paid for the practice, and all liabilities taken over at the point of sale. Sales of this type of firm can take a considerable amount of time.
Not the easiest firms to sell as buyers are dependent on the goodwill connected to the outgoing owners. Buyers tend to be traditionally hesitant spending this kind of money on something that has been built up by a couple of partners without employing senior staff who can continue to run the firm if the partners retire. Good sized personal injury caseloads or ongoing conveyancing work can make it an easier sell.
As a quick aside, this is one of the reasons why it can be such a good idea when running a business in any field, to try and detach yourself from it as best as possible so as to achieve a sale at some point in the future. We know how hard this is because we have the same problem ourselves and our directors are fully involved in all aspects of our businesses which one day will make it quite hard for us to sell some of them! However, this has to be the aim of most businesses – find yourself someone else who is able to run the business whilst you concentrate on the management side of things.
Scenario 3 – Large Firm £1.5 million turnover
Three office practice, 25 staff, £1.5million turnover, a claims history involving claims going back over 10 years, two offices, one freehold, one leasehold, mix of work including all high street matters (conveyancing, wills and probate, commercial property and litigation). Two partners looking to retire, other partners planning to remain as consultants but not wanting any responsibility.
This type of practice can be the hardest of all to value because of the sheer number of variables that are involved. Take the staffing numbers as an example – if anybody takes this practice over, they are dependent on those staff remaining, and also continuing to be an economically viable unit. It may be that the partners have been doing all the work and some of the staff are unnecessary, but you won’t know this until you take the business over. Whoever takes over the business is also taking a huge amount of liability on at the point of sale, because they’re suddenly going to be hit with a rather large wage bill as well as ongoing costs. It is for this reason that usually this type of practice is virtually impossible to value.
However I would imagine that an overall deal price for this particular practice would probably be in the region of about £375-500k if it had no claims, but potentially with the freehold of the one premises on top. I think the price would definitely be extremely discounted to take into account the claims in this particular scenario.
The bottom line is that law firms have so many factors affecting their value that they can be virtually impossible to put a value on when it comes to sale. Limited companies sold in a low price band seem to attract more interest amongst buyers and so do ABSs (alternative business structures). The ABS structured firms are often asked about by non-lawyer buyers and seem to get quite a lot of interest. However very often non-lawyer buyers fail completely to appreciate the amount of regulation that is involved in running a law firm and get scared off as soon as they start looking into it in a bit more detail, so although ABSs are in more demand and attract a higher price, I think at times it can be harder to sell them.
If you would like a valuation of your law firm, please get in touch and we would be happy to have a discussion, whether in confidence and informally on the telephone or a written opinion. Jonathan Fagan – 01824 780937 or firstname.lastname@example.org.