We have recently heard reports of solicitors’ firms closing their doors across the UK. The owners have decided it is time to retire, cease trading or simply had enough of the copious amounts of compliance work that goes with running a law firm. This article looks at other options to simply closing down as even law firms without clients have a monetary value..
Run-Off Cover – ‘a complete nightmare’
The difficulty with simply closing a solicitors’ firm is the huge cost of paying run off cover for the professional indemnity insurance. For the uninitiated, this is the considered risk the insurers require you to cover should a claim arise in future years after you have closed down. Whilst you may think that this is a little like buying house insurance after you have sold your house, this is the harsh reality of owning a law firm.
Our experience of run-off cover is that it costs three times your annual premium. So if you are paying out £7,000 a year for your Professional Indemnity Insurance, the cost of closing your firm will be c£21,000.
Surely some mistake – paying to close your firm?
This seems so unfair. You have worked for 20 years to build your business up, never had a claim, maintained a healthy bank balance but then take the decision to close down, enjoy an easier life – and get stung for £21,000.
This is exactly what appears to be happening to some law firms across the country who find themselves with time to think about their futures and making the decision to close their doors and not reopen.
Is there an alternative?
Yes absolutely. There are a few alternatives and this article discusses these. We can only provide information on an anecdotal basis, and we recommend you speak to an expert about any of these options.
Sell Your Firm
We have recently been involved in the sale of a number of ‘shell’ law firms and you need to be aware that even if your firm has no clients and no income it still has a value that will almost certainly exceed the run-off cover costs.
To give a couple of examples – a sole practitioner in South East England recently sold his firm for £10,000 and the potential of ongoing consultancy on any clients he wishes to carry on assisting on a 95/5 fee share basis. The firm sold essentially as the firm name, the website, the bank account, the professional indemnity insurance and a claims free history. Turnover was irrelevant to the buyers.
A two partner practice in Shropshire sold for c£25,000. Again this was a shell and the buyer got the benefit of a bank account, professional indemnity insurance, the website and a relatively claims free history. There were no clients and no ongoing business. The partners had already transferred their clients to another practice.
As far as we know (we were the introducers for both these deals) both of these firms avoided paying run-off cover. Selling was straightforward. One of the firms was a limited company, so the buyers simply became directors and shares were transferred across. The other firm added the buyer as a solicitor at the practice and then removed the existing partners. The buyers took over the compliance roles and were added as beneficiaries to the firm bank accounts.
All very simple.
Difficulties with Selling
Naturally it is not so simple if your firm has a complicated history with the bank, or has outstanding claims against it. These can scupper any deal – buyers tend to want a clean bill of health or matters to be completely resolved before they purchase. If you have issues, you may be able to persuade a buyer to take over the practice but the sale will almost certainly involve you remaining at the firm in some capacity until any issues are ironed out. It is likely that any payment will be made at a future date.
Convert to an ABS
An ‘Alternative Business Structure’ (ABS) is to some extent the premium method of owning a law firm. If you have ABS status your law firm can be owned by non-lawyers, which opens up a whole new market for investment opportunities and selling your practice. We get very regular telephone calls from would-be law firm owners wanting to purchase ABS’s rather than traditional solicitors’ firms. The cost of converting is about £2,000 plus £150 for each individual involved. According to a recent Law Gazette article, one firm took two years to go through the process, so this is not a quick solution!
We were recently involved in the sale of an ABS in central London and it was purchased by an overseas investment company looking to develop international legal services. A premium was paid and again – no run-off cover was needed by the sellers.
We occasionally work alongside an ABS specialist adviser, Jonathon Bray, and he would be able to provide further advice on converting to ABS status. His company will also consider taking over a firm closing down and converting it to ABS status with a view to selling it. Jonathon’s website is www.jonathonbray.com (we get no benefit from providing this link).
Conveyancing or Private Client Specialist? Become a CLC regulated firm
CLC (Council for Licensed Conveyancers) provide regulation to property and probate lawyers. There are three major advantages of being regulated by them as far as we can see.
Firstly – CLC regulated firms pay no run-off cover when they close down – they are covered automatically for six years. Why? Is it because insurance companies have worked out that any claims for conveyancing and private client matters come up quickly so no need to insure the future? The CLC look after their firms more carefully than the SRA? Or possibly because this is an anomaly that the Legal Services Board have ever managed to iron out? Who knows. We are aware of solicitors’ firms who have converted to CLC status simply because of this issue.
Secondly – anecdotal evidence is that CLC regulated firms pay quite a bit less in PII (Professional Indemnity Insurance) premiums. Whether this is true or not we don’t know. PII premiums are quite often a major chunk of overheads for law firms. We are aware of firms with a turnover of £1-2 million paying out 10% of their turnover in PII costs.
Thirdly – CLC firms can be set up as ABS’s. Which means that like solicitors’ firms they can be owned and operated by non-lawyers. We have heard, again anecdotally, that the CLC have a considerably lower level of red tape than the SRA (Solicitors Regulation Authority), which can make the CLC route considerably more attractive. The cost of applying for ABS status with the CLC is £1,200 plus individual application fees (see the link below for our source of information).
The Council for Licensed Conveyancers have produced a help sheet for switching to CLC regulation from the SRA and it is available here: https://www.clc-uk.org/lawyers/switching-to-clc-regulation/
Look for a Merger
Fairly similar to selling but ever so slightly different – this is where you look for a firm to join forces with. It has the major disadvantage that the firm you join up with will become a successor practice and may require you to purchase run-off cover to protect against future PII claims. If you have no run-off cover in this scenario, the merged firm becomes liable for any claims against your practice from the point of merger.
Mergers are less popular at high street level and seen more regularly when two large firms join forces to access market opportunities and cut costs.
Ten-Percent Legal is not only a recruitment consultancy. We also are very much involved in the buying, selling and merging of law firms. To see details of our services, please click our Law Firm Sales link in the drop down menu above or click here.