Selling your Law Firm?

on 13 July, 2015 Email this Email this - Print this Print this

What to do and what NOT to do

 

Solicitors are a weird breed.  Principals of law firms work in a very challenging and exacting profession.  Most of them are graduates.  They are highly qualified and academically accomplished.  The odd things is that when they come to selling their law firm, their brains turn to mush, their legs turn to jelly and they forget all the basic rules of business.

 

Imagine that the MD of an engineering company that makes nut and bolts goes to a Solicitor because the MD wants to sell his Company.

 

The Solicitor would generally know what to do and he would probably check that the MD has already taken professional advice.  Has the MD spoken to his Accountant?  Has the MD had his Company independently and professionally valued?  Has he carried out due diligence on the buyer? Has he checked that the buyer actually has access to funds to buy the business?

 

The odd thing is that Solicitors generally don’t do that.  You’d be amazed how many times a Client has said to me:  “Mr. Bloggs has offered me £X for my business so that’s obviously what it’s worth – well he’s a Solicitor so not only do I trust him, but I believe every word he’s told me.”  Derr!!

 

Solicitors are terrified if the person who buys their law firm is going to change the nature of the firm or the way it’s run.  Imagine that the law firm is a traditional “high street” practice that handles wills/trust/probate, residential conveyancing and matrimonial work.  The buyer wants to change it to a legally aided criminal or immigration practice.  In many cases the owner of the law firm will refuse to sell it. Why? “Well, we’ve been acting for Gladys and her family for over 50 years.  What will she do?  Most probably, she’ll go to another law firm.

 

If the engineering company that makes nuts and bolts is sold to someone who now wants to manufacture screws and washers – well, so what!! I’m all for loyalty to my Clients but Clients will happily go to another law firm to save £10 on a conveyancing transaction.  So much for loyalty. I’ve had Clients who have refused to sell their law firms to potential buyers because of the way that the buyers had planned to run the firm in the future.  To be honest, if I had a choice between sitting on the beach drinking Pina Coladas or sitting in the office handling the probate for one of my Clients, it doesn’t take too much brain power to work out which option I’d choose.

 

I’ve had Clients who have wanted to retire for years and years but have delayed and delayed and delayed selling their businesses because of the fear of what Gladys and her family will do – only for the Client to get cancer, a heart attack, have a stroke or even fall down the stairs and break their leg [all of which are real examples].  And what did Gladys do?  She went to another law firm anyway!!

 

Something that Solicitors always seem reluctant to do is to take advice from a professional third party. Always talk to your accountant for the most tax efficient way of selling your business. Make sure you investigate Entrepreneurs Tax Relief.

 

Always go to an independent third party to get your law firm valued.  Don’t get fooled or conned into thinking that law firms don’t have a value.  You’d be amazed at the number of times that a potential buyer of one of my Clients’ law firms tells me that law firms don’t have any value so they’ll be delighted to take my Clients’ law firm off their hands for nothing.  I always reply with “If law firms don’t have any value, I’ll take your law firm off your hands for nothing.” To which I am generally told, “My law firm has a value – it’s just everybody else’s law firms that don’t have a value.”

 

Imagine if someone came to you house and told you that property has no value and so could they have your house for nothing.  I expect your response would have been two words and the second one would be “off”.

 

I also know of many law firms who state that it’s their company policy not to recognize the payment of goodwill on an acquisition.  Interestingly enough, they do recognize goodwill on a disposal of one of their branches.  I wonder why that is?

 

Always take professional advice when preparing the heads of agreement and the terms and conditions for the sale of the business. Don’t try and do the legal work yourself.  Remember the maxim – a Solicitor who acts for himself has a fool for a client. If you need a referral to a commercially astute Solicitor who can draft the heads of agreement and the T+Cs for the sale of your law firm, let me know.

 

Make sure, right up front, that the potential buyer knows that you expect 100% of the payment of your firm on completion. A good analogy is the comparison with selling your house.  Let me give you a couple of examples.

 

I’ve had buyers of law firms say that they’ll pay the incumbent owner of the law firm out of the profits of the practice over the next two years after they’ve taken over the firm.  Would you sell your house like that? It’s like saying that the buyer of your house will not pay you anything on completion. You just give them your house for nothing but then pay you out of the rental income they receive over the subsequent few years after they’ve acquired your house from you.

 

I’ve had buyers of law firms say that they want to work in the firm for three months before they actually take it over.  That’s like saying that the buyer of your house can live there rent free in your house for three months before they decide to buy it.

 

I’ve had buyers of law firms offer to buy the law firm in instalments.  They negotiate a goodwill figure with the seller and then decide that they’d like to pay it in monthly or even quarterly instalments.  However, what happens if the buyer of the law firm screws up, the SRA intervene and the firm closes down?  You lose your law firm and get nothing for it.  Believe me, I know of many such examples where that is exactly what has happened.

 

Don’t ever sell your firm on an “earn-out basis”.  An earn-out basis is when the consideration for the purchase of the goodwill is based on the financial performance of the firm AFTER disposal.  For example, the net profit for your firm, before you sell it is, say, £100K.  You agree a figure of £X for the goodwill.  The buyer want to give you 50% of £X on completion and then offers you a higher percentage of the goodwill payment based on the next years’ net profit.  If the profit goes up, you get more – if the profit goes down, you get less.  Why would you agree to this? You don’t own the law firm anymore and have no control over the performance of the firm.  I can virtually guarantee that you’ll see little or nothing of your remaining share of the goodwill.

 

Many buyers [and in some cases, also the sellers] want the incumbents to stay on in the firm after the transfer of ownership.  This can be a beneficial to both parties.  However, don’t get conned into exchanging your goodwill payment for salary.  Suppose you agree a lump sum for the goodwill of £100K.  Don’t agree to work for 3 years at a salary of £33K p.a. in order to get paid for your goodwill.  This way, you’re basically working for 3 years for no pay.  There’s no problem with being paid £33K p.a. for 3 years provided you get your £100K up front.

 

When it comes to consideration, I have a very simple approach.  What you want is 100% of the goodwill payment on completion.  No ifs, buts or maybes. If the buyer doesn’t have the money then either they’re not serious or they’re trying to get the firm for little or no payment.  They should do what most people do when they buy a house – they go to a bank or a financial institution to borrow the money using the firm they buy as security for the loan.  Remember, the interest on the loan is a legitimate expense for taxation purposes.

 

If you need any help in selling or valuing your law firm, we provide free information and advice – just call us on 01494 483728, email raymondafox@aim.com or take a look at www.BottomLineConsultancy.com

 


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