How do you value your law firm when selling?

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Posted by Ben Holmes, managing director of Legal Futures Associate Invest in Law

Holmes: whether goodwill has a value depends on the likelihood of repeat business

When attempting to put a value on your firm, never has the quotation of economist Jonathan Reeves been more appropriate: “Something is only worth what somebody is willing to pay for it.”

There will be those who will try and put an arbitrary value on your firm, but can you be sure this isn’t just to entice your custom? Then only later on do you find out that the reality of the market is somewhat different, or that a simple multiple of net profit is too blunt an instrument.

Of course, there are indicators as to value, such as turnover and profitability, but is there any goodwill? My view is that there can be goodwill, but this is the exception to the rule at the moment. Key to whether this is present is the likelihood of repeat business.

Take, for example, a personal injury client. One would hope (for their sake) that they’re not a repeat client, but on the other hand a client who made a will with you, and named you as an executor almost certainly will be (unless the estate is so small probate is not required).

That’s not the entire picture though. The personal injury client may have received an excellent service, and whilst they may not be injury prone again, they may recommend you to their friend who is. Meanwhile, the relatives of the probate client might feel they were over-charged and may never go back to your firm as a result.

Possibly the best solution would be to conduct a survey with the ‘man on the street’, but this isn’t very practical, and more often than not an educated guess about a firm’s potential for repeat business has to be drawn.

A buyer would also look at the reasons for the repeat business. Is it the excellent reputation or relationships attached to an individual, or has it transcended individuals to become part of the firm? If it’s the latter, there is a case for the goodwill having a value, but if it’s the former, and that individual is leaving as part of the sale, an acquirer would be more reluctant to offer value for goodwill. If there’s uncertainty whether it’s an individual or the firm that has the reputation or relationships, a buyer would also err on the side of caution. A period of consultancy by the leaving individual would mitigate this as much as is possible.

The most obvious example of where there is goodwill is perhaps where the firm has large institutional clients, with whom they have an ongoing contractual relationship.

A firm’s name can have goodwill attached to it, but if for other commercial reasons that name has to go in the acquisition process, an acquirer will be reluctant to offer value, or as much value for it. It is certainly more costly promoting more than one brand and sending mixed messages to consumers.

There have been occasions where a firm has such a strong brand and reputation that it will remain in place post-acquisition. The public does need to be made aware over time though that two have become one, and it is costly educating them.

On this point I notice Russell Jones & Walker’s signage on its Chancery Lane offices has over the last two years changed from ‘Russell Jones & Walker’, to ‘Russell Jones & Walker – part of the Slater & Gordon Group’ to now simply ‘Slater & Gordon’. My point is the process is gradual, and the actual cost of the signs is very much only the tip of the iceberg.

Another difficulty is that a law firm is not a particularly liquid asset. In my view, the most important factors as to valuation are getting sufficient initial interest from acquirers, within the right timescales.

Take the recent example of the DWF’s pre-pack acquisition of Cobbetts from the administrators. I’m sure that the two were having decidedly different conversations last year when they were considering a merger. The timescale was the most important factor here – and linked to this was the fact that several firms weren’t even allowed to the table after DWF secured exclusivity (as sanctioned by the Solicitors Regulation Authority).

Needless to say, acquiring firms from administrators can be attractive to acquirers, but it’s not only failing law firms that need to be sold. There are a number of reasons why a very successful firm might want to sell, for example when the partners are retiring, or they decide that they would like to be part of something bigger.

In my view, the most important factor in receiving the right value for your firm is by making sure you reach out to the greatest number of potential acquirers from the outset. Your firm might be an ideal fit for another firm looking to consolidate in your area, or with your client base. You just need to ensure that they become aware of you and at the earliest opportunity.