Sell, sell, sell? It’s not that easy in PI

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26 November 2013

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

Holmes: talk of a sellers’ market instills false confidence in firms

Recent press coverage has suggested that it’s a sellers’ market for personal injury caseloads, with acquirers queuing up. Sellers just don’t realise it, and consequently don’t receive a fair value for their files.

I would like to offer a more balanced view and suggest this is something of a misnomer and can in fact be quite damaging to sellers.

There may well be a significant number of firms aspiring to be acquirers out there, but the reality is the vast majority of these are either day-dreamers or tyre-kickers, and lack either funding or capability, and often both, to make an acquisition. The reality is there is only a handful of quality acquirers with the requisite resources in place to see a deal through to conclusion.

In my opinion, it’s actually damaging for commentators to talk of a sellers’ market as it instills false confidence that a firm can try everything they can to survive, and if all else fails, they’ll find a buyer after a bidding frenzy the following day. It’s encouraging an emu approach amongst firms, which might wrongly believe they are safe in the knowledge an exit is simple, when the reality is these firms need to start engaging with suitable acquirers at the earliest possible opportunity to achieve the right value.

Before engaging with acquirers, you of course need to get your house in order, but it can be detrimental if there is substantial delay, going to the trouble and expense of endless advice, when you’ve already reached a decision to sell – either because you want to close your firm, or PI no longer fits with your strategy.

Specialist advisers are popping up seemingly weekly – and it’s of no surprise that most of these ‘specialists’ are the strongest advocates of a sellers’ market. We’ll save your firm, they announce, but if we can’t we’ll make sure there’s a bidding frenzy for your caseload. But are they simply adding another layer of expense to the process?

Receiving an independent valuation for your caseload may well be useful, but paying for your own full due diligence, for example, is work that will inevitably be duplicated, as all reputable acquirers will undertake their own due diligence process.

If an acquirer doesn’t insist on due diligence from the outset, you should be wary about whether they are capable of completing the deal. If they do complete the deal without any due diligence, you should be very wary about whether you’ll get paid.

Added to this is, time is most certainly of the essence as the value of your WIP is a depreciating asset, as the proportion of pre-Jackson files diminishes, so too does the value, and the reality is there is a limited time to sell your caseload.

When a strategic decision has been reached to divest the firm of PI, there is of course the option of running the files down in-house. There’s been comment that the knowledge of this will somehow help motivate staff. You’ve got to ask yourself whether you would be motivated by the certainty of losing your job in 12 months’ time.

The reality is the best staff will leave first, leaving the remainder in a moral-sapping downward spiral of inefficiency. That whole experience may well not be to your financial benefit in any event.

My view is it is neither a sellers’ nor buyers’ market at the moment, but much more balanced, so sellers are achieving a fair price, and acquirers are receiving some discount to take account of the inherent risks associated with the transfer process. Recent speculation that WIP is only attracting 40p in the pound is, in my experience, out-dated; current market rates have moved on considerably from that point. The higher-value stock is attracting considerably more than this.

It’s simply not the case that acquirers are like a volery of vultures swooping in to make a steal, as some would have you believe. It’s a difficult and costly process acquiring PI caseloads – it takes experience, and is being driven by the same Jackson factors that’s affecting all PI firms, whether large or small.

Invest In Law has created a Personal Injury Calculator to give solicitors a view of current market rates and see how the main experienced buyers structure payments for PI caseloads

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