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Thinking about selling your law firm? This is how you do it

Posted by Rudi Kesic, CEO at Legal Futures Associate Advantage Consulting [1]

Kesic: You need to make your firm look its best

Selling a law firm can be a complex process. The time comes when you might want to move on or retire, and finally extract as much value as you can from your practice.

It’s a huge decision and a challenging task, with many tax and legal implications to consider. As a business consultant, I have worked on hundreds of law firm sales, mergers and acquisitions, and even more to the point sold and exited my own law firm in 2018.

How do I set realistic expectations?

The first question is why you want to sell. You could be ready to retire or wanting to release capital to start a new venture. Perhaps you’ve had partnership disputes and want to move on, or profits are dwindling and you’re afraid of losing more money.

Whatever your personal reasons, you should keep your end-goal in mind at every step. Whether you have an amount you need it to fetch or a deadline you want to be out by, these objectives will make the process more focused.

You should be prepared for the deal to take six months at least, so getting prepared early will be crucial to reaching your goals.

How do I prepare my practice for sale?

First, try to make it as attractive as possible. It’s just like preparing a house or a car for sale – you want it looking its best:

What about the tax implications?

If you make a profit when you sell your law firm, you’ll need to pay capital gains tax on anything over your tax-free allowance.

However, there are some tax reliefs that can lower the expense:

When is the right time to sell?

If you have a deadline in mind, you should think carefully about the timing that will secure the best deal and facilitate the smoothest transaction. Generally speaking, it’s a good idea to sell your solicitors’ practice when profits are high to attract buyers.

You might also want to sell your business when economic markets are expanding and there is more appetite for deals. For example, at the moment we are seeing more demand for law firm acquisitions than ever before.

You need to give your business consultants lots of time to plan your sale. You should aim to start preparing your business for sale two years in advance to give you the best chance of getting your accounts in order, building a strong team and expanding your client base – these are all factors that will help you achieve a higher price.

How do I get my business valuation?

You can think of a law firm valuation as being similar to a house valuation. It’s the asking price for your practice, based on aspects including physical assets, projected profits, your brand’s reputation and the work in progress.

There are many different methods we use to value your business, but it helps to get a real legal sector expert on board to give you a detailed valuation report or an estimate. Accountants are not very good at valuing law firms – so try to get help from the experts and don’t waste money on the basic profit-based calculations from the accountants.

And, just as with a house valuation, that isn’t necessarily the price your firm will eventually sell for. Prepare for a lot of haggling but bear in mind that most law firms have no value at all. In fact, the majority of legal aid-only law firms are totally worthless in terms of profit-based valuations. But we’ll leave that for another day.

What is a sale prospectus?

Just as houses on the market come with details about their features, law firms for sale need documents summing up their unique selling points.

This document needs to be produced by the experts, ideally by your trusted business consultants. A typical sale prospectus includes a succinct one-page summary to grab attention, focusing on the headline points including the work you do, the team, USPs, management structure, WIP, reasons for sale, turnover and potential for growth.

Then it goes into more detailed information about your operations, premises, leases, equipment and other assets.

Before a deal goes through, you may need to create a Lexcel-compliant office procedures manual to help the buyers take over. Most law firms we work with require full Lexcel compliance for risk management tool, as a minimum pre-requisite for the acquisition.

What is the due diligence process?

Any seriously interested buyer will want to carry out rigorous due diligence to ensure your business is what you say it is. Be prepared for this – any holes or glitches will quickly put them off, so it’s worthwhile getting a business professional or a specialist legal sector expert to manage this process for you.

To give you an idea, here are some key aspects to look out for:

How do I find a buyer for my law firm?

You now have more ways to find a buyer for your law firm than ever before. There are websites that list businesses for sale like the Advantage365 portal (www.advantage365.co.uk), so you could try one of those, or you can engage M&A experts to sell the practice for you.

We do not advise the use of social media for selling your law firm, for many obvious reasons.

The best solution is to engage the experts who will work with you and approach law firms who we think would be interested in buying your practice.

Do I need to engage an expert consultant?

My advice is to always use an expert to take you through this process. An M&A expert will act as your trusted adviser and middleman between you and the buyers. They’ll help you find buyers and secure the best deal.

Although you need to pay for their services, the higher price you may achieve and the expertise should outweigh the cost.

Here are some advantages of using an M&A expert:

We advise against using ‘general brokers’ because they know very little about law firms. You should also try to avoid ‘sale brokers’ as they charge a sizeable commission for selling your practice. A quality M&A legal sector advisory team will guide you through the process.

How do I negotiate the best deal?

In most cases, your buyers will of course want to negotiate to get a lower price or deal terms that suit them better. When you have offers coming in, the first step to take is to make regular contact to avoid losing the deal before you’ve had chance to negotiate.

Remember, negotiating goes both ways.

Also, be sure to check that your buyer has the necessary funding in place to buy your practice, as this will help the sale go through without setbacks.

Now for one of the most crucial tips: at this stage your consultants should be putting everything in writing as the ‘heads of terms’.

Make sure you follow up all discussions made over the phone with emails that you can refer back to, should there be any disagreements further down the line.

It’s also a good idea to ask potential buyers to sign confidentiality/non-disclosure agreements to protect your business.

Get a business lawyer involved to draft your sale & purchase agreement

A specialist contract solicitor should usually take you through this step, helping you review agreements and work towards an agreed sale date.

Here are the main agreements involved:

I’ve sold my law firm. What next?

It’s best to wait until the deal is finalised before you inform your employees, to avoid any interference affecting the sale. Once the agreements are all in place, let your employees know exactly what will happen, how the sale will affect them and where to go for information and support.

Once you’ve sold the practice, you will need to pay any tax that’s due. Avoid spending any profits too hastily, to make sure you have enough money to foot tax bills.

Finally, selling your law firm isn’t the only way to move on from it – there are various other exit strategies you could consider instead. Talk to us – it’s all about what is best suited to your personal circumstances and goals.