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:
- You need to build a strong management team and business structure that would be appealing to buyers. Without this in place,your firm has very little or no value.
- Upgrade your technology and software to the cloud. For example, make sure you switch to a cloud practice and case management system such as Clio or Actionstep. Very few buyers want to deal with firms who keep boxes of paper files in their office.
- Settle any outstanding disputes with suppliers, employees and clients. If you have unresolved complaints and pending insurance claims, sort them out first. Otherwise, this can significantly reduce the value in your firm.
- Get all your contracts and leases in order. Most buyers want the business to continue in the same office structure to ensure the least amount of disruption.
- Reduce your personal expenses. It is crucial to get this in order at least 12 months before sale, as historic personal expenses will be reviewed by buyers as part of the due diligence process.
- Prepare up-to-date accounts – ideally to sell at or just after year-end. You need to ensure your accountant is on board and you have all the financial information ready for your M&A consultants.
- Engage the professionals. If you’re thinking of selling your firm, you need to get the professionals involved to take you through the process. Specialist business consultants will help you decide whether now is the right time to sell and how to get your practice in shape before you do. They can also help you with the tricky process of valuing the firm. And, when it’s time, they will assist you to negotiate the best deal.
- Gradually pass owner responsibilities to the management team. Unless your business can function without you, it probably isn’t worth anything. Realistically, you need your management team in place, functioning for at least six months, before you can exit.
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:
- Business asset disposal relief – as long as you’ve owned the business for two years as a sole practitioner or business partner, you could pay a lower rate of 10% in capital gains tax.
- Business asset rollover relief – you can delay paying capital gains tax when you sell some assets if you’re using the money to buy new assets within three years.
- Incorporation relief – you can delay paying capital gains tax when you transfer your business to a company by transferring your business and its assets in return for shares.
- Gift hold-over relief – if you are selling a business asset, you can transfer the responsibility of paying the capital gains tax to the buyer.
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:
- Loans and liabilities – pay these off or be transparent about them.
- Financial statements – you need annual accounts dating back at least three years.
- Statutory registers – ensure Companies House and other registers are up-to-date.
- Properties and assets – be clear about what is included in the sale and prepare documents about the lease, if there is one in place.
- Shareholders – create clear information about the shareholder position.
- Intellectual property – ensure trademarks, copyrights, your company name and domain name are properly protected.
- Contracts – review employee, supplier and client contracts to make sure they are all up-to-date and clear.
- Insurance – make sure you have the necessary professional indemnity insurance in place and consider run-off cover, if required.
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:
- Save time – finding buyers and negotiating deals can be a full-time job, and you simply might not have the time to do it properly;
- Market access – if you’re new to selling a law firm and not sure where to look for buyers, a consultant will give you access to a broad range of their clients;
- Get a higher price – experts will work very hard to get the highest price as they are paid by you; and
- Experienced negotiators – the consultants can take care of the negotiating for you, handling difficult conversations you may not want to have.
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.
- You should have room in your valuation for the price to go down slightly but keep a minimum amount in mind.
- It’s important to research your buyer, too. See what their priorities are and focus on the USPs that may be especially valuable to them.
- Most buyers already own law firms, so look for synergies between yours and theirs to help convince them that your business is the missing piece they’ve been searching for.
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:
- Sale & purchase agreement – this will cover the terms of the sale;
- Lender documents – these will need to be included and reviewed if the buyer is borrowing money to finance the purchase;
- Lease agreements – if there is a leased premises or equipment, the lease will need to be assigned to the buyer;
- Bill of sale – this document transfers the business assets to the buyer; and
- Non-compete agreement – you may be asked to agree not to start a new law firm in direct competition.
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.