Posted by Elliot Tayler, Mergers & Acquisitions Consultant at Legal Futures Associate AJ Chambers
Tayler: Selling early takes run-off insurance out of the equation
Succession planning in the legal profession is crucial for equity partners to ensure the smooth transition of their practice and preservation of their legacy.
However, when there is a lack of interest from within the firm to take over, partners must explore alternative strategies. This article looks at the considerations for selling a legal practice well in advance of retirement.
By proactively addressing these factors, partners can secure the future of their practice, protect their financial interests, and facilitate a successful transition.
Minimising the financial burden
One significant financial consideration when retiring from a legal practice is the cost of professional indemnity insurance run-off cover. This protects against potential claims arising from work conducted prior to the closure of a practice and currently costs around 3.5x the usual annual premium.
A sale can allow partners to avoid this burden, with the buyer becoming the successor practice that takes on the potential liabilities.
By arranging a succession pathway well in advance of retirement, the risk of run-off cover is also not a factor for a buyer to take advantage of when negotiating the purchase price.
Maximising the value of the practice
The market demand for established practices remains robust, as buyers recognise the advantages of an existing client base, reputation, operational infrastructure and a partner willing to continue in situ beyond any earn-out period.
By selling early, partners can position themselves to negotiate a fair price for their practice, maximising its value. This provides financial security for retirement while ensuring a smooth transition for clients and staff.
Local competitor risk
As referred to above, the knowledge that a partner plans to remain on at the selling practice post-sale is a significant factor for most acquirors. A number of equity partners, particularly when they are sole owners, struggle to find a buyer when they have short-term exit plans.
This reduces the pool of potential suitors mostly to those firms who already have a presence in the local area. A common difficulty partners face in this situation is the business risk associated with having sale discussions with a local competitor.
In the alternative, acquirors further afield may see too much risk involved in acquiring a practice where the leadership and management will soon fall away – recruiting a partner to run the new office is not an easy task with the current battle for talent.
Facilitating a smooth transition
Transitioning a legal practice requires careful planning and knowledge transfer. By selling the practice early, partners can actively participate in the transition process, ensuring their expertise and insights are passed on to the new owner. This collaborative approach fosters continuity and maintains the trust of existing clients.
It is common in legal market M&A for most of the purchase price to be paid in deferred instalments or be contingent in the form of an earn-out. Partners can play an integral role in facilitating a smooth handover, thereby protecting the bulk of the sale proceeds from clawbacks and/or ensuring any earn-out targets are achieved.
Opening new possibilities
Selling a legal practice long before retirement offers partners the opportunity to explore new personal and professional endeavours. Partners can embark on their retirement journey with peace of mind, free from the administrative and managerial responsibilities of running a firm.
This new-found freedom allows partners to pursue other interests, such as consulting, mentoring or engaging in philanthropic activities. They can shape their retirement on their own terms, ensuring a fulfilling and rewarding next chapter.
Timing is of the essence when it comes to selling a law firm. From a potential buyer’s perspective, the closer to their retirement an owner leaves it to sell their practice, the less valuable it becomes. Selling it sooner not only maximises its worth but also minimises the risks and uncertainties for both parties involved.
Partnering with a legal M&A consultant can prove to be a crucial strategic decision for any practitioner. The process of selling a practice can be complex and multi-faceted, often presenting challenges that require expert guidance to navigate successfully.
An M&A consultant brings a wealth of experience and specialised knowledge to the table, offering invaluable insights on market trends, valuation techniques, and a network of potential acquirors.
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