Jack Hayman, senior manager in the legal sector team at accountants Hazlewoods, outlines ten key issues you should think about long before you actually put your law firm up for sale. (23 September 2021)
1. When do you want to exit?
It is estimated that less than 10% of owners really know the answer to this. However, having a timeline gives you the clarity to enable you to plan properly as, ideally, you want to be in control of the process and not let the process control you. Planning for a sale can take between three to five years as there is a lot to do to ensure that you both maximise value and have a smooth transition.
During this period, there will be two conflicting objectives that you will need to handle sensitively. The first is the need to reduce costs and maximise profitability, to show a potential acquirer what a great investment you are. The second is the need to continue to invest in the firm’s future, as you do not want to risk losing your staff - your key assets - if they lose faith in the firm.
2. A tidy house
Potential acquirers will be less interested in the past than in the return that your business can give them going forwards. However, depending on the type of deal, an acquirer usually wants to see a firm that is well run and does not have problems such as a bad claims record, poor debt collection, old work in progress that should have been written off, or onerous supplier contracts with long tie-in periods and expensive exit charges. Planning a sale three to five years in advance gives you the opportunity to address these kinds of issues and get your house in order.
3. Having a clear knowledge of each department’s performance
Buyers are increasingly sophisticated in their analysis of a potential firm’s opportunities under their new ownership. As a bare minimum, you can expect to provide financial information for a number of previous years. In addition, a lot of acquirers will want detailed forecasts and management accounts on a departmental basis. It makes sense to report on this basis for your own management team anyway, as it enables you to spot any under-performance quickly and address it during the preparation period.
4. Understand what makes you attractive
With over 10,500 law firms in the UK at the moment, trying to stand out from the crowd can be quite difficult. Every firm will have a key selling point, but it is a case of finding it. It might be your location, your areas of expertise, your client base, your team, or something else. Once you establish what makes your firm attractive, you can maximise that aspect of the firm.
5. Your greatest asset
It is easy to focus on the owner’s position in a sale and forget that the real value of a law firm is the people within it. Whether you intend to remain involved or not, your key employees will have their own view about any upcoming changes and whether they want to remain part of it. Although in the initial stages of any discussions you are not likely to involve them, you do need to think hard about them and their role in the new entity. This is particularly important if the deal involves an earn-out, as achieving the desired results without key members of your team could be difficult.
6. Identifying who you want to sell to
There is no reason to wait for a telephone call from a potential acquirer. Instead, take control of the situation by identifying the type of practice that you want to sell to. What offers the best future for your firm? Who would you be happy to remain working with for a period of time? Knowing what makes your firm valuable should give you the confidence to make that initial approach.
7. Who can help you?
There are many options when it comes to finding advisers to help you sell your practice. Two things are particularly important.
Firstly, the adviser should have deep experience of the legal sector, as selling a law firm (and getting the best outcome for the vendor) is very different to, say, selling a manufacturing business.
Secondly, the advisor should have experience in selling firms of your size.
Thirdly, the advisor should have the depth of knowledge and the resources to support you fully through the whole process. As law firms know only too well, it is one thing to win work in the first place and it is another thing to consistently deliver excellent results for clients.
8. Understanding the structure of a deal
No two deals are the same, as value in the eyes of one party may be very different to value in the eyes of another. It is always helpful to speak to your accountant in advance of any sale to consider your options. Run through the different types of structures that are possible, and what they could mean for you, so your expectations are set. Tax is usually a key issue, as what is more tax-efficient for a buyer may be the opposite for the seller. Fully understand the tax liabilities before the sale is completed, to avoid nasty surprises.
9. What professional assistance do you need and when?
Do not underestimate the time that will be absorbed dealing with potential acquirers and the negotiations that ensue. Even if you have sold a practice before, or your area of specialisation is corporate transactions, it is not recommended to try and do everything yourself. For a start, you need independent advice. Engage with your accountants as early as you can, to get help structuring a deal.
It is always a good idea to have heads of terms drawn up by a specialist lawyer. Although they are not legally binding, these terms ensure that all the crucial aspects of the deal have been agreed early on. Completing the detailed final agreement then becomes much easier for all parties.
10. Consider your post-deal role
The first question to ask yourself is ‘Why am I selling?’.
Are you selling because you no longer want to be practising and, therefore, this is a sale with no further involvement?
Or, are you selling because you do not want to be involved in running the firm, but you still enjoy the client work and would like to continue with that?
Understanding what role could fulfil you going forwards is an important part of the whole equation. It is likely to be one of the first questions that an acquirer asks, as it can have a major impact on the value and culture of the firm post-acquisition.
Note: This article is based on the item Legal update: 10 things to think about before approaching anyone about selling your practice on the Hazlewoods website.