Selling your Law Firm
In this article, specialist lawyer Mark Briegal breaks down the process of selling your law firm and outlines the stages necessary to ensure the successful sale.
The Starting Point
It’s often said that the best time to start planning to sell your business is when you start it. I always ask commercial start-ups the question, “What’s your exit plan?”. If they don’t have an exit plan, then they have a lifestyle business. That’s not a bad thing, but it tends to mean they focus on providing for their current and short-term needs, rather than thinking of growing the business for a sale.
Law firms are often different in that they have historically passed from one generation of partners to the next. Nowadays its more common for them to be sold, either to extract goodwill or because it solves a succession planning issue.
Once you have decided that you want to sell, you need to start thinking like a buyer. What do they want to buy and have you got it to sell?
The oft-quoted truism is that, as a business owner, you should work on your business and not in your business. There are two key reasons for this. One is that the business becomes scalable if it’s not just you and, secondly, it becomes valuable. A business that depends entirely on you has no value to anyone other than you. In order to achieve a good price, you need the firm to be able to generate profit without you. This often favours more commoditised firms rather than traditional firms or niche firms, but it can be done.
The first thing to think about is timescale. You don’t want to be selling in a rush. Also, from a tax viewpoint, you need to have owned business assets for two years to be able to claim entrepreneurs’ relief, which enables you to pay tax at 10%, rather than at 28%, on your capital gain on the sale of the business. You must also have owned 5% of the capital and voting rights, so you need to review this – beware spouses who have non-voting shares and recent transfers.
The next thing to think about is the due diligence. This is the series of detailed questions about every aspect of your firm that the buyers will ask. You need to have all your ducks in a row so that the buyer sees a clean, efficient and well-run business. Make sure all your contracts are up to date, together and current. This applies to client bills, engagement letters, purchase invoices, leases, office equipment, staff contracts, SAR reports, PII proposal forms etc. Once a buyer finds out that everything is not squeaky clean or there are missing documents or problems in the business, for example, high numbers of complaints, then they will either walk away or start chipping away at the price.
Once you have decided that you want to sell, you need to appoint good advisors. Your accountant or a good broker (we know good ones of each) is your starting point. He or she will be able to help you value the business, put together an information memorandum to give to potential buyers and deal with the initial negotiations on price.
A good lawyer is also crucial (I would say that, wouldn’t I?). And it may be best if that good lawyer in external to your firm, however good your internal ones are. You need a lawyer to draft the documents which will ensure you get paid and offer you the maximum protection possible. The first document you need is a non-disclosure agreement to make sure that anyone you disclose information to does not misuse it.
It is vital to get your advisors on board early. They can help you through the stages and help you prepare.
The key question that most people selling a business want to know is “How much?”. That depends. It depends on what you are selling and who the buyer is. A business may have a different value to a range of buyers depending on how it fits into their existing businesses. Your advisors will be able to help you with this. Price is often a multiple of maintainable earnings with the multiple being based on the sector and the profitability of the business. Net assets and goodwill are also factors in the discussions.
The next discussion is whether, if you are a limited company, you are selling your shares in the company (a share sale) or whether the company is selling its assets to the buyer (an asset sale). In general terms, a share sale is preferable for the seller as it is neater, more tax efficient and the whole business passes to the buyer. There is no need to transfer individual assets or liabilities and the staff are not affected by TUPE as the company stays the same, just the owners of the shares in it change.
Buyers often, however, prefer asset sales as the buyer will not then acquire any of the liabilities of the company that they do not specifically agree to acquire. There may be some tax advantages to them too.
Sole practitioners, partnerships and LLPs will usually sell their assets, although it is possible for the buyers to become partners or members, but unusual.
One other issue to consider is whether you are getting cash or shares in the buyer, or a combination, whether it is all paid in one lump sum on completion or whether there is some form of earn out. This all affects the price and the negotiations. Cash now is usually better than cash in the future, but an earn out (you get more money if the business generates certain levels of profits after the sale) may produce a higher price.
The diagramme below sets out the keys stages of the process. I often warn clients when they embark on a sale or an acquisition, that they will get very fed up of me in the process. Do not underestimate the time or effort it will take, on top of continuing to run the business.
Your lawyer will guide you through each stage and negotiate the contracts.
Warranties are statements that specified things are true about the business, for example, that all tax due has been paid and that there are no outstanding claims against the business. If they turn out to be untrue, the buyer can claim damages for loss caused by the breach of warranty. The seller will make disclosures against the warranties, for example, that an employee has been off on long-term sick leave, and then no claim is allowed. If there is a specific known issue, the buyer may demand an indemnity – that is that the seller pays the costs of the known event. For example, if an employment claim in course, the buyer may insist that the seller pays the costs of any award made by the tribunal. Warranties and indemnities form part of the legal negotiations.
The whole process often takes between three and nine months from start to finish.
The key to a successful sale is doing your homework before you start and keeping an eye on the process. You need good advisors and must devote the time to the deal.
Out top tips are:
1. Be clear about your rationale for selling.
2. Understand what is driving the other party to buy.
3. Decide the basis for valuing your business.
4. Clearly, understand your deal-breakers.
5. Prepare for appropriate legal, financial and contractual due diligence.
6. Dedicate sufficient resource to the deal.
7. Keep key stakeholders informed as far as is commercially possible.
8. Use external professional advice as the cost of failure may be significant.
If you need assistance selling your law firm, we can help!
Mark Briegal is a founding partner at Bennett Briegal LLP, a specialist law firm advising primarily partners, partnerships and professionals. Mark’s background is as a corporate lawyer and he has extensive experience of M&A work. Prior to qualifying as a lawyer, Mark worked in international banking and management consultancy and brings a practical approach to legal work. Mark has a degree in Classics from Cambridge University and an MBA from Manchester Business School.