I was interviewed recently by Law Firm Ambition about my views on the most common questions I see around selling a law firm. To read my thoughts on the first five questions, check out the previous article here. Below looks at questions 6-10 about how to work out overall value and the value of work-in-progress and tangible assets.
6. Are there any consolidator firms willing to buy?
Yes. These tend to work by taking on your back office functions (eg marketing, finance, etc) which creates an instant increase in profitability by sharing fixed overheads over more work. This in turn leaves the lawyers (whether that is you or your successors) to get on with what they do best.
For the right firm it can be a neat solution to a problem, especially where the next generation are not willing or able to take over. However, some report that the centralised functions are spread very thin, and that over time it becomes unclear if they are value for money as they take the future profits for minimal involvement.
7. How do we work out the value of the firm?
There is no one answer and in this area it is crucial to take professional advice.
The textbook answer is a multiple of either maintainable earnings (ie profit with suitable adjustments made to it) or a multiple of turnover or assets (being careful to distinguish between the book value of assets in the accounts and what they could actually be sold for).
In practice, the value is only as much as a willing buyer and a willing seller can agree on (usually late at night over multiple coffees!). Having a sensible mediator to run these conversations is key.
8. Do people still pay for goodwill when buying a law firm?
Yes they do. However, not in every case and it does vary considerably based on the attributes of the firm.
Even where they do not, there are still some areas to discuss. These might include realising work in progress and partners’ current/capital accounts that might otherwise go unpaid, finding a good home for clients and staff, and avoiding potential closure liabilities such as redundancy, onerous leases and run-off cover.
9. What value is placed on work in progress when the firm is sold?
More than you may think and so this is important.
Accountancy rules (known by its old name of UITF40 but actually Financial Reporting Standard 102, Section 23) dictate that the book value of WIP is likely to be very low, as you have to be virtually certain of its recovery. This immediately excludes many matters, especially those at an early stage or on conditional fee arrangements. However, in a sale negotiation there is no obligation to follow UITF40 – though the acquirer may wish to!
Instead, it seems fair that work properly done under your regime should be reflected in the consideration that you receive, the difficulty being in valuing those items. How complete is ‘nearly finished’? Will the court find in your client’s favour? Will the client pay? Will some of the recorded time have to be written off?
This area becomes very complicated very quickly. It is often the subject of days of careful due diligence and investigation by specialist accountants to come to a ‘fair’ representation of the WIP’s true worth. One number it is very unlikely to be is the figure in the financial statements!
10. What value is put on the tangible assets (eg the building)?
Probably very little. The second-hand value for desks, chairs, etc is effectively nothing.
If you own (and many firms rent) the building then clearly it has a market value (easily obtained from a surveyor), but that does not mean the acquirer wants the building. Many a former law firm building has found itself turned into luxury flats or a boutique hotel.
That said, acquirers are always keen to maintain a status quo. Many clients do not know the name of their solicitor, but they do know the address or the telephone number. The acquirer needs to harness that brand awareness – one mechanism to do that is keeping the same premises, at least in the short term.
The next set of questions focuses on the sales process and key points for negotiations.
If you're planning to sell your law firm and have any questions, get in touch with Andy
