How to sell a law firm

How to sell a law firm

There are an unprecedented number of issues impacting the legal sector at the current time, including legal aid reform as well as general trading conditions. The issues are pushing the market towards consolidation and activity in this area is buoyant.

The following are my top tips that you need to consider if you are looking to exit the legal sector market:

Preparation and time

Ideally the preparation to sell your practice will begin a number of years prior to your target date.

This will allow the time to ensure your practice is operating as profitably and efficiently as possible, and to fully consider the other tips below in order to maximise its value.

Whatever the timescale of the sale, you will need to be as prepared as possible.  Entering into the sales process without the information and required understanding of your own business is only like to damage the likely outcome for yourself.

Understand your objectives

Why are you selling your practice?  Is it simply to maximise price and exit the legal services market?  Or are there other factors to consider?  These may include consolidation through expansion, security for your staff or a good future service for your clients.

Be realistic about the value of your practice

A formal valuation of the practice should be undertaken.

The value of a practice in reality is often very different to what the owners perceive it to be.

A formal valuation will help to focus and understand what the realistic outcome of the process will be.

What are the practice’s strengths and weaknesses?

You need to know what is attractive about your practice to a potential buyer.  This may be the loyal experienced staff, efficient working practices, or the potential for future growth within your client base.

This will be crucial in identifying weaknesses which could negatively impact any deal and allow consideration for how those potential faults can either be addressed before the sale or negated by the buyer in the future.

Research your potential market to maximise value

Identify a small number of firms that will be a good fit with your practice through market research, and based on areas such as work types, geography and strategic objectives.

Reverse due diligence should be undertaken to ensure any buyer is in an appropriate financial position.

Accurate data

WIP value will be one of the most essential areas in selling your practice, and will be closely examined by any buyer.

Ensure your data is accurate and that you understand its realisable value.

Close any completed cases, write off any irrecoverable WIP and identify cases where WIP may be under-valued. A formal WIP audit by a specialist may be appropriate.

Consider what other data may be required and ensure that is both available and accurate.

Up to date financials

Your financial information needs to be up to date and readily available.

Any buyer is likely to want to see both historic accounts and future financial information, in the form of forecasts.

Explanations for any anomalies or variances, both positive and negative should be pre-empted, and the basis of any forecasting should be both understood and documented fully.

Consider your future tax position

Understand what you are selling.

To some extent this will be dependent on your firm’s structure and the motivation behind the sale, and may be shares in a company, or the assets of the practice.

Tax advice should be taken early on in negotiations to ensure that any tax implications of the proposed structure of the deal are fully understood, and that the deal is as tax efficient as possible for you.

Involve your external advisors early

Any external advisors should be involved in the process as early as possible. This will include an external lawyer and a lead advisor as a minimum.

They will assist in removing the emotion from the process and be able to advice on the process from an objective point of view.

Finally, although not covered in the list of the points above, arguably the most important factor to consider is culture. If the culture of the two practices doesn’t match or can’t be aligned, then post-merger integration rapidly becomes impossible and if not addressed at an early stage, can also lead to the merger falling down late on in the process.

Rosy Rourke, Legal Sector Manager at Armstrong Watson

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