A recent law firm sale process has got us thinking about an issue that comes up quite regularly when it comes to selling a law firm, which is that very often a lot of the business coming into a firm for sale is flowing through and sourced by the person selling the practice.
A practice might have a senior partner, two or three consultants, junior fee earners and support staff. The owner will probably do the vast majority of the work but also it is likely he/she will also be the person who doesn’t want to carry on working once the sale has gone through. Sellers tend to expect a lump sum to be paid for the practice upfront and for themselves to leave and stop working within a period of a maximum of six to nine months.
Buyers on the other hand instantly see things differently. Feedback after some initial meetings can be that as far as they can see all the value is in the seller and there is very little else up for sale. The buyer cannot understand why a £400,000 turnover practice is for sale with a cash price of £200,000 if the main creator of all the work is going to be leaving the business within six months. As such, they can’t see any value and the most they can think of offering will be somewhere around the £25,000 to £30,000 mark.
This has happened a few times over the last couple of months and it is a common issue right across all kinds of business sale in all sectors. Countless business books have been written about the issue - planning for the future and extracting yourself from a business with maximum benefit. The main piece of advice is always that you should avoid making yourself the asset that is going to be up for sale.
Hire a Manager
This is easier said than done. I run businesses and I know how hard it is to recruit to take over my work so I can concentrate on other things, because I know as soon as I hand over part of the business that particular area will find the income dropping. I have the possibly inaccurate perception that someone else is not going to generate as much work as I do. It means that one day when I don’t need to work anymore and want to sell up, the value of my business is going to be lower than if I recruit staff who do that work and I simply manage the teams.
There are so many law firms right across the country where this is just not contemplated, for whatever reason, and lawyers carry on working without looking to take on other fee earners until they’re in their 70s and then seek to release equity from their practice even though they haven’t got a team to run the work if they retire.
This of course is all absolutely fine if your plan is simply to use the business to generate work and then when you want to stop you simply close down the business, pay the run off cover and walk away. No problem at all. However, if you want to sell your business and walk away with a lump sum from it, or you want someone else to pay the run off cover because it’s a huge amount of money, then you are going to need to think about this issue very carefully.
Step Away from Fee Earning
Do you really need to be doing the fee earning work or would it be better to simply find someone else to do that for you, and for you to concentrate on managing your business and growing it further? If you source a fee earner to do your work would you be free to spend more time generating new income streams?
Pros and Cons
Weigh up the pros and cons – the pros of doing it yourself are that if you do the work your business makes more money, you have no stress over paying staff, you don’t have to manage or supervise someone else doing your work, you know the work is going to get done properly. Cons – your business will be worth less when you sell it, you will not have any time to generate any more work but simply spend most of your time dealing with work you already have, your company will never grow substantially, your business will simply stay the same size.
I guess it all boils down to whether or not you are someone who likes to take risks. If you take a risk and employ someone to do certain types of work, if it doesn’t work out you can always let them go. If you don’t like taking risks then aiming at a disposal when you retire that simply results in someone else taking over the practice and avoiding run off cover is probably the safest and easiest thing to do.
I’m not always sure that the SAS motto of ‘he/she who dares wins’ always counts when it comes to business, but if you are thinking of selling in the next 10 years it is probably a very good idea to be thinking about whether or not you are the sole asset to your business, or whether there is a way that you can get out of this and set up a structure that you can then sell to someone else when you want to get out.
For further information and advice on buying and selling a law firm, please contact Jonathan Fagan Business Brokers at jonathanfagan.co.uk or by calling 0800 246 5016. We are always happy to have a confidential chat about future plans.