How specific should I be about the type of buyer I want for my business?
in Advice

How specific should I be about the type of buyer I want for my business?

We often send over details of buyers to sellers to get consent to release information (we never release details of any sellers to any buyers without their specific consent). Sometimes sellers come back to us to say that they don’t want to consider the buyer because of the type of buyer they are, rather than who the buyer is. We thought it might be worth just adding an article to the site to explain why this is not a good approach and also to cover a few queries that often arise with certain types of buyer.

We fully understand why some sellers turn down specific buyers, because they either have a very dubious reputation or the seller has googled the buyer and discovered some revelation about them. Not all buyers, whether good or bad, have a clean reputation and sometimes this can be a major factor in a seller turning them down. However, this article is more about the situation where a seller turns down a buyer because of the type of buyer they are.

We want a successor practice to take us over, not an individual solicitor

This is a common reason for turning down a buyer who is a solicitor working in another practice looking to acquire their first law firm, and not having a trading history at all. There is an assumption that this arrangement will result in paying run off cover as the new owner will not be a successor practice.

This is because the seller automatically assumes that if an individual solicitor comes in and takes them over, they will need to apply for their own professional indemnity insurance.

Indeed, brokers will often tell sellers this if they have contacted their insurance broker early in the process. Because of this, the seller thinks that a) the buyer will have to go through such an elongated process that it will not make it a simple transaction and b) they will need to pay run off cover. They therefore turn down this type of buyer without actually looking at them as an option.

Fake news

Our response to this is that solicitors looking to buy into a practice are not necessarily a bad option at all, and in fact, provided they are not wasting everyone’s time because they do not have access to the capital needed to invest straight into a practice, they can make an extremely good buyer in some circumstances.

Regardless of the professional indemnity insurance brokers claiming that a new individual buyer without existing insurance would need to take out a whole new policy (they would say this wouldn’t they?), a new solicitor investor coming into a practice is actually quite a straightforward process if it’s done in the right way.

Firstly, there is nothing to stop you as the owner of a firm, whether you are a partnership or a limited company, taking on a new partner or director or shareholder. Whilst this will be a notifying event in all likelihood for most professional indemnity insurance policies, it does not usually substantially change the professional indemnity insurance policy. You will have the same professional indemnity insurance policy but just with an extra member of staff/business partner. The buyer becomes a director or partner of the business and at some specified time in the future the seller simply retires from the partnership or limited company and transfers their ownership to the buyer.

No run off cover needed

Unless someone tells me otherwise at some point, this is not a successor practice scenario and therefore run off cover is not needed. This is simply the continuation of an existing business, albeit with a change of ownership at some point. Everything stays the same other than the owner has changed. With this in mind, the whole issue about a buyer needing to have their own insurance policy is a complete fallacy, because of course they will have the insurance in place already that has been in the ownership of the seller for numerous years. This is of course where part of the value of a practice exists for quite a lot of people.

If you are a small business with a long track record and a clean claims history, then anyone buying your business will benefit from this when it comes to applying for professional indemnity insurance. This applies whether or not you are still with the business at the point the application is made. Sellers often get caught up in the idea that they need to be responsible for the professional indemnity insurance and that once the sale has been made, the insurance policy will lapse. This is not correct. The insurance policy does not usually belong to the seller, it belongs with the business, and so if someone takes over the business the policy automatically becomes theirs.

Naturally, it is for the buyer to make sure that the policy is going to be sufficient for their needs and to notify the insurance company that they have taken over ownership, and are quite possibly changing the areas of law they are covering etc which may lead to increased premiums of course (but this would be the responsibility of the buyer).

The situation in relation to the buyer as a new worker at the firm rather than a firm taking over the practice is not one that is going to put the seller necessarily at a disadvantage.

PII brokers are not your friend

This is the danger in speaking too much to professional indemnity insurance brokers as if they are your friends when it comes to business decisions. I am very often told by buyers and sellers that they enjoy an excellent relationship with their broker and they are sure the broker will look after them. I also come across sales where the seller is essentially being advised on the sale by the broker and where this happens you can guarantee that the sale will invariably not happen or take twice as long.

In my experience I don’t think that insurance brokers are your friends. They are simply there to make money out of you and your business by selling policies and charging for any changes to policies. Any excuse you give them to make extra amounts of money is something that most of them will take.

NB: if there is a broker out there who doesn’t think like this, please get in touch as we would love to be able to refer you to all our clients, but this is our experience generally of the sector, and possibly quite rightly so – insurance is a high risk, fairly low profit enterprise and it is all about sales.

Selling to non-solicitors

Quite often sellers automatically rule out any buyers who are not qualified solicitors. The same applies for accountants who sell their practices but specify they will only sell to an ACA accountant or more specifically an ACCA chartered accountant with a specific level of experience.

This is not a good idea and we try to dissuade most sellers from taking this approach. There are many ways to address this so that it should not be something that means you automatically turn down a buyer just because they are not of the same qualification as you.

ABS Lawyers

Firstly, if you take over a practice and you are not a solicitor or authorised person for the purposes of whichever regulator you are going through (SRA, CLC or ILEX) there is an easy, albeit fairly lengthy way for that particular person to take ownership.

Invariably someone purchasing a solicitors’ firm will have a solicitor on board in some capacity, whether as investor, owner manager or part shareholder, but if they don’t then the business will need to look at converting into an ABS (Alternative Business Structure) format, so that the non-solicitor can acquire an interest in the business. There is a specialist ABS consultancy out there who are extremely experienced at assisting with these types of situations. If you contact www.jonathonbray.com and have a word with Jonathon he will usually be delighted to assist, provided you don’t expect hours of free advice!

It is not an easy thing to do quickly and takes a bit of time – quite often three to four months – but it is a way for a non-solicitor to acquire a law firm that does not have ABS status. You simply need to be a bit flexible in terms of the time it will take for the deal to go through – basically, the buyer will put in an offer, heads of terms will be agreed, and part of the heads of terms timetable will be for the practice to convert to ABS status. Once ABS status has been acquired, the buyer will come on board as a director, the sellers will resign and the shares will be transferred across. It all sounds very easy (it isn’t) but it is certainly not a reason to automatically turn down any non-solicitor buyers, because if there is a genuine non-solicitor buyer who is prepared to go through this process, then there is no reason why you could not sell to them, and you have simply turned someone down just on the assumption that it could not happen.

Not local enough to me

This is a common complaint for accountants rather than solicitors, but it does crop up from time to time in both professions.

There is an automatic assumption amongst professionals that they need to dispose of or sell their business to someone who is based very locally to them so that their clients have a continuation of service in the same capacity as they had before.

This is very often an inaccurate assumption and quite often the seller is doing themselves a disservice. To date, in all the deals we have done I have not seen any local deals (i.e., from one local business to another local business) that has not been done at a huge disadvantage to the seller. Most of the time the buyer almost says they’ll do the deal as a favour to the seller and take over their business, rather than the seller getting some value from the deal and the buyer paying consideration in order to acquire the business or the assets of the business.

If you think about it, a local firm is going to look at your business and wonder why they need to take it over, when if you simply close down, they will in all likelihood acquire all your clients who would have used them on a local basis anyway.

This logic is quite reasonable, because if you are so desperate to give the practice away to a local business at next to nothing, it probably means that you have not been successful looking to sell elsewhere. If you have not been successful looking to sell elsewhere, then it is highly likely your business has no value. And so, the circle goes on – it is very unlikely that you will be able to dispose of your business to another local business and acquire a good price for it.

It is more likely that the deal will simply go through whereby the local business acquires your assets, continues your firm and saves you the bother of having to pay run-off cover.

Successful deals usually come from the most unexpected of places and people – and rarely from just around the corner! I often get lists of suggested firms to approach from our sellers and to date I have not had one deal go through from any of them.

Buyers looking at a specific type of firm rather than a location tend to be looking more at the potential value of your business and they are fully aware and expect to probably have to pay a premium price to acquire it.

Summary

I hope that these pointers give you an idea that it really isn’t a good idea to turn down buyers on the basis of their type of buyer rather than specifically who they are. Always look at each buyer individually, by all means do a background check on them, but make sure you consider everybody on an equal footing and don’t automatically discount someone because you don’t like the look of the type of buyer that they are.