Valuing Law Firms and Accountancy Practices – a Business Broker’s Experiences
in Advice

Valuing Law Firms and Accountancy Practices – a Business Broker’s Experiences

As this is one of the most common telephone calls we take every day from owners of law firms and accountancy practices, it is also one of the most common articles that we choose to write about. It remains one of the hardest things to correctly predict when it comes to selling law firms. Accountancy practices are of course much easier! Jonathan Fagan Business Brokers offer valuation services starting at just £650 plus VAT. For details of our valuation services please click here. Written valuations are included as a matter of course in our premium services for sellers.

Valuation Variations

This article is about the difference between the two professions and our experiences of valuations of both. For details of our valuation services please get in touch or click here.

Law Firms – notoriously hard to value

Law firms are notoriously difficult to value. There are so many different factors involved in the operation of a law firm in terms of:

  • types of law
  • structure (LLP, Ltd, sole practitioner, ABS etc.)
  • owner involvement
  • the types of clients (business, private, high net worth, ultra high net worth)
  • connections to particular communities
  • turnover
  • professional indemnity insurance levels (a key sale point)
  • accreditations held (eg CQS, LEXCEL)
  • ongoing contracts in place – eg the legal aid agency, retainers with large companies, trade bodies or other recurring fees
  • potential value of a following of clients who may have been with the practice for generations
  • value of walk-in trade
  • location of the offices of the law firm (if any).

Very often our advice to most sellers is to look more at the structure of a deal and the ‘end game’. What do you want to get out of a sale? As part of our premium services to sellers we do offer deal structure advice and valuations (also available as a one-off service for a small fee). Try not to think about a set cash value but instead get the practice listed for sale, see what enquiries you get and at the same time think about what you want to achieve from a potential sale. Speaking to potential buyers will soon give you a very good idea of the options available to you.

Accountancy Practices – Easy to Value

Accountancy practices are completely different. They are incredibly easy to value and buyers tend to be very savvy in terms of what a practice is worth and how to structure a valuation of it.

It is always interesting when it comes to accountancy practice sales that the sellers (who are almost always accountants) tend to not know themselves what their practice is worth, even though they spend a lot of time advising their own clients on similar issues, and doing so very effectively! Its always easier to take an impartial view on someone else’s business when no emotion is involved but incredibly difficult to do the same for your own..

Gross Recurring Fees

Most accountancy practices will sell based on the value of their gross recurring fees (GRF). This figure is very easy to work out because accountants are exceptionally good at keeping spreadsheets of their clients and their values. Most accountants will put together a list of their gross recurring fees plus details on each client. This will include:

  • type of client (individual, limited company, date established)
  • age (some will list in categories – eg 25-40 years, 40-50 years etc.)
  • length of time with the practice
  • annual fees charged
  • any additional work they have done with the client throughout the year.

This means that any buyer coming in can immediately see the potential value of a practice from the outset and an offer tends to be made on the value of a multiplier of the total figure for the gross recurring fees (we have seen ranges from 1-1.6 x GRF).

The key factors that seem to affect accountancy practice sales tend to be the age of the clients, their length of time with the accountancy practice, the type of trade they are in and their turnover. Sellers tend to want a buyer who is fairly local (if the clients are based locally to the office) and the same certification – eg ACCA, AAT or ACA).

Accountancy practice sales tend to be more negotiated around how long the seller is obliged to stick around for, the clawback amounts and how the sale is structured – ie how much of the money is going to be paid at the point of sale (often the sellers want 50% and the buyers want to pay 33%) and how the clawback is dealt with – eg does it cover all the payment or just a second and third sum paid after 12, 18 or 24 months.

Key difference between Law and Accountancy

This is the key difference between law firms and accountancy practices. In law the vast majority of sellers are simply looking to get out as quickly as possible, retire and hand over their practice together with their clients and any assets in the hope of avoiding paying the usually quite painful runoff PII cover that the insurers will require for them to stop practising. Some solicitors seem to get so stressed by the thought of paying runoff cover that they just keep working rather than need to worry about paying off the runoff cover or retiring.

Accountants always know that their client lists have value and can retire safe in the knowledge that someone will be interested in acquiring their practice or their clients.

It is a very sad state of affairs for solicitors as law firms seem to be completely restricted in what they can and can’t do by their very weak relationship with their insurance brokers, who seem to hold all the control. Quite often insurers even play a part in sale negotiations, with some solicitors feeling obliged to notify their broker at all stages of the process. Interestingly at the time of writing this licensed conveyancers do not usually have to pay runoff cover..

Speed of Transactions

Law firm sales tend to be harder to get going than accountancy practice sales and getting buyers simply to express an interest tends to be the hardest bit, whereas with accountants it tends to be the offer stage that is the hardest bit. Once lawyers have started talking to each other there is a reasonable chance that at some stage a deal will occur, although whether this is the original deal intended by the parties or something completely different is another matter.

Accountants also tend to see their practices in a different way to law firms. Solicitors can get a little bit tied up with the idea that their clients need to be carefully looked after and hence they need to carefully consider who they sell to. Accountants tend to be more happy to hand their clients over as an asset to another business.

Sale Prices

Law Firms

Current values of law firm sales are hard to say because the market is starting to go into a period of fluctuation and figures that were fairly accurate 12 months ago will no longer be accurate as and when you read this article. We provide full valuation services and deal structure examples for a small fee – click here for details.

Accountancy Practices

Accountancy practices tend to be a lot more straightforward and at the moment they seem to sell for a multiplier of between 1.1 and 1.4 of gross recurring fees, with a common figure being seen of 1.2. So if a practice has £200,000 worth of gross recurring fees then the sale is likely to be for somewhere around £240,000. The negotiations tend to be more around how that is paid, what percentage is paid upfront and how much is paid after a period of six, 12, 18 or 24 months. Most buyers like payments to be made as quickly as possible and most sellers like to spin them out for as long as possible.

aw firms don’t tend to be quite so keen on arrangements like this and it is rare to see deals that involve future payments. Deals tend to be more around payments that are made upfront with any future payments being done either as salary of consultancy fees, rather than premium price paid for the sale of the practice.

Crossover between Law and Accountancy

There is surprisingly very little crossover between the two trades at the moment, despite a trend a few years ago for businessmen to try and set up a one stop shop for all professions including accountancy and law. In recent times we haven’t seen much of a crossover other than a couple of accountants who have purchased law firms and the occasional lawyer interested in taking over an accountancy practice to run alongside their law firm. Whether this will change in future is unclear, but as it stands there is not much crossover between the two.

Summary

If you have a law or accountancy practice that you are looking to get valued, please get in touch – we will be delighted to assist with a valuation of your firm that can be used in future negotiations, or simply to give yourself an idea as to the sorts of sales and prices you can expect to receive.

Jonathan Fagan Business Brokers Valuation Services

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