We often get contacted by partners and managers of solicitor practices in the UK, wanting to know what their business is worth. It may be that somebody has approached them to ask them if they want to sell, or it may be that they are looking to retire and one of their colleagues is keen to take over the practice. Similarly, they may have been in negotiations or discussions with a potential buyer and the buyer has asked them what they actually want for the business.
This is one of the hardest questions to answer if you are the owner of a business and need to come up with a figure as to the potential value of it.
No Easy Way to Value
One of the problems with solicitors’ firms is that despite accountants’ assertions, there is really no hard and fast way of calculating the value of a law firm without going through in quite a bit of detail what exactly that law firm consists of.
This is markedly different to other professions, where a factor can be applied or there are ongoing fees, for example in the case of accountancy practices. These companies are fairly straightforward to put a value to because a potential buyer can see that there is a value to the business going forwards, and it can be realised.
Law firms are very often a collection of small groups of lawyers servicing clients as and when they need help, without any ongoing fees in place, very few assets such as fixtures and buildings and no guarantee of anything much once the business has sold and the seller has departed.
This is made even harder in the case of a firm where the owner is retiring and leaving the practice completely. In these cases, the seller walks away potentially with all the goodwill attached to them and not to the practice they are selling.
Disposals v Sales
There are quite often law firm sales that are not sales in the sense that the person buying the practice is not actually paying any money for it, but instead taking over the liabilities and responsibilities that the practice had. This of course is because of the strange anomaly in law firms compared with quite a few other professions, where solicitors have to pay run off cover to their professional indemnity insurance brokers to cover any future losses if a claim arises after the practice has closed down. It is usually valued at somewhere between 2.5 and 3.5 times their annual indemnity insurance premium, albeit paid over a period of 6 years, but still quite punitive.
So, the question any potential seller needs to ask themselves is not what their practice should be sold for, but rather how the deal should be structured.
This is because very often law firm sales are not a simple matter of a buyer handing over cash to a seller and acquiring the firm. It is more often the case that in the event of a sale, the buyer will either agree a favourable lease, offer a consultancy, pay a salary, require the seller to commit to the practice for a period of time, pay a sum over but have this contingent on a specific event occurring, and it is probably this question that needs to be dealt with rather than an actual figure to give to the buyer.
There are of course advantages to this as well, because if a seller indicates to a buyer that they want £200,000 for a practice and this immediately makes the buyer walk away, negotiations have finished. It may be that in that particular case a deal could have been struck where £75,000 of this money was paid up-front in cash and the rest was paid in the form of a consultancy over a period of two years. This would make the deal a lot sweeter for the buyer than the initial demand for an actual lump sum. The seller may well be comfortable with this in the circumstances, particularly if they have not had any other offers, but to actually counter an offer in this way automatically means that no deal occurs, and everyone walks away.
We have come across instances where deals could easily have been struck between two parties, but because a seller has come up with a required figure for the buyer, the buyer has immediately walked away thinking it was way too expensive, whereas if a deal had been done where a favourable lease was granted, a consultancy payment was made and commitments were undertaken to certain future events, then the whole thing could have been progressed and a deal could have gone through.
This also applies of course to buyers indicating low offers to sellers, and we often get contacted by our sellers, literally spluttering with rage because a buyer has put forward a deal that they think is ridiculously low and insulting to all the efforts and value they have put into their practice.
However, in the cold light of day it may well be that that particular deal can be very lucrative for the seller, but because there is no cash payment being put forward right at the start of a particular high value, the seller has immediately felt affronted and walked away without any further consideration.
It is for these reasons that I repeat the assertion that any seller ought to be thinking more about how to structure a deal than how to actually come up with a lump sum for the value, because this is going to be more interesting to any buyer, and also generate more negotiations than an actual lump sum figure.
We can offer valuation services based on recent deals, and deals we have been involved with rather than just figures we are plucking from the sky based on valuation methods. We offer a more detailed service than our basic service which will give a full valuation from different approaches prepared by a qualified management accountant as well. If you would like a valuation of your law firm or would simply like a discussion with us as to the value, please get in touch.