August 23, 2023
In a nutshell, and without spending the usual hours looking at your firm in detail; the answer is no.
Or at least for 99.9999% of law firms with a turnover of less than £10 million the answer is no.
If you think about it, how on earth could this ever happen?
Lets take a typical high street law firm.
Two partners, one office manager, three secretaries, one other fee earner.
Turnover is £400,000. The partners generate £275,000 of this, the other fee earner generates £125,000. The practice operates from leased premises, there are longstanding clients, the firm has all systems in place and pays less than 10% of turnover in Professional Indemnity Insurance. Profits are c30%, shared equally between the partners.
Assuming the partners are moving on (usually to retire and get as far away from the legal profession as possible!), the buyer gets the following from any purchase:
- The remaining fee earner and their billing
- The clients
- The support staff and the infrastructure of the firm
- A lease if required
- Future work coming into the firm
- The benefit of the professional indemnity insurance and the trading history linked to this.
- The website and IT systems
Now think about what you would pay for this.
Assuming the business broker valuation is correct and the firm is worth £1.2 million, this would mean the partners would get £600k each, paid in cash up front.
Could this ever work?
My thoughts are below.
- The buyer would need access to finance or funding of over £1 million to purchase a business that has no assets to base this funding on.
- A buyer would need to be a solicitor or solicitors able to assume the COLP and COFA roles, or a recognised competent person (if ABS).
- The partners would be each earning 10 years’ worth of profits by selling the business.
- The business would not make a profit for 10 years, because the buyer would have paid this amount to the sellers.
- The buyers would need to recruit two new members of staff to take over the work of the retiring partners, probably costing about 2/3 of profits previously taken by the partners. This would mean that there is only 1/3 of the profits remaining for the buyers, which means that the 10 years of profit to break even would actually become 30 years before any profit was made unless turnover and profit dramatically increased.
- The sellers would be well within their rights to celebrate such a sale by flying around the world first class and enjoying the high life. Personally I have always quite fancied owning an island somewhere in the Caribbean.
Lets face it, if a business broker gives you a valuation that makes no sense, cannot be quantified or backed up by realistic factual evidence, they are after one thing and one thing only – your money up front. There are copious amounts of detail online about the activities of some of the larger generalist brokers and the way they generate income, and you only have to do a quick search to find out.
If you want a realistic valuation based on facts, actual experience of law firm sales and common sense, please contact us. We would be delighted to help. Whilst we would love to provide valuations that make you jump up and down with unadulterated pleasure, and then cream off £000s before disappearing into the sunset, we are ethical, honest and hardworking business brokers operating in the real world and providing market-based valuations and deal structure suggestions.
Jonathan Fagan Business Brokers are law firm (and the occasional accountancy firm) merger & acquisition specialists. Its all we do! We are not charlatans promising the earth and delivering nothing, which is unfortunately quite prevalent in this line of business!
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