April 22, 2023
I often have conversations with owners of law firms about their exit strategy, and I am often informed that the exit strategy is simply to contact larger firms locally, advise them that they are planning to exit and the large firm will pay them to take over the practice. The large firm will simply buy their practice and the owners will retire.
Sounds a good plan, but does it ever work in practice?
The reality is that unfortunately most large firms are not the slightest bit interested in purchasing smaller firms for a premium unless there is something very specific about the smaller firm that is of interest to them.
Most information about law firm sales by smaller firms is gleaned from their reading of the Law Society Gazette. This will include announcements such as A & B Solicitors has been acquired by C & D solicitors and the solicitors at A & B are delighted. You can almost guarantee that if a deal has happened for one practice to acquire the other and payment has been made, then there is something very specific about the firm that has been acquired that is of interest to the firm making the acquisition.
Unfortunately, in the vast majority of cases where a larger firm takes over a smaller firm, the deal does not actually involve any cash being paid. Its possible that the larger firm has been approached by the smaller firm who were desperate for someone to come in and take them over because they are running out of money, or the partners want to retire and cannot see any other way of doing it.
Firms that generate a decent value tend to have ongoing contracts with specific clients, a particular niche or sector, a team of lawyers operating the firm and in a very good location.
Larger firms have more money?
I get the impression from smaller firms that they think the larger firms are going to be quite wealthy and will have spare money to make the purchase with. This is a myth perpetuated over many years! Just in the last couple of months I have valued slightly larger firms on the high street with eye-wateringly low profit margins, and smaller firms with astonishingly healthy profit margins,
Local buyers only
We have sellers who will who will regularly decline to speak to anybody who is not a partner at a local firm. It does not matter what standing the potential buyer has, the firm are just not interested in speaking to them, unless they have the local connection.
We can understand this because everybody likes certainty and dealing with your local competitors means you know exactly who you are speaking to. And there is an element of trust between the parties. However, in our experience, most deals done between local firms, whether large or small, rarely have much value to the seller, and a more of a case of the other firm looking to acquire a bargain and not to hand over any cash in order to acquire a local competitor.
Summary
You need to explore lots of different avenues rather than just approaching local larger firms. I often say to sellers that its quite likely the final buyers tend not to be as you imagined them to be.
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