FAQ’s – Buying A Business

Quite often we refer to ‘staff for TUPE’ in our listings, and if you are not a lawyer you may not know what this is. Taillte Mallon, one of our specialist advisers, has prepared the following advisory note.

What is TUPE?

TUPE stands for Transfer of Undertakings (Protection of Employment) Regulations 2006.

A ‘TUPE transfer’ happens when:
• an organisation, or part of it, is transferred from one employer to another.
• a service is transferred to a new provider, for example when another company takes over the contract for office cleaning.

Your rights are protected under TUPE if both things apply:
• you’re legally classed as an employee.
• the part of the organisation that’s transferring is in the UK.

Does the size of the business matter?

No, the size of the organisation you work for does not matter. Your rights are still protected if you work for a large organisation with many employees, or a small one like a shop or a pub.

When does TUPE apply?

The 2 types of transfer where TUPE applies are:

Business Transfers

This is where a business or part of a business moves from one employer to another. This can include mergers where 2 businesses come together to form a new one. It’s possible for the business, or part of it, to have just one employee.
• Your employer must change for TUPE to apply.
• You will automatically transfer to your new employer when the transfer happens.

Service provision changes

This is where contracts are taken over. This can be because:
• a service provided in-house is taken over by a contractor (known as ‘outsourcing’)
• a contract ends and the work is transferred in-house (known as ‘insourcing’)
• a contract ends and is taken over by a new contractor (known as ‘retendering’)
• this can also include labour contracts

TUPE does not apply if the contract is for:

• the supply of goods only, for example a car manufacturer getting their brake pads from a different supplier
• a single event or short-term task, for example a conference or an exhibition

TUPE Protection

If an transferred employee is dismissed either because of the transfer or a reason connected with it, their dismissal is automatically unfair.

Notice Period

• The organisation needs to give 45 days’ notice. However, some organisations will give more than this to enable employees to ask questions and attend meetings.
• Employers must inform and consult with either a trade union or employee representatives about the TUPE transfer
• Businesses with fewer than 10 employees are not required to invite the election of representatives for consultation purposes if no existing arrangements are in place.

Employee Rights

When transferring from one employer to another, an employee’s contract continues with the new employer. This is because the current employer is not ending the contract – it automatically transfers to the new employer on the transfer date.

The current employer must provide the new employer with specific information about each employee. This is known as ’employee liability information’ (ELI).

The current employer must give this information to the new employer at least 28 days before the transfer:

Employee liability information includes:
• identity
• age
• terms and conditions of employment
• any active disciplinary and grievance records, or ongoing cases, from the last 2 years
• any agreements between employer and a trade union (‘collective agreements’) that affect an employee’s terms and conditions.
• any claims related to employment that have been made against current employer in the last 2 years or that they believe an employee may make when transferred

The terms and conditions of employment automatically change to the new employer. This can include if you’re transferring from one employer to another, your contract continues with your new employer. This is because your current employer is not ending your contract – it automatically transfers to the new employer on the transfer date.

Your current employer must provide your new employer with specific information about you. This is known as ’employee liability information’ (ELI).

Employee Liability Information

Your current employer must give this information to your new employer at least 28 days before you transfer.
Employee liability information includes:
• your identity
• your age
• your terms and conditions of employment
• any active disciplinary and grievance records, or ongoing cases, from the last 2 years
• any agreements between your employer and a trade union (‘collective agreements’) that affect your terms and conditions
• any claims related to your employment that you’ve made against your current employer in the last 2 years or that they believe you may make when you transfer.

Pensions under TUPE

Whether a pension will transfer to the new employer will depend on if the employee has:
• a personal pension – a pension that arranged by employee.
• a workplace pension – a pension arranged by employer.

Personal Pension

• Pension rights will automatically transfer to new employer. This means the new employer must pay the same amount into an employee’s personal pension as before the transfer.

Workplace Pension

• it’s likely it will not transfer to the new employer as it is exempt from TUPE. This means the new employer does not have to continue the same pension. But they must provide a reasonable alternative scheme and match employee contributions up to a maximum of 6%.

How long does TUPE last after transfer?

• The protection period by TUPE is indefinite. If the new employer attempts to change the terms and conditions of a contract because of the transfer, it’s illegal. TUPE can still protect an employee even years after the transfer.

Buyer’s Responsibility to new employees

Can changes be made to an employee’s contract?

Yes, if it falls under ETO. ETO TUPE refers to the basis upon which an employer is permitted to make changes under the regulations to an employee’s contract following a TUPE transfer or, where necessary, to dismiss an employee, namely for an “economic, technical or organisational” (ETO) reason.

For a dismissal, regulation 7(1) states that where either before or after a relevant transfer, any employee is dismissed, that employee shall be treated as unfairly dismissed if “the sole or principal reason for the dismissal is the transfer itself or a reason connected with the transfer that is not an economic, technical or organisational reason entailing changes in the workforce.”

Even if there is a clear ETO reason for dismissal, all proper dismissal or redundancy procedures must be followed, and the employer must act reasonably in their decision to dismiss or in their selection for redundancy.

Consequences of acting without an ETO reason

If a new employer seek to change the terms and conditions under which your new employees are expected to work without a clear business reason to do so, or dismiss any one of these employees in similar circumstances, this may give rise to a whole host of practical and legal problems.

Employees may:
• Refuse to work under their varied contract of employment.
• Elect to work under their varied contract, albeit under protest and treating the variation as a breach of contract
• Resign and claim constructive dismissal, where the variation under the contract is substantial.
• Take a case to a tribunal for breach of contract or unfair dismissal, or even unlawful deduction of wages where the change affects their pay.

Yes and no. If you are a qualified solicitor with more than three years post qualification experience, then in theory you can own a solicitors firm, regulated by the Solicitors Regulation Authority (SRA), and operate the firm yourself as well.

If you are a qualified legal executive, then you can own a firm of legal executives, and in some cases you can also be an owner of a solicitors firm regulated by the SRA. SRA rules are here: https://www.sra.org.uk/solicitors/firm-based-authorisation/authorisation-recognition/

If you are a licensed conveyancer, then you can own a firm regulated by the Council of Licensed Conveyancers (CLC).

If you are none of these things, then it is still possible for you to own a solicitors firm which is SRA regulated, but it has to be set up as an alternative business structure (ABS). This involves converting a traditional solicitors firm with a structure of a sole trader, partnership, limited liability partnership (LLP), or limited company, and turning it into a regulated ABS.

So, the very specific answer to can you own a law firm if you are not a lawyer, is yes you can, but it depends on the circumstances and the structure of the law firm in question.

For a further discussion on this, please get in touch with us and we would be happy to talk through what you need to do, as well as give you recommendations as to how to do it.

Yes it is. We are very happy to provide our services to any sellers or buyers of law firms or accountancy practices, and to act as your adviser on strategy and procedure throughout the process for a fixed price. The service level is the same as our Gold or Platinum Service (or our Platinum Plus Service if you want legal advice & full due diligence), so if you would like us to act as your advisers during a deal, simply sign up for one of our services and we will provide the necessary advice. This can include providing legal advice, assisting with templates where necessary, negotiating on your behalf with the other side, sourcing alternative buyers or sellers if wanted and providing you with a valuation which can be used by both or one party when it comes to setting a price. If you would like to instruct us as your advisers, simply get in touch to discuss with us, or click here to view our sellers’ services.

A common question in recent times has been how to calculate net profit when working out the price of a law firm and in particular relating this to the situation where a seller is also working as a fee earner and taking drawings or dividend out of the business.

The key question is usually whether or not to deduct some or all of the drawings/dividend/salary of a partner or owner, and any family members, in the overall net profit calculation.

In terms of a valuation this needs to be adjusted according to the replacement value of the seller and any family members. This is because the vast majority of owners don’t take out an equivalent sum to the level that they would get if they were a normal fee earner in their role.

So, for example, if you have an owner of a law firm taking out £90,000 per year and they undertake conveyancing work and are head of conveyancing, then the calculation ought to be based on the estimated salary you would be paying a fee earner to undertake that work as a head of conveyancing and a conveyancing fee earner, which will probably be more around the £65,000 mark in most cases.

These are the sorts of figures that come up in law firm valuations which we undertake on a regular basis, but we don’t think you can simply deduct the money paid to the owner of the firm and expect to have an accurate figure.

It is an incredibly complicated calculation to make, because you do need an idea as to the sort of salary levels and payments that need to be made to a fee earner to replace the money paid to the owner. This is not a simple calculation to make, and one that you will probably need assistance with. Fortunately, we can provide that assistance through our valuation and deal structure reports, and if you require our help please get in touch.

However, we think it is wrong to include the money paid to the owner, simply because in law firms, the money paid to the owner rarely reflects the income they are generating.

Finding inexpensive or affordable solicitors to act for you in the sale or purchase of a law firm or accountancy practice can be quite difficult.

Solicitors’ firms are set up to do commercial work, but the profitable commercial work is for large businesses and multinational PLCs and definitely not acting for SMEs!

This means that very often you will be quoted hourly rates to complete the legal work needed to make a purchase of somewhere between £350 and £450 per hour, which on a small sale or purchase of a firm valued at around £30-40,000 can actually result in you paying almost half the cost or sale price in legal fees.

You can undertake your own due diligence if the deal is smaller sized and this will almost certainly speed things up dramatically and cut your costs considerably.

Options

We usually offer clients a few alternatives. Firstly, we can recommend a Legal 100 law firm who have extensive SME M&A experience for an hourly rate in the region of £400 per hour. For larger, more complex deals, this can be very good value for money.

We can also recommend a couple of specialist SME M&A lawyers who will charge around £185-300 per hour to provide the requisite advice.

Finally we offer in house lawyers at a rate of £75 per hour.

Conventional Law Firm Option £400 per hour

The first option is to use a conventional law firm with a team of M&A solicitors experienced in the sale and purchase of SMEs and with the manpower to be able to move extremely quickly where required, including on any commercial property purchases, sales or leases to be assigned. The hourly rate for this is often c£400 per hour, possibly higher depending on the deal and the time frame the deal is taking place in. This is with a firm we can recommend you to; compared with other firms and teams of similar size, this is a surprisingly cheap option for using a conventional law firm with the expertise and manpower to be able to assist, and so is probably recommended for larger firm sales where there are complexities and you do need someone who knows what they’re doing with all aspects of the deal. Also relevant where a deal needs to be done quickly. Contact us to request a referral.

SME Specialist Option £185-300 per hour

The second option is to use a specialist for SMEs but someone who will be working on their own as a consultant via a solicitor’s firm. The cost of this is usually somewhere around £185 to £300 per hour. The difference between this one and the first is the time it will take the solicitor to complete the deal. With this arrangement you will be working with a single solicitor and totally dependent on their availability to complete the work. Furthermore, if there are different aspects to the deal that need additional expertise then you will need to pay for those specialists to come on board as well, and this may well slow things down further. If you want to use this service please drop us a line and we will refer you.

Interim Lawyers Platform £75 per hour

The final option is to consider using an in-house lawyer to provide you with legal advice on a non-liability basis. As M&A work is usually non-regulated, you do not need to use a solicitor’s firm to complete it for you. This means that you can actually take advantage of having your own in-house lawyer providing you with advice.

The way this works is that you use our Interim Lawyers Business Lawyer platform, and it is done on a pay as you go basis.

The major catch with this particular option is that you have no recompense if there are any problems with the advice you are given. The lawyer will be acting on an in-house basis and will not accept any liability for the advice they give you. So, in essence, you are sacrificing the ability to be able to sue your professional adviser for negligence in return for low-cost legal advice.

Typical Legal Process for Business Purchases

The process of selling or buying a law firm usually involves the production of the heads of terms and then a subsequent business purchase agreement, asset purchase agreement or share purchase agreement. Each time one of these documents is produced, you simply send it off to the interim lawyers platform and we will provide you with a time estimate. If you are happy with the time estimate for completing that particular review of a legal document, you pay up front for those hours, the lawyer completes the review, and the work is returned to you.

3 Options

So, there we have it – three options for getting legal advice in relation to the sale or purchase of an SME law firm or accountancy practice. Each one is different, and each sale or purchase has separate issues relating to it, which will dictate which one of the options is the most suitable for you.

Any questions? Contact us.

Who buys law firms and accountancy practices?

Law Firms

Law firm buyers fall into a few categories. Large investors buying into the sector, family buyers – purchasing for family members to take over and run a law firm, lawtech companies buying into the actual transactional side of the industry and companies in related sectors looking to run their own legal operations. We get some solicitors who look to establish their own companies by buying another business, but they are the exception to the norm.

One glaring exception is the local rival law firms. Our experience to date is that the vast majority of enquiries we get from local rivals or firms based locally looking to expand by takeover are making the enquiries to either a) get intel on the operations of a local rival or b) looking to try and acquire a local rival without needing to spend any money.

Looking at our list of successful sales, those we have had involving local firms have mostly been retirement arrangements, where the seller became a consultant for the buyer’s firm, the buyer’s firm became a successor practice and no money changed hands.

A lot of sellers have a fairly romantic notion that they will set up a firm, work in it and on it for over 40 years, find a young, enthusiastic solicitor just starting out who wants to spend £250k on a law firm, sell it to them and depart to enjoy retirement. Unfortunately reality is very different. Most younger solicitors see how easy it is to set up their own firms and don’t see the point in purchasing an existing practice, particularly one that may have antiquated systems and methods of operation. It is rare to find firms managing to find a younger partner who comes on board with a view to acquiring the equity after a set period of time.

Accountancy Firms

Very different types of buyers. Most buyers of accountancy firms and gross recurring fees are other accountancy firms and accountants. Just about every deal we see or are involved in will be with another accountancy firm, probably quite local, looking to pay a set multiple for the gross recurring fees. We don’t see many alternative types of buyer and there doesn’t seem to be the consolidation that occurs in the legal profession – accountancy firms on the whole are either 1-4 partners or large multi-partner operations with multiple offices across the country, if not the world.  

Generally there are so many different types of potential buyer for businesses it can be hard to categorise them, but the above is a general snapshot of the buyers we see on a day to day basis making enquiries about the law firms and accountancy practices we have for sale.

Yes, no and it depends on the circumstances is our answer!

If a buyer purchases your law firm, becomes a director of the firm and the law firm carries on as before then there is no successor business because the law firm has continued to trade and no-one has become a successor and inherited the liabilities. The original firm still has the liabilities because it still exists and is still trading.

If the buyer takes over your law firm and merges it into his/her existing law firm so that the new law firm is Smith & Co incorporating Old Firm & Co, then the new firm is the successor practice. The old firm has ceased to exist and is now part of the new firm structure.

I think this is the easiest way of distinguishing between a law firm sale where a successor practice is involved and a law firm sale where investors have purchased it and the practice is continuing as before.

Please get in touch if you would like to expand on this advice or clarify it further – always happy to add extra information to the FAQs..

Run Off Cover

There are all kinds of issues involving PII run off cover when it comes to law firm sales. The upshot is that while run off cover is a major stress for sellers to be worried about it tends not to be a major issue in the actual sale or disposal of your business because if you do achieve a sale or disposal of a practice it is highly unlikely you are going to need to pay run off cover. Some brokers still try to have their cake and eat it and try to make the seller pay run off cover even though their practice has been acquired by a successor firm. There are situations where run off cover comes into play because a buyer has simply bought the structure and not the clients of a firm, or vice versa, which in some circumstances still means that run off cover needs to be purchased in order to protect the seller when they retire.

In relation to law firms, by far an easy sale is one where the seller has a realistic idea as to the sort of price a practice is worth. Not only that, they have also communicated quickly each time an enquiry has been made, they have got all the paperwork together ready to go each time a new buyer enquiry gets sent over and they are easy for everyone to deal with.

Accountancy practices tend to have everything ready at the outset and we don’t have so much of a problem collating everything together for these deals.

So many deals happen because of synergy between the buyer and the seller rather than any particular feature of a firm for sale.

Deals often break down because one of the parties gets a bit awkward or doesn’t communicate well with the other side and things start to go off the boil rapidly. Furthermore, if a seller does not respond to a request for further information quickly, then a buyer can quite often decide it’s not for them and walk away.

Quite a few sellers put their firms on the market and take a very long time to respond to queries when they come through from potential buyers, which gets the buyers frustrated and they move on to new targets. The seller then contacts us to ask why no enquiries are coming through (!).

Key factors that will make a sale happen or more likely to happen are a willingness to provide information quickly from both sides, a willingness to discuss and negotiate on prices, and a good spirit throughout discussions.

We have been working with UK law firms and accountancy practices of all shapes and sizes on recruitment and business sales for over 20 years. The information we give in relation to values of businesses is very specific to our experiences of previous and current deals and is always tailored to an individual business. Our specialist valuation services are available on a standalone basis or as part of our seller packages. Unlike other brokerage services we are specialists for law firms & accountancy practices and we offer transparent fee structures for buyers and sellers alike. We want to help you achieve a satisfactory deal.

Yes we do. We are happy to be as involved as the parties to the deal want us to be. Sometimes we have sellers and buyes who require our full input throughout. The seller will want us to communicate on their behalf with the buyer and their representatives and the buyer may well require us to keep channels of communication open with the seller. For other deals we will have virtually nothing to do with negotiations or communication and both sides will simply notify us once a deal has gone through.

We don’t mind how negotiations take place, although we have found that deals occur more effectively when a) both sides deal politely with other (conversely sellers or buyers who are unnecessarily aggressive or confrontational with each other tend to find that deals collapse) and b) the parties do not change the goalposts every 10 seconds – a common problem with negotiations that take place between the buyer and seller directly and not via 3rd party advisers.

No is the quick answer and no is the even longer answer. In the UK anyone can set up as a business broker to buy and sell businesses. There are quite literally 100s if not 1000s of individuals, businesses, estate agents, accountants and lawyers who assist with the sale and purchase of businesses. There is no regulation of business brokers at all, although essentially the services most provide are simply advertising and marketing assistance, rather than any actual professional advice.

Simply click the link below to fill out our online form and we will register you as a potential buyer. Every week you will receive an email update with any new firms for sale that may be of interest. https://jonathanfagan.co.uk/register-as-a-buyer/

Sales Procedure – a Rough Outline

A very rough outline of the procedure is as follows:

1. All parties sign confidentiality undertakings.
2. We agree terms with the buyer.
3. The buyer is provided with information about the practice for sale.
4. The parties meet or speak about plans and proposals. Proposals can be as varied as the partners of the selling firm joining the buyer’s practice or the selling partners accepting a lump sum in cash to exit the business.
5. A ‘heads of terms’ (also known as a HoT) is drafted and agreed. This sets out a timetable for the acquisition and specifies who does what and when. It is rarely legally binding – just an outline of the intentions of both parties.
6. A deal is reached and completion takes place. The buyer pays us an introduction fee – this varies according to the sale/purchase in question.

As coincidence has it, we have a guide to selling a law firm available right here – no charge! If you have any questions about any of the advice or content, please contact us.

Please click the link below to download our guide.

Yes we do – we specialise in both law firms and accountancy practices and provide market valuations based on current deal experiences and suggested deal structures. Our valuations are used for a wide range of purposes including partnership disputes & divorce proceedings. We recommend getting a valuation done as a first step to considering the sale, merger or disposal of a practice.

Please contact us for further details.

Yes we do, as part of our Platinum Plus service.

We offer very straightforward fees.

Sellers pay no fees unless you use our premium services.

Buyers pay a fixed fee, agreed at the outset, if a deal occurs. No deal, no fee.

And that’s it.

Further Details

Our buyer fees tend to range from around £6k plus VAT up to £15k plus VAT, depending on the size of the firm for sale and the perceived complexity & involvement for us in any deal. We never change the fee once it has been agreed at the outset, even if the deal takes months to conclude.

Sellers pay no fees to list their firm for sale and we do not charge any fees to assist with negotiations, discussions, advice on strategy, verbal valuations or provide information. We do however provide premium seller services – Gold, Platinum & Platinum Plus – which include a wide range of additional services for sellers on top of our standard list and sell service. Details of our seller services are here.

Buyers pay nothing to access our information services online, assistance with negotiations, strategy advice, discussions and anything else we can assist with. We do of course charge a fee if a deal takes place (or you recruit staff from the target firm). List of firms for sale available here.

We provide paid formal law & accountancy firm valuations. These are available to anyone – whether you looking to purchase or sell a firm or simply take on a new partner or raise capital. Click here for details.