December 29, 2023
Obtaining finance to purchase a solicitor’s firm is not the easiest thing to do at any stage of a cycle in the economy. This article explains the usual route to obtaining funding to acquire a law firm.
Law Firms Are Not an Easy Sell for Finance
Finance tends to be available for acquiring businesses where there is clear evidence of potential growth, stability, ongoing work and an established staff team with realisable assets included in the sale.
Putting that into the context of law firm sales, this excludes most of them because very often law firms to not have established lines of work that are guaranteed to continue in future. This means that anyone looking to provide finance to a buyer of a law firm will almost certainly be quite happy to do it if a buyer’s credit rating is good, but similarly they are very unlikely to get actual finance to make a purchase without borrowing individually and personal guarantees.
Cash(flow) is King
One of the hardest things to do when setting up a business is to keep cashflow going, and also not to end up in debt personally when the whole reason for probably starting out in business is to be your own boss and responsible for your own outcome. It is very hard to do this if you owe the bank hundreds of thousands of pounds and need to pay back a loan from the outset (when money can be incredibly tight).
There are ways of getting credit that do not involve personal guarantees, but for law firms this is incredibly rare. It is something we have never seen in our time in the sale and purchase of law firms.
Personal Guarantees Guaranteed
In the first instance you need to be prepared to take a personal guarantee on your assets, quite possibly your house, if you need to raise funds to make an acquisition. Secondly you will probably be paying quite high interest rates and thirdly you need to be sure that you are purchasing a business when you are going to be in a position to be able to make payments back on the finance you have taken out. You want to make sure you are not going to get into a position where you are unable to afford the finance you have already spent – it will start to impact on your personal life.
It is very common to see law firms acquired with finance, and there are finance houses out there and brokers who can assist (we can recommend a very good source of advice), but you do need to be aware as to what you are letting yourself in for, which is that finance companies are not there to help you necessarily they are there to make money out of you and if you are acquiring a law firm you need to be confident that the acquisition you are making is going to provide you with a good return in order to satisfy the finance and also to generate an income for yourself.
Jonathan Fagan is Managing Director of Jonathan Fagan Business Brokers Limited, specialists for law firm and accountancy practice sale, purchase and mergers. For valuation reports and advice please visit www.jonathanfagan.co.uk.
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