What is a Shell Law Firm?
A ‘shell’ law firm is one that is SRA or CLC regulated, has a limited number of clients, no staff, no premises (ie very few liabilities or assets), but does have a history of holding professional indemnity insurance cover for a period of time.
Typical buyers of shell law firms include new start ups – PII insurance costs can cripple a start up, particularly one that is dealing with conveyancing, commercial property or wills & probate. This is not so much of an issue for litigation firms (eg family, commercial litigation).
Shell law firms with an affordable PII premium do have a value, which varies according to market demand. Firms with claims against their PII rarely have any value as a shell, neither do firms who have actually ceased to trade or are yet to start trading.
If you have a law firm and are looking to run it down with a view to closure, give us a call for a confidential chat.
If you contact the SRA about this, you will quite possibly be informed that “a firm’s SRA authorisation is not a saleable asset” and “we may seek to revoke [ ] where an authorised firm has been sold as a vehicle to another person, thereby allowing them to evade the authorisation process themselves.” Both statements are of course correct but it is not usually the SRA authorisation that buyers are after; it is the professional indemnity insurance history. SRA authorisation tends to be straightforward for most buyers who are already solicitors with clean practising certificates and no disciplinary history.
There are extremely good financial reasons for acquiring an existing firm and continuing it, rather than starting from scratch.
Call us today for a confidential discussion.
What does a business broker do?
Business brokers are essentially estate agents for the sale and purchase of businesses. This is probably making it sound a lot more basic than it actually is, but this is the role of the broker. We source sellers and we find buyers. We match buyers to sellers and, if both sides like each other, we help facilitate a deal.
There are a lot of differing types of broker and a lot break down into “Seller-Side Brokers” or “Buyer-Side Brokers”. Seller-side brokers act in the best interests of the seller, their client, and buyer-side brokers do the same for the buyer. In both circumstances the broker will very often charge a percentage success fee – usually based on the overall value of the business for sale or the purchase price.
Although we get paid by buyers if a deal occurs, we do not act for one side or the other in any deal. Instead we work as impartial advisers to both sides, giving confidential advice & assistance where needed. This is a fairly unique service – we recognised the need after hearing so many horror stories about other business brokers getting up to all sorts of things; buyer-side brokers telling sellers their businesses were worthless so they or a connected third party could acquire them for nothing, seller-side brokers giving ridiculous valuations to entice sellers to pay exorbitant up-front fees to market them. We set a fixed price at the outset; once a buyer agrees the fee we do not change it.
Why is there a surge in buyers looking to acquire law firms in September and October each year?
Firstly because buyers sit on the beach in August thinking about expansion plans and then decide to do something about it when they get back from holiday. We see this on an annual basis!
Secondly, because September and October is PII renewal season for a lot of firms, and brokers will be telling their clients things like “the market isn’t great and I am afraid your premium has gone up by 150%.” Happily trading businesses suddenly find themselves in a difficult position of having their profits wiped out by random PII premium increases.
One solution for some seems to be to go out and look to start again with a new SRA regulated entity (see above). Similarly other firms will find out that the relatively minor claim in one department has resulted in a huge increase in premiums and no possibility of continuing to trade in their current form so consider other options.
We have had a few buyers try to register in the past few weeks and it tends to involve a keen interest in looking around at law firms who can sell or do a deal quickly.
Thirdly, new entrants to market often get through their first bits of form filling etc in the summer, speak with PII brokers and realise to their horror that the premium to open a conveyancing practice (for example) will wipe out their profits for the first 5 years of trading! Plan B is very often to look around for an existing practice to take over and use their trading history and PII in order to circumvent the efforts of the insurers to restrict access to the market.
Finally there are occasions when firms look to separate out different parts of their business, particularly in relation to conveyancing, and then seek to acquire another firm in order to achieve this. Not a very common occurrence but we do see an increase in interest on this basis in September every year.
Why are there so few accountancy firms for sale on your website?
It takes on average about 4 weeks to sell an accountancy firm. It takes considerably longer for law firms to sell. As a result, our listings are always overloaded with law firms, with the occasional accountancy practice appearing. Once you list a firm of accountants with us, we will usually have enquiries for you within 48 hours, initial disclosure completed within a week, meetings arranged within 2-3 weeks and a first round of offers within 4 weeks. These will usually be at ‘good’ or ‘exceptional’ levels, which also means that very often one of these is accepted without needing to return to stage 2, which is to explore alternatives as they come in. Usually we will get an additional wave of enquiries between 2 and 6 weeks which opens even more doors for potential sales.
Law firms are very different and take a lot longer to sell – mainly because of the various stumbling blocks along the way – regulatory & professional indemnity insurance issues are the main two. If accountants think they are heavily regulated – try being a solicitor in England & Wales!
Do you provide accountancy practice valuations?
Yes we do – our valuations are based on current deal experiences and suggested deal structures. We recommend having a valuation prior to listing your firm for sale. It can be completed within 2 weeks for most businesses.
Are business brokers regulated?
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.
What underhand tactics do business brokers use?
The business broker and business transfer agent market in the UK has some really dodgy operators in it. A couple of the more regular tricks are below:
1. The small print – there are quite literally hundreds of articles and complaints on the internet about some of the larger and more sophisticated sales operations out there who have armies of agents cold calling businesses to see if they want to sell. The most common clause is the exclusivity one. You sign an agreement with a broker and then if you end early or sell elsewhere you pay them an administration fee. www.cebta.org.uk has links to actual cases and examples that have arisen, involving some of the more dodgy firms.
2. The high valuation to entice a signature. This is a real problem for us – we have clients who have paid for a valuation, which we think is off the scale in ridiculousness, but the client is convinced that the valuation is genuine and insist on a sale at that price. Unfortunately the valuation is a complete waste of time and has been prepared for one reason only – to sign the seller up on an exclusivity contract for a period of time and take fees for various services.
Obviously our company is a little different! We charge no upfront fees and neither do we tie any of our clients in to exclusivity contracts. We are naturally delighted if anyone sells or merges without our assistance and we provide any additional advice to all our sellers and buyers at no cost.
How secure is our data?
Owners of law firms and accountancy practices can be assured that any data sent to Jonathan Fagan is kept highly confidential. We never release any information about your business without your express consent in every circumstance and we do not divulge any detail to third parties. The only information ever disclosed to buyers about sellers is the paragraph of information displayed on our website. Anything else requires the specific consent of the seller.
All buyers and sellers sign a non-disclosure agreement at the start of the process and we renew these with potential buyers every 12 months.
Jonathan Fagan Business Brokers Limited is Cyber Essentials certified and registered with the Information Commissioner’s Office. We operate documented controls covering access, confidentiality, secure transfer, retention and deletion. Further information is available on our Data Protection and Confidentiality page.
Do you offer due diligence services?
Yes we provide advice on due diligence to buyers and sellers as part of our Platinum Service (sellers) and our Enhanced Service (buyers).
