July 30, 2024
We are regularly called upon to provide market valuations for solicitors’ firms across the UK. We produce a valuation report detailing our specific valuation and provide reasons for it. At the same time we also outline suggested deal structures and give examples of agreements we have come across in the past. As our company solely deals with law firms and accountancy practices, we tend to know the likely range of offers that will arise for particular types of law firm. There is rarely consistency in any of the deals we have been involved with and pretty much every deal for sale or merger is completely different.
Here are a few of the valuation methods and figures you will see bandied about.
High Valuations to Get Sales
Recently we have come across a large national multi-sector business broker (the one that calls you regularly to ask if you are selling your business any time soon) providing valuations in the law firm sector. The sales technique for this company is to provide an extremely high valuation in the hope of getting clients to sign up with them for their paid services, so they use a multiplier to produce a figure. You know the type – just search the web for details. The firm will look at the turnover and multiply it by a factor of around 2 to 3. To get customers signed up, we understand that this company will usually go with a multiplier of 3 x turnover.
Rule of Thumb – Law Firms Have No Value
This is all over the internet – mainly written by consultants and buyers looking to acquire law firms without cost. The argument is usually that your firm has no value because you need successor practice status to leave. Without successor practice status, you have to pay your run off costs for the PII insurance. Therefore the firm has no value because any buyer is doing you a favour.
‘Super Profit’ Valuations
Removing partner drawings or dividend, adding in new fee earner costs and multiplying the remaining profits by a factor of between 1 and 4. This involves net profit minus notional salaries for the owners (replacement staff required when the owners leave).
1/3 of Current Turnover
This is advice we have seen from a number of accountancy practices advising law firms. No other factors are taken into account.
National Buyer Calculations 0.8 – 1.3 Factor
Legal Futures reported a little while ago that Knights were acquiring law firms and applying a factor of 0.8 to 1.3 to turnover to come up with a value. We see these types of multiplier applied to accountancy practices – its a very common way of valuing in the accountancy sector due to the recurring fees that most accountants have.
Turnover Multiplier 0.5 to 3
Rule of thumb reported by some brokers – get your turnover, consider the following list, and then use a multiplier to calculate the value. Field of legal practice (is the practice area in a new or growing field that’s becoming more in demand?), number of clients, amount of repeat business and geographic location.
EBITDA (earnings before interest, tax, depreciation and amortisation )
Take the firm’s normal profits and adjust for exceptional income and expenditure. Make the EBITDA adjustments (for high street firms in particular there doesn’t tend to be a lot to do here) including adjustment for notional salaries for the owners and in theory, come to a figure to multiply – reported range of advisers is 0-7.
Net Asset Calculations – multiples of 0-7
Fairly easy to do – the figure is in your annual accounts. It is essentially the firm’s assets less its liabilities. Multiply by 0-7 and there’s your valuation. Niche firms go high, high street firms go low.
Discounted Cashflow
A method predicting future revenues. Every seller’s dream – eg the buyer makes on offer based on the future recruitment of 3 corporate commercial solicitors to boost the firm’s turnover by 400%! To use this method you estimate future cash flows using your accounts from the last five years and apply a growth rate to forecast a value of the business at the end of a set period. These figures are then discounted. In a nutshell the method looks at the projected rate of return on future cash flows.
Market Comparison
FInally, market comparisons. This is essentially the valuation system we use. Essentially it is a) using market intelligence as to what other law firms have sold for, b) what offers have been received and c) what factors have affected these sales to accurately predict the price a firm will probably attract.
Comments on the list of valuation techniques above:
High valuations are a waste of time (we have never seen a law firm sell for 3 x its turnover!),
No value – most law firms have a value, although those with outstanding PII claims, ridiculous PII premiums or rather a lot of debt rarely sell!
Super profit – the super profit calculation looks very sensible in part, but multiplying profit doesn’t work as a valuation technqiue; for a lot of smaller law firms fees are usually tied in part to owner fee generation so buyers will not pay a premium based on them.
1/3 of turnover – not accurate for the majority of cases.
National buyer offers – we think the national buyer calculations are solely applicable to particular types of firms that seem to have been targeted for acquisition by the firm in question. Take a look at the Gazette for details.
Multipliers – turnover multipliers of 0.5 to 3 are just pie in the sky in our opinion (please tell us if you have achieved a deal along these lines!).
EBITDA and net asset valuations – very sensible techniques, but again rarely seem to apply accurately in practice because of the use of multipliers.Probably more relevant if a firm is approached by a buyer when not actively selling and wanting to justify a sale price.
Cashflow – discounted cashflow has to be discounted as a viable method of valuing most law firms, other than those with guaranteed income for the next x years. At the time of writing this article we had one law firm for sale that probably falls into this category (Ref 100350 if you want to take a look) – and this is incredibly rare to see.
So which is the most useful?
We would argue that in order to get an accurate valuation in the sector we primarily work in – high street law firms, smaller regional practices and niche commercial firms – you have to use market comparisons. These are the holy grail of valuations. Everything else seems to be wishful thinking or guess work on the part of your advisers.
Getting hold of market comparison data is virtually impossible unless you are working specifically in a particular sector and regularly seeing offers and deals being made. This is why we like to think our valuation service is of particular benefit to our sector – we do have this data and we use it regularly to value practices.
We have seen valuations completed by accountancy practices attempting to do a market comparison valuation by subscribing to a business intelligence service and coming up with ‘recent deals’. Interestingly the most recent deals reported appeared to come from a period between 2015 and 2019 and seemed to be of law firms with turnover in the region of about £5 to £20 million.
Interested in a valuation? Drop us a line – happy to assist!
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