February 05, 2023
This query comes up regularly because it is a key feature for buyers. In short, our answer is yes, it is a very good idea to convert a sole practitioner law firm or a non-LLP partnership into a limited company, because it makes it easier to sell and gives more value. This may seem a little odd, and I often get asked about it because sole practitioners cannot understand often why anyone would want to do it, but it really does seem to add value.
There are a number of reasons for this, with the main one being how much easier it is to sell a limited company than it is to sell an SRA regulated sole trader firm. An SRA regulated limited company can be bought and sold like any other, with the new owner acquiring the shares and becoming a director, and the old owner selling the shares and resigning as a director. If you compare this with a sole practitioner, the sole practitioner needs to either take on a partner and then resign from the partnership, or arrange for the new person to come in and take over the practice on a sole practitioner basis.
The latter does not seem to be too problematical, but what we often find is that as ever, professional indemnity insurance brokers like to get heavily involved, are more likely to scupper the deal if it’s a sole practitioner selling than a limited company, and generally hold everything up and attempt to charge lots of money to those involved.
It is much easier to convert to a limited company, do a share sale and keep the information you provide to your PII broker as limited as possible.
It all gets back to the feature I regularly write about, which is that your professional indemnity insurance broker is definitely not your friend, and is there to make money at your expense wherever possible, which can include scuppering any deals you may attempt to try and sell your business. The less information you can give a broker, the better.
Selling a limited company can be as simple as transferring your shareholding to someone else, and then leaving them to deal with the professional indemnity insurance. It is not so easy when you are a sole practitioner taking on a partner or similar, because the moment you do this, your PII providers will want their say in the matter.
So, the advice to convert to a limited company falls under two reasonings. Firstly, it is a smoother transaction to sell a limited company than it is a sole practice or a non-LLP partnership, and secondly you minimise the risk of your professional indemnity insurance broker scuppering the deal, causing you lots of hassle, or costing you a significant amount of money. This is not to say that they will not try the latter even if you convert to a limited company, but we do get a lot more interest in limited company law firms from buyers.
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