1. When do you want to exit?
It is estimated that less than 10% of owners really know the answer to this. However, having a timeline gives you clarity to enable you to plan properly as, ideally, you want to be in control of the process and not let the process control you. Planning for a sale can take between three to five years as there is a lot to do to ensure that you both maximise value and have a smooth transition.
During that period, there will be two competing factors; the first being the desire to maximise profitability, so reduce costs to show a potential acquirer what a great investment you are. The second being the need to continue with investment itself, as you do not want to risk losing your key assets, your staff, who may leave if they can see that you are not continuing to invest in the business during that period. It is a fine line to walk but one that is required.
2. A tidy house
Potential acquirers will be less interested in the past and more interested in the return your business can give them. However, depending on the type of deal, an acquirer wants to see a firm that it is well run and does not have any issues i.e. bad claims record, poor debt collection, old work in progress held for no reason and poor supplier contracts with long tie-in periods and expensive exit charges. By planning a sale three to five years in advance, it gives you the opportunity to get your house in order and address all these issues.
3. Having a clear knowledge of each department’s performance
Buyers are becoming increasingly sophisticated in their analysis of a potential firm’s opportunities for them. You can expect as a bare minimum to provide financial information for a number of previous years. In addition, a lot of acquirers will want detailed forecasts and management accounts on a departmental basis. It is helpful to get used to reporting this information for yourself, if you are not already doing so, as it will enable you to spot under-performance quickly and address it during that preparation period.
4. Understand what makes you attractive
With over 10,500 law firms in the UK at the moment, trying to stand out from the crowd can be quite difficult. Every firm will have a unique selling point, but it is a case of finding it. Once you can establish what makes you attractive you can maximise your value, which could be anything from your location, areas of expertise, client base etc., you can then use this to your advantage when trying to assess what your firm is worth.
5. Your greatest asset
It is very easy to think about the owner’s position in a sale and forget that the value of a law firm really comes from the people within it. It is therefore important that you consider key employees, as they will help make your firm more desirable. Whether you intend to remain involved or not, key employees are also likely to take a view of any potential structural change and make their own decisions as to whether they want to be part of it. Although in the initial stages of any discussions you are not likely to involve them, you do need to think about them and their role in the new entity. This is particularly important if the deal involves some sort of earn-out mechanism as it could be very difficult to achieve this without them.
6. Identifying who you want to sell to
There is no reason to wait for a telephone call from a potential acquirer. Identifying the type of practice that you want to sell to, not only to give the best future for your business and particularly if you want to stay working in it for a period of time, is within your control. Knowing what your unique selling points are and where the value of your business is can give you confidence to make that approach.
7. Who can help you?
There are a variety of sources of business that can help you sell your practice. Each have their own merits. The most important things to look for are that:
- the firm has experience in the legal sector, as selling a law firm is very different to selling a manufacturing business; and
- they can deal with the size of your business in order to provide the breadth of knowledge and experience to help you make decisions and support you through the process.
8. Understanding the structure of a deal
No two deals are ever the same. Value for one party is very different to value for another and, often what is more tax efficient for a buyer, might not be more tax efficient for a seller. It is always helpful to speak to your accountant in advance of any sale to consider your options and run through the different types of structure and what they could mean for you, so your expectations are set. There is nothing more soul-destroying than getting the offer of a lifetime and then suddenly discovering that there is a lot more tax to pay after the ink has dried on the paperwork!
9. What professional assistance do you need and when?
Unless you have sold a practice before, it is not recommended to try and do this all yourself, even if your area of specialisation is corporate transactions, as you need independent advice. Do not underestimate the time that will be absorbed dealing with potential acquirers in negotiation, agreements etc. Having that support will help you manage that time more effectively. Engage with your accountants as early as you can to help you structure a deal. It is always a good idea to have heads of terms drawn up by a lawyer as, although they are not legally binding, it ensures that all the crucial aspects of the deal are agreed which should then make the final agreement itself easier to prepare for all parties.
10. Consider your post-deal role
The first question to ask yourself is ‘Why am I selling?’:
- Am I selling because I no longer want to be practising and, therefore, this is a sale and no further involvement?; or,
- Am I selling because I do not want to be involved in running the business but I still enjoy the client work and, therefore, would like to continue with that?
Really understanding what role could fulfil you going forward is an important part of the thinking process in the period running up to a sale. It can be one of the first questions asked by an acquirer as to what they are looking at. The reason for this is that acquirers are looking at the total cost of a deal and not just the initial acquisition of the business.
This is an interesting subject and value to one is very different from value to another. The concept of value is going to be looked at in our next article...