While there is a whole industry focused on evaluating law firms to facilitate mergers, here are some basics of evaluating law firms that lawyers should be aware of when they start considering acquiring another law firm. The evaluation of law firms is not an exact science. Actual value can only be determined through negotiations between an informed/consenting buyer and an informed/consenting seller. In the absence of formal marketing for sales, professional practices are usually evaluated using one of three valuation methods: This is the most frequently asked question by small law firms and individual practitioners. Do we want to merge or do we want to sell and leave completely? Our advice is usually to consider both, but with the possibility of extracting yourself in the short and medium term if you wish. You can then add additional variables such as payment terms and the relative bargaining power of the buyer and seller, and you`ll see that evaluating a law firm is as much an art as it is a science. In theory, this would be an effective and efficient way to base the value of a law firm on what similar law firms are sold for. The problem is that the prices and terms of these transactions – whether between two separate law firms or between partners within the same firm – are rarely published. This valuation method is based on the projected future financial performance of the target company. Specifically, this method creates a valuation by estimating a company`s future cash flows (typically based on financial statements for the past five years) and the expected return that lawyers would reasonably expect for those cash flows. Welcome to the Ten percent Guide to The Sale of a Law Firm, which is intended for lawyers, jurists, licensed developers and anyone else with a financial interest in a law firm who wishes to sell or exit.
A seller, with the luxury of time, can always optimize their own business and organization to increase their value, but finding a buyer who would find the greatest value in their attributes should be a priority. Providing the buyer with greater security for a higher economic income, for example by accepting a period during which some key partners stay and customers are changed, increases value. Selling a business can be a long and long business, and to ensure you, as a broker, get some return on every effort, a fee should be charged, ideally in advance if you are the broker. However, there is another option, and that is to use the Ten Percent Legal Buy and Sell Law Firms service for free as a seller. This is because we only charge buyers a fixed fee to find and introduce businesses for sale, with fees payable only when a transaction takes place. We work a bit like a reverse real estate agent. The legal industry has slowly consolidated over the years, but this process is accelerated by the impact of the current crisis, its economic impact and the operational changes it entails. Some areas of practice will flourish, others will be negatively affected. Some companies need to strengthen infrastructure (technology, remote work), which requires investment, while others have surplus infrastructure (offices, back office) that can adapt to growth.
“The rule of thumb for valuing a law firm, licensed funder or ABS (Alternative Business Structures Regulated by the SRA) with a turnover of less than £500,000 is to take your average net profit from the last 3 years and multiply it by 2.” It`s the same in real terms as paying £45,000 for your business, a 15% return on sales or, according to normal measures, a £300,000 business could produce a profit of £130,000 and so the seller is “paid” 35% of the profit, which is not a bad return. This is an economy and therefore of course a tax exemption. Note that all value judgments here are based on forecasts of the acquiring company`s position after the acquisition and not on the seller`s economic income projections or a multiple of its earnings. A lot of chance comes into play when evaluating law firms. We scoured the internet and here is a list of websites with articles on “What is my law firm worth?” We recently took a quick look online and found that a number of articles have been written by investors who are acquiring law firms (and, of course, point out that law firms have no value!). Take a look at the following articles and see how many consultants give you numbers and details instead of vague statements: Needless to say, acquiring companies from directors can be attractive to acquirers, but it`s not just failing law firms that need to be sold. There are a number of reasons why a very successful business wants to sell, for example, when partners retire or decide they want to be part of something bigger. Choose a professional you want to work with who has experience in evaluating law firms similar to yours and who has extensive experience with law firms. Therefore, in this agreement, the seller moved safely into the new business through its customers, protected staff, avoided the costs and disruptions of the closure and earned £135,000 in actual net amounts. Are you experiencing financial difficulties and need a quick sale? We meet with him quite regularly, but probably not as often as you might think. One of the first companies we were involved in a few years ago was a company in the North West of England, where the partner ran out of funding to maintain a number of high-quality cases. We looked for a quick sale for him and joined him.
While we haven`t learned the details of the terms of sale (there are usually confidentiality clauses for both parties and since we don`t charge a fee on the value of the sale, we don`t necessarily need to know), I imagine the seller made a significant loss on the sale as you would expect. but he was able to continue working and obtain a home for his staff and records. We generally recommend that you calculate the average gross revenue from business expenses over the past five years to offset particular increases or decreases in the revenue stream. Next, multiply that average year`s gross fee income by a certain factor. The factor varies by industry and even by geographical location. For example, accounting firms are valued at 1.0 to 1.5 times (100 to 150%) of gross annual fee revenues. An established standard is still in its infancy in law firms. Some argue that the multiplier of the empirical method for legal practices should be between 0.5 and 3.0. However, based on what we have seen in recent law firm sales, the empirical method multiplier for law firms ranges from 0.6 to 1.0 (60% to 100%) of the year`s gross fee revenues. Another way of looking at it would be 1.2 to 2.0 (120% to 200%) of net income.
(Based on the partnership`s accounting method and not including the owner`s remuneration as an expense) Whether the multiplier is in the lower or upper range depends on the following: Is life insurance sufficient given the value of the business? Some potential acquirers use an asset-based calculation that uses deceptively simple calculations: add up a company`s assets, subtract its liabilities, and get net worth. This focus on assets and liabilities means that valuation is determined by the activities of the law firm rather than by practice. This valuation does not take into account a company`s profits or cash flows – two extremely important measures for a company`s financial well-being. For this reason, asset valuation is not a common valuation method. If you do not have financial experience and experience in evaluating law firms, you will need the help of an external source. Professionals who can help with valuations include: Net asset value is simply the value of the company`s net worth. The questions to consider here are whether there is goodwill, and unfortunately there is often very little in law firms, and the value of any work in progress (WIP) that is not taken into account in the balance sheet. The capital of current shareholders is not an asset unless it is represented by cash.
Acquirers are more likely to pay for value in the form of additional revenue streams and/or costs avoided by business development (i.e., acquiring a new business area, geographic area, or new customer base). This is the case when there is a strong synergy between the activity of the buyer and the seller, which is manifested by the fact that such changes lead to valuation problems, whether in the valuation of companies or in their shares. While traditional valuation methods can be used as comparative benchmarks, they do not necessarily focus on the actual value of a transaction. Other issues that have recently affected the sector include the Legal Services Act and legal aid reform, both of which have reduced the multipliers used in evaluations. In practice, the number of law firm mergers and acquisitions decreased during the recession, although interest in law firm mergers is increasing due to changes in the market. .
