I was interviewed recently by Law Firm Ambition about my views on the most common questions I see around selling a law firm. To read my thoughts on the first five questions, check out the previous article here. Questions 5 - 10 focused on determining value, and can be found here. Below are questions 11-15 that look at minimising tax and getting your law firm ready for sale.
11. How can we maximise the value of the firm?
The ultimate answer here is to be good at what you do and to be profitable. Clearly there are a number of ways to achieve that. Some are obviously financial (eg control overheads), but others are much less tangible (eg are your staff well motivated and trained?).
Whichever route you take (and there are several), maximising value in an exit scenario is not something you should leave until you step into the negotiating room. Have a five-year plan so that you can exit the firm on a high point – when potential acquirers can perceive the value they are getting, as well as what they can add to take it to the next level.
12. How can we minimise tax when we sell the firm?
This need not be complicated, but it is important to get it right. There are many potential taxes that could affect a sale, including income tax, national insurance, capital gains and VAT. The interplay between all of them is too intricate to detail here.
The short answer is to take some pragmatic taxation advice and seek to maximise normal reliefs, without doing anything that is contentious or open to challenge by HMRC. For example, entrepreneurs’ relief is well documented and encouraged by the tax system. It can allow gains to be taxed at 10% which is clearly better than higher rate income tax at 45%, so taking advice as to what qualifies for that relief becomes key.
13. What do we need to do to make the firm sale-ready?
Much of this is about being profitable and successful, but I’m sure you were doing that already! The particular nuance when it comes to sale is making sure that the firm can survive without the principals.
This may mean widening client relationships early, so that clients are not affected by a transition of fee-earners. It may mean professionalising the management and support functions, so that the managing partner is no longer required to run the firm. Whatever the exact requirement of your circumstances, the acquirer needs to see how the firm will continue without you.
14. Do I have to be a certain structure (like an ABS) to sell up?
No, you do not. However, if you are looking for external investors then being an ABS would be a requirement.
15. What is the process for selling the firm and how long will it take?
The process should start years before in grooming the firm and making it ready. Thereafter the actual sale process starts by identifying potential suitors and approaching them if you have not already done so.
We always advocate an initial meeting over coffee to assess style/culture etc, with no specific conversations about valuation or mechanics. There are two reasons for this. Firstly, you are about to enter into a negotiation with them and it helps to see them as another human being. Secondly, you are likely to be working with them for some time – at least for a small handover period, but possibly in a fee-earner/consultant role for many years.
Thereafter, each process is slightly different. It usually involves some form of due diligence (which ranges from an hour or two of looking at files through to weeks of formal appraisal by specialist accountants), initial valuation and offer, negotiation of price and heads of terms, tax structuring, and ultimately a signed sale and purchase agreement.
If you're planning to sell your law firm and have any questions, get in touch with Andy.
