Pie in the Sky Law Firm Valuations
in Employers, Law Firm Sales

Pie in the Sky Law Firm Valuations

We’ve recently had a UK solicitors’ firm up for sale with one partner and no assets other than a legal aid contract and turnover in the region of c£50k in the last 3 years. The firm received an enquiry from a potential buyer who was looking at the practice with great interest due to its legal aid contract.

The two parties started to discuss the matter and the conversation came to the inevitable question of how much money the buyer was willing to put in to purchase it,and what the seller was willing to sell for.

Sellers Do Not Usually Have a Price (unless they use our valuation services!)

One thing you may not realise is that the vast majority of law firms for sale do not have a price attached when they are first advertised. Very often the owners do not know what they want to sell for and this only becomes apparent after a few discussions with potential buyers. At some point they may resort to using our valuation services to come up with some figures or proposed deal structures.

The buyer put forward a figure that to me seemed overly generous in the circumstances. The practice had very little in terms of assets, the seller was at retirement age and there was no stability at all following on from the end of the legal aid contract, which of course have a maximum shelf life of a couple of years at the best of times.

The buyer offered the seller a figure in the region of about £20,000 cash plus up to c£60k in future payments depending on performance. I have to say that I thought this was possibly at least twice as much as the practice was worth even with its legal aid contract.

Seller on Another Planet

You can imagine my surprise when I get a rather blunt email from the seller to say that the buyer was way off target and that he needed to come up with a cash figure starting at £200,000. As you would probably imagine, the whole thing quickly collapsed.

Calculations – Online Valuation?

I was racking my brains to work out how the seller had got to this figure of £200,000 as a minimum price, and can only conclude that they have used an online valuation tool, a rule of thumb or someone has told them what they ought to be selling the practice for without actually having any market intelligence.

£100k = £30-£60k*

Our experience of law firm sales tells us that if a practice is turning over in the region of up to £100,000 then the highest amount they are likely to get for a sale is going to be in the region of about £30-60,000. This would assume that there was something in it for the buyer, such as a legal aid contract, a will bank, a small team of staff, ongoing files which are generating business or good sources of referral. A shell law firm (ie one without clients) usually sells for about £20-40k depending on a whole host of factors, including buyer desperation, although ABS structures will usually cost a lot more.

£100-500k = £50-175k*

A firm with a turnover in the region of about £100,000 to £500,000 is probably looking at achieving a sale price of somewhere in the region of £40k-175k, again depending on the assets being sold, the circumstances of the sale and ongoing work.

£200k Sale Price?*

To achieve a sale with a cash price of at least £200,000 we think that a firm would usually need to have a turnover heading upwards of about £600,000, if not considerably higher, or an asset or potential stream of work that they are able to virtually guarantee from the outset. Furthermore, such a sale would usually involve the firm selling files, fixed assets and transferring a team of staff to the new firm, which of course then gives the new practice ongoing work if that team of staff are generating it.

Life on Earth Not Mars

It is important when thinking about selling your practice to have a realistic idea as to what someone would want to pay for it. The usual way of working out what you think the practice is worth is to think what it would take someone to offer you for you to be prepared to walk away. This has nothing to do with rules of thumb, valuations for business brokers, potential valuations of future work or any other circumstances. The value to you of a sale is the amount you would need in order to agree to a sale.

I’m Walking Away

If you are running a practice and it is turning over £35,000 a year, but for you to walk away you would want the stability of say five or six years income at that level, then the value to you of that practice is five or six times that turnover less expenses, which is highly likely to be in the six figure region.

The chances of you getting this amount are minimal. In these circumstances you probably do not need to sell your firm, because you are unlikely to get what you want for it and you’re probably wasting your own time even thinking about it for the time being. Running the firm for 5 years and then closing it down or offloading as a shell may well be a better option. You may want to consider our exit strategy services to discuss in detail with us and get advice on potential solutions.

Buyers Want Assets, Sellers Want Cash

A buyer needs assets or identifiable benefits in return for giving you money to take over your practice. They will also usually want to try and tie you in as well (you are of course an asset usually). Benefits need to be identifiable and you need to be conscious of what they are and what they are worth to a potential buyer.

Similarly, if you are in need of a sale and want to get rid of your practice because it is a headache causing you untold amounts of stress, then you need to be very realistic in what the practice is worth to you. You have to weigh up essentially what you would walk away for against the stress your ongoing involvement is having and what you would pay to no longer have that stress. You need to take that figure off your initial valuation and keep it in your mind without putting any potential buyers off by issuing outlandish sums of money that in reality, although these are ideal, are not going to be achievable.

Rules Of Thumb – Hardly Ever Accurate

Rule of thumb valuations, as we say repeatedly to sellers, do not really give you an accurate figure of the value of your practice. Accountancy valuations similarly do not really help very much, other than get some ideas in your mind as to what you will be comfortable selling for, bearing in mind the value of assets the accountants have identified.

The True Value

The true value of your firm is the amount that you would feel comfortable selling it for with a thought towards what you need to deduct from that in order to remove any stress or ongoing involvement, if that is indeed an issue for you. It also depends on the deal structure. We can of course assist with both – valuations and structures – and provide the service as part of our premium seller services or as a standalone – details here.

Aim High, Drop Down Low?

We would never recommend giving high figures that have no bearing to any of the amounts involved currently in your turnover or profit margin, unless you really don’t care about selling. It creates bad feeling for buyers who think that we are somehow complicit in your outlandish valuation, but it also involves copious amounts of time spent dealing with enquiries that fail to progress.

*Please note – the figures above are not our valuations of law firms – they are our experiences of what firms usually get sold for when they fall into these turnover brackets. There are so many factors involved in a sale – fields of law, geographical location, freehold premises (rarely included in the sale price), partners staying on as consultants, WIP, PII claims history, staff and length of service, how well established a practice is, whether the sum paid is cash up front or paid on performance, instalments etc.. For details of our valuation services for sellers and buyers, please click here.

Jonathan Fagan Business Brokers is the law firm sales arm of the Ten Percent Group of websites. For details of our services please visit our website.

Jonathan Fagan

Jonathan Fagan LLM FIRP is Managing Director of Ten-Percent Legal Recruitment. He has been recruiting solicitors and legal support staff for law firms and in house legal departments for over 20 years and handles roles from junior fee earners through to partners and law firm sales/purchases. A non-practising solicitor on the Roll since 2000, he is also the author of a number of legal career books, which are available at www.ten-percent.uk. You can contact Jonathan at cv@ten-percent.co.uk