There have been a flurry of interested partners of law firms looking to sell up, whether through retirement, weariness, cash flow issues possibly, or just generally feeling that their business has taken its course and looking to move on to pastures new. We get a lot of calls into our offices asking what the practice is worth, and I thought this might make a good article for others to read. You can of course use our law firm valuation services – click here for details.
Factors for Sale Prices
We will usually ask for the turnover of the practice, the rough location, the claims history, the price paid for their professional indemnity insurance, the areas of law covered, whether the practice is on lender panels if the work is conveyancing, whether they have CQS or LEXCEL accreditations and also what the partners’ plans are for the future – instant retirement and run away, staying with the practice short term or medium term, or looking to stay on as a consultant or fee earner going forwards.
We then use this to give the potential seller an idea of deals we have experienced at similar sized firms in order to give the practices an idea of the types of value they could be looking at.
Rule of Thumb
As of March 2021 there is a very rough rule of thumb that can be applied to a substantial number of the law firms that are coming up for sale through us.
Simply halve the last year’s turnover.
I cannot emphasise how rough this is, because there are so many other factors in play, but nevertheless it is as good as we can get it and probably more accurate than a good number of other formulae you can see online. Futhermore the law firm market fluctuates so wildly that it is incredibly difficult to predict pricing in 1 month, let alone 1 year’s time.
So if your practice is a CQS conveyancing firm, on most lender panels, good claims history (i.e. no claims), and partners willing to stop on in the short term either as consultants or fee earners with a turnover of £400k, then as a starting point you’re probably looking at a deal price in total of about £200,000.
You will not get £200,000 all paid up front to you, and it is possible the buyers will try and negotiate a hard path to making some or most of this dependent on future events. The rough rule of thumb applies to the total value, and whether or not your deal is cash paid on the date of completion, WIP payments, favourable rent or consultancy arrangements, cash paid on date of completion plus future monthly instalments, we would expect the price to be somewhere around 50% of last year’s turnover.
The Evidence for the Rule of Thumb?
There is no science to this, no economic justification, no factors and percentages of profits, this simply seems to be the sort of value we are currently seeing when deals occur (NB this article is written in March 2021).
Back in the Day
We were speaking to a potential buyer today who indicated that she had sold a practice back in 2019 with a turnover of £270,000 and managed to get a cash price of £100,000 for it. I don’t know what the circumstances of that sale were but that would mirror our own experiences of the market not being particularly busy in 2019, which seem to be in part affected by Brexit, but hotting up since then into its current state of a reasonable number of enthusiastic buyers, both large and small, looking to buy practices and to pay a cash sum for them.
Value to Every Firm
There is a value to virtually every practice that goes up for sale, although if your turnover was £10,000, your professional indemnity was £20,000 and you have had five claims in the last six months, your value is going to be less than zero!
For a list of questions to prepare responses to for selling a law firm, please visit:
https://ten-percent.co.uk/questions-to-ask-yourself-when-preparing-for-the-sale-of-a-law-firm/
For our current list of law firms for sale please visit www.jonathanfagan.co.uk
For up to date (and very specific) law firm valuations please visit www.jonathanfagan.co.uk, the business broker arm of the Ten Percent Group of websites. Please note that this article is written as an extremely rough guide only. Every law firm is different; to give you an idea of the detail required when completing a valuation and suggesting deal structures, most of our valuation reports are about 20-25 pages long.
