This is one of the number one questions asked by clients who instruct Ten Percent Legal to seek a buyer for their law firm or accountancy practice. If I retire what can I get for my business and by implication how long have I got before I run out of money once I have retired?
I would love to be able to write an article that tells you everything you need to know about the value of your business so that you can value it for yourself. Unfortunately it is not as simple as that.
Buyers of businesses see opportunities. Sellers of business see solutions. Putting opportunities and solutions together is a very difficult thing indeed, because expectations are so different. Sellers are looking for a lump sum to give them a comfortable existence on retirement, and to realise the assets that they consider they have built up.
Take my business for example. We own over forty different domain names, we have trademarks in our company brands, we have good will from customers who come back and use us time and time again, and we have evidence of a reasonable turnover and record of turnover dating back almost 20 years. But at the end of the day my business is only worth what someone is prepared to pay me for it, even if I believe it to be worth considerably more (which I will invariably do).
When considering retirement and valuing your business, it is probably a better method of thinking to instead of having a price in your head; explore opportunities as they come up, because everyone will be different. Some buyers are looking for branch offices that they connect up with and retain the current owners as partners or consultants in order to achieve a consistency in trading going forwards. Other buyers simply want to take over a business and incorporate it into their current company. Others simply want to get value out of a purchase and this will be to your detriment unless you seek a fast exit.
Most buyers are fully aware that as a seller you are going to have certain obligations and costs that only through selling are you going to be able to do something about. With solicitors firms this is namely the run off insurance that is in place once a partner retires and is a considerable expense for anyone seeking to end their relationship with a firm they have set up. In one way it seems grossly unfair that a solicitors firm has to pay out to an insurance company for potential future occurrences that haven’t yet happened and may well happen once they have nothing to do with a business. The only way to avoid it is to get a successor practice in to take over the liability of the existing practice, and this is usually one of the key negotiating positions of any buyer who knows anything about the way solicitors firms operate. The buyer considers themselves to be doing you a favour when they take over your business because they know you’re going to have to pay this insurance premium. As a seller you may not be too concerned about paying this insurance premium and have it as part of your plan, but this is very often the starting point of any buyer, which is that if they take over your business they’re doing you a favour and you should be grateful for it.
Very often the seller’s starting position is to take one of the various rules of thumb out there on the internet or via professional advisers to work out the value of the business. At the time this article is written (2019) one of the common ways of valuing we see is to take the average of your net profit for the last 3 years and multiply it by two.
Unfortunately buyers never see these as realisable values, and instead look at every practice on its individual merits. So one of the first things to do is to get away from the idea that there is a definite way of valuing your business that a potential buyer is going to look at and say yes they can understand why you got to that figure. It is very unlikely to happen.
Instead of this, meet with your potential buyer and tell them about your business. Explain to them what your plans are for the future and why you are looking for the sale, be as open as you possibly can be. Give them lots of information about your practice – where your business comes from, what your typical clients are, how many clients come from general enquiries rather than your personal reputation (a very important point – see previous articles),and explain to them what the ethos of your business is and how you see it developing in the future. Once you have had this conversation the buyer can see for themselves whether or not they appreciate the value you are claiming exists in your practice, and whether or not they want to make you an offer for it. I can almost guarantee that any buyer will ask you for a price for your business to start off with, and then immediately come back and tell you that there is absolutely no way they are paying it. It can be a solution to get round this to not actually give them a price, and instead give them facts and figures and ask how they envisage funding a purchase themselves and how they would get you out of the business going forwards.
One of the fundamental issues with a business sale is making sure that the business sale is not about you but instead about the business you are seeking to sell. Easier said than done because so many small businesses are based around their owners and not around the business itself and the staff.
If you would like a valuation of your law firm or accountancy practice, please visit our business broker website, Jonathan Fagan Business Brokers, for details of our valuation and deal structure reports, as well as our exit strategy advice services.
