Second and final part of the author's acocunt of lessons learnt from selling his legal practice: best strategies in concluding a sale, and how to prepare for what comes after
So, you’ve found a prospective purchaser and presented your business to them in its best possible light. Unfortunately, you’ve now only reached the beginning of the most difficult part! Let’s consider in general some of the hurdles you are going to have to deal with.
The price is right?
One extremely important point to remember at this juncture is that deals are done between two people. It is personal, and while “matchmakers” and professional advisers can present things in the best possible light, ultimately it comes down to two parties sitting down together and reaching an agreement that both are happy with. If as a seller you feel unhappy about the price, don’t sell. There is an argument that as a purchaser if you feel that the seller is unhappy about the price, don’t buy: you are unlikely to acquire much goodwill at the end of it all. Listen to what your advisers tell you, but make your own mind up in an informed manner on the terms on which you are prepared to proceed.
Well then, what’s the value of your business? As I indicated previously, the market for legal firms is limited and this tends to depress the price. Accountants can, of course, justify many different types of valuation both for purchaser and seller, and it is unlikely that these will be the same. As a seller, if the decision has been made to sell then it’s about maximising the price, but principally it’s about obtaining some value for the business and, possibly even more importantly, closing off some of the liabilities that we discussed earlier if you were simply to close the door and walk away.
It would be an article in itself to consider the sales process and maximising values! Circumstances will vary from individual to individual and deal to deal. There are a number of things to bear in mind though. Present your proposition in the best way possible. In the ideal world you want to show any prospective purchaser that your income streams are robust, recurring and not dependent on you as an individual. Be realistic in your pricing. Better to encourage a dialogue rather than have possible purchasers refuse to open discussions because the asking price is too high. Lastly, make the proposition as attractive as possible. Consider agreeing to a part of the price being dependent on future fee or business levels. This takes away many of the fears and risks to the purchaser. Remember though that if you are prepared to agree to this, there should also be a corresponding uplift if the business does better than anticipated.
Advisers at arms length
As far as the practical implications are concerned, each sale will be different. Some will be the sale of a business as a whole, some will be one partner selling to the remaining partners, and there will be a wide range of variations in between. It is therefore hard to give much specific advice regarding the practicalities of a sale, but from my own recent experience there are a number of suggestions I would make that might be useful.
At the earliest opportunities, speak to your professional advisers and make sure you understand fully the implications of what you are considering from the outset. You will need to consider items such as price, goodwill, the tax implications and (possibly) tax mitigation, a best completion date, and the best breakdown of the price between goodwill, work in progress, capital etc. Only the very brave would wish to complete any formal agreements themselves, so speaking to a legal firm specialising in these matters will allow you to understand the legal implications and what specific areas you may require to address for your business.
One word of caution though: I personally believe that the actual negotiation should take place directly between purchaser and seller and not, except on technical issues, through agents. As solicitors we do have a tendency to overcomplicate the technical matters. So far as possible, try to reach heads of agreement with the other party directly and without the need of agents. If possible, work through a draft agreement with the other party and identify and deal with any potential difficulties on a face to face basis. Thereafter, when hopefully the main points of contention have been resolved, pass matters to your professional agents to finalise. This should allow matters to move far more quickly and minimise any additional expenses.
My own experience was that once all of the foregoing points had been dealt with, the actual practicalities of leaving the profession were relatively simple. There were the usual intimations via the Journal and to the Society, indemnity insurers and the bank. Clients and professional connections need to be notified as appropriate, and staff issues require to be dealt with. Final accounts will obviously require to be completed and a final tax position resolved, but these generally are matters of administration and are relatively straightforward to resolve.
A sight of goal
I suppose the two questions that I’m asked most and, in some ways, the summation of this article are, “What would you have done differently?” and “How are you enjoying retirement?”
Hindsight is a wonderful thing, and some of my views I’ve already touched on. I think that you have always to start with the end in mind. If the end is a business which is a valuable, easily realisable asset then there are several things I would have changed. If you are in a partnership I think it is essential that there is a partnership agreement in place that fully identifies the exit route for the partners, both at the agreed retirement age and also should they wish to change careers at an earlier time. Few of us like to discuss what happens when it all goes wrong, but as most agreements are only ever examined at exactly that time, it is extremely important that full and frank discussions take place at the outset and all of the possible outcomes discussed and agreed. The difficulties for partners in larger practices without one may be extremely hard to overcome.
Starting with the end in mind, you also have to consider who your purchaser in the future might be and what they might wish to buy. The “who” can be addressed by putting in place the structures today that will create the purchasers of tomorrow. One way is investment in younger solicitors who will be the future partners, and their retention within the practice. While many firms have structures in place for this and, indeed, this was always the traditional route for legal firms, many smaller and medium sized firms, faced with profitability or other issues, seem keener to invest perhaps in paralegals to process work. Graduates and young solicitors also seem less keen to serve their time in smaller firms for perhaps less attractive salaries or, notionally, doing less interesting work, in return for greater profit shares in the future.
The other method is to build a legal practice with real sales value. This might be by specialising in an area, or acquiring a significant market share or work type in an area or number of areas. Certainly businesses which can show recurring income streams, ideally independent of the principals, will always achieve the highest values.
There is no one answer, but, if the question isn’t asked and measures put in place, the answer that you are faced with at the end may not be one that you wish to hear.
Nothing to do?
As to how will one enjoy retirement, again the effort and planning put in beforehand will affect the answer. Finances will be a factor. I was once told “capital will never replace income”, and that is a lesson I am relearning very quickly. It would be sensible for anyone seeking to change their career to spend some time looking at their finances and to be clear that these will meet their reasonable requirements when they no longer have the same income stream.
Likewise, while the thought of long leisurely days with nothing to do seems irresistible when faced with demanding clients, work pressures and partnership issues, the reality is that most of us will become bored very quickly, faced with no new challenges. Some time spent even at the early stages, considering the structuring of one’s time after retirement and the routines that will be put into place to make it both productive (in the widest sense) and enjoyable, will be very well spent. One may also wish to consider, like a runner, a warm-down period. In the high pressure world in which we all operate, it can be extremely difficult to go from busy and stressed days, to doing little, literally overnight, and many say that this can have adverse health issues. Instead consider “warming down”, taking a period of time to gradually reduce work and stress levels. This could be some form of consultancy, some part time or locum work after retirement, or just a reduction of work in the year or so leading up to retirement.
Lastly, there are issues for those leaving the profession before retirement age that few consider. There may be a loss of status, or at least a loss of definition of who they are in society. They are no longer solicitors, professionals, men of business – what then are they? There can be the loss of a social experience: our work has taken up such a large part of our lives that many will miss the interaction with staff, clients or partners. Some may well experience feelings of loneliness without daily contact with their work environment. Routines may have been the bane of your life, but life without routine also has its issues. Again there are no simple answers to any of these questions, but they should at least be considered by those contemplating change.
While I joke with friends that I am retired at age 46, I suspect that there are many busy and productive days ahead of me. I am however extremely lucky in being able to take a little time to consider what I want to do next. The ability, even for a short period, to wake every morning and do (subject to what my wife has planned) exactly what I want to, is a gift and should be treasured.
Stephen Vallance is a former partner in Vallance Kliner & Associates, Glasgow. He is happy to undertake consultancy work. For any queries arising from this article or any issues surrounding practice management, profitability or marketing, contact him at firstname.lastname@example.org .