Buying a Law Firm – Small Legal Practices

Are you one of the many principals of small legal practices who will be looking to sell their practice in the next few years?

If you understand what buyers are looking for, then you can make your practice more attractive to those buyers and potentially achieve a quicker and more lucrative result.

In determining what buyers of small law firms are looking for, I interviewed a practice sale specialist in business broker Trevor Willoughby of Wollerman & Associates in Melbourne. As you can imagine, Trevor speaks to many potential buyers and so can offer an insight into the types of things that they are looking for when buying a smaller legal practice.

These same practices can also be useful when looking to buy your own law firm

All buyers of practices will want to know certain basic information about the practice such as:

1)    Revenue and profitability for the last three years and also Year to Date (YTD)

2)    Number files opened for the past three years and YTD

3)    Split up of turnover between work types over that period

4)    Staffing

5)    Details of the lease

6)    What is included in the sale eg plant and equipment

7)    Why are you selling?

PRACTICE SALE TIP

Buyers naturally will prefer to see a history of increasing revenue and profitability. If there have been ups and downs in the immediate history of the practice, document this so that there is a plausible explanation.

Other Often Overlooked Issues

While this information is what you would expect, in talking with Trevor, some other issues came to light, that perhaps aren’t so obvious and could well help you to both sell your practice and also get a better price for it.

i)             Working Capital Management

Currently law firm buyers generally are coming from two distinct areas. You have first time buyers who are often moving out of the corporate sector and then you have other legal practices who are looking to expand.

Trevor identified, that one area of concern for both groups was the acquired practices billing policy.

As you can imagine, either group of buyers will have limited capital, so they want to ensure that the billing practices of the practice to be purchased are such that working capital is kept to a minimum. If these policies are suddenly changed when the new owner takes over, then there is a risk that clients will leave.

Examples of problem working capital policies are:

1)    Not getting clients to pay all disbursements, leaving the practice to carry these

2)    Leaving billing of matters till the file is closed, which means the practice may have to carry the Work in Progress for many months.

NB Buyers will still buy practices with poor working capital management, they will just pay you a lot less for them, to allow for the additional working capital that they have to tie up.

PRACTICE SALE TIP

Get your house in order now, well before sale, so you can demonstrate to a purchaser that you have great legal practice management.

–          Institute policies so all clients pay for disbursements

–          Progress bill clients if the matter is drawn out.

–          Start recording time on all matters so you have an accurate value for work in progress ( buyers want to know this figure)

–          Tighten up debtor terms

 

ii)            Legal Marketing

Trevor makes the comment that while most practices they see coming onto the market, are doing little in the way of legal marketing, one area that is particularly valued by buyers is evidence that the practice has developed strong relationships with local real estate agencies and developers.  This is likely to ensure that the practice will continue to generate a steady flow of conveyancing referrals under the new owners.

PRACTICE SALE TIP

It is never too late to start to build those relationships. Develop a written plan for what you are going to do and get started.

Suggestions:

–          Refer to our previous blog “How one practice is increasing their share of the conveyancing market”

–          Communicate with them regularly on “ How can we help you”

–          Regular “Lunch and Learn”

 

iii)           The outgoing principal’s ongoing relationship with the practice

For purchasers, particularly first time purchasers, having the outgoing principal continue to have an ongoing involvement in the practice, is very attractive.  Apart from the obvious one of allowing a seamless  transition of clients to the new owner, with less leakage of clients, the other things that are attractive to buyers with this arrangement are:

1)    The purchaser can continue to make use of the vendors knowledge and experience

2)    The vendor may well be able to provide a mentoring role to an inexperienced purchaser

3)    The vendor may well still be able to introduce new clients to the practice particularly if there an incentive to do so.

4)    The purchaser gets a experienced practitioner who is immediately profitable.

PRACTICE SALE TIP

If you are thinking of selling, then walking away as soon as you can after the sale,  will probably be limiting the attractiveness of your practice to many purchasers. Think through your retirement plan and allow for the possibility of working for a couple of years post sale. If necessary, bring your practice to market sooner.

iv)          Staffing

While all purchasers will want details of the staffing of the practice, they are particularly interested in the capacity of the continuing staff to add more value to the practice. From that point of view issues such as ongoing training, existing skills, particularly underutilised skills and development of specialities will be of particular interest.

PRACTICE SALE TIP

At the very least make sure that you have identified these opportunities so you can tell the purchaser, rather than just hope that they see it.

v)            IT Systems

Buyers are looking for a practice ideally running the same software, so there is little training of staff. While that may be luck of the draw, they also are looking for well developed use of technology, with properly networked systems and staff having appropriate skills.

PRACTICE SALE TIP

While you mightn’t be inclined to spend a heap on a new computer system, if you are planning to sell, make sure that you are using the one you have as best you can.

Get your database in order.

–          Many practices don’t have all of their safe custody documents on their computer system

–          Do you have a system for collecting email addresses and mobile numbers?

 

If you are thinking of selling your practice, you can contact Trevor Willoughby at Wollerman & Associates.  Click here

(Please note that Ritchie Business Solutions has no commercial arrangement with Wollerman & Associates, but have simply drawn on their expertise in the sale of legal practices)

Want to Read more?

– You may be interested in:

The Greatest Professional Business Opportunity- Buying a Small Law Firm

My client is buying a small law firm in Sydney for $1, but both buyer and seller are happy!

Selling a Small Legal Practice? – The most important issue that buyers are concerned about

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