Stephen Vallance tells of the issues that arose when he decided to leave the law without having done much forward planning – and his advice with the benefit of hindsight (1 of 2)
I was 46 when I sold my interests in my legal practice. It was a long and much more difficult process than ever I had imagined, and I must admit that my last day “in the office” was not the day of happy relief that I had expected, but rather one tinged with some sadness for the passing of a very significant proportion of my life.
I remember in my teens telling my father that I wasn’t enjoying my law degree. I remember during my traineeship that I thought about leaving the profession and travelling the world. By the time my first job as an assistant came around I was caught up in the routines of life with a wife and then a son, so I tried to make peace with myself by planning that I would be out of law by my 45th birthday.
About a year ago I sat at my desk and realised that my 45th birthday was upon me and that I hadn’t done much about getting out. My partner and I had talked through “exit routes” several times over the preceding years, but had never been able to put in place a strategy to allow either of us to leave the practice at a time and in a manner of our choosing.
The purpose of this article is, in light of my own recent experiences, to consider many of the practical issues surrounding a principal in private practice attempting to realise his interests in the business with, hopefully, a few useful pointers on how to manage the transition. I will also attempt to identify some of the strategies that can be put in place to make the outcome more certain for those considering an exit in the future.
I have always considered myself goal-driven. Throughout my professional life I had a clear idea of how I wished to conduct my business and how to achieve what I believed to be the key objectives. Strange then that no such plan existed for my exit. They say that the only things in life that are certain are death and taxes. Retirement must come a close third. Why does it therefore seem then that so few principals in private practice have clear exit strategies?
Let’s look for a moment at the practicalities, in the absence of any other agreement, for anyone leaving their business – in essence just closing the doors and walking away. They have, amongst other things, the following matters to consider:
The staff, some of whom have possibly been with them for many years, will require due notice of termination and, of course, redundancy payments. While there are things that can be done to minimise this, there is still potentially a large liability.
Professional indemnity insurance – depending on one’s claim record, there may be the costs incurred in paying for run-off cover (which I believe is a capital expense and not a revenue one and therefore cannot be offset against income). In addition, you will need to make provision for the self insured portion of any potential future claims.
Files – they need to be maintained in a safe environment with the associated storage costs for up to 10 years.
Work in progress – this will almost certainly have to be completed, and almost certainly the government will have taxed you on it. If you leave private practice, you have no way of completing it.
Lastly, it is likely that you will still require to deal with clients’ queries and claims that arise from transactions handled by you, and therefore you will have to retain some way of dealing with these matters after you leave.
There are also a host of other possible headaches, including the cost of disposing of premises whether by sale or the renunciation of a lease (with associated worries of dilapidations etc), finalising the clients’ account, and disposal of furnishings, papers and other miscellaneous detritus acquired over a lifetime in the legal profession. For most of us who have been self employed there are of course, those final accounts and the final payment of tax to the Revenue.
End of empire
It suddenly begins to dawn on you that this empire that you have built, this machine that has provided a steady income for you and your family, may not be the asset that you thought but might in fact be a huge liability! You begin to realise that if you don’t have a strategy, you might not be able to afford to leave the profession as it will be too expensive.
The wise amongst us (of which I was not I’m afraid one) at this point might pull out their partnership agreement and sit back in the comfort of knowing that some, although probably not all, of these matters have been covered during the careful drafting of this lengthy tome. I suspect from my own investigations that they will be in the minority. Many practices today still do not have written partnership agreements or, if they do, many of the practical issues of a retiring partner will not have been addressed. Even those who have properly drafted agreements are still dependent on the partnership existing at the time of their retirement in an appropriate form. In these days of dissolutions and mergers and changing market conditions there can be no guarantees as to the future, and while partners in their more senior years may be less concerned, the more junior partners will have to hope that they are not the ones left to turn off the lights when they in turn wish to exit.
So, faced with a desire to leave, and not wishing to just close the door and meet all the potential liabilities, what can you do? For the purpose of this article I will not address the issues of those with valid and correctly considered partnership agreements. I will simply wish them the best and hope that all parties are able to honour their commitments.
Selling in a small market
What then? Well, the obvious next step is to find a purchaser for your interest in the business. This might be your other partners, or a younger solicitor within the firm, or perhaps another firm or solicitor entirely who might wish to acquire it. Sounds simple, but this has many more complications than you may have realised.
One of the first issues is that the market for legal businesses is extremely limited. At the moment, in essence only other solicitors can buy one. Therefore while your business may be extremely profitable or desirable, the pool of prospective purchasers is small. This in itself tends to restrict the price that can be achieved. Legal work also has a high degree of personal involvement, whether perceived or actual (i.e. clients believe you do all the work for them whether you actually do so or simply delegate it). Often clients relate to an individual solicitor and not to the practice as a whole. Some may even argue that when that solicitor retires there is little value in his or her client following, as they will not automatically stay with the firm.
For those in partnership the position is much more difficult than that of a sole trader. Unless all partners agree to the business being sold as a whole and all their respective needs accommodated, or unless the remaining partners wish to acquire the outgoing partner’s share, there are some very serious practical difficulties in realising any value for their share in the business. Where there is no agreement to the contrary, the outgoing partner would be faced with the equally unattractive options of attempting to sell their personal, and largely unidentifiable, interest to a third party firm; a dissolution of the partnership followed by a voluntary sale of the one half interest; or at worst a forced sale by a judicial factor.
The first option has a number of potential difficulties, including identifying one’s own clients and interest in any business name, intellectual property, capital assets etc. The second option is at the very best unwieldy and unattractive, and potentially unworkable. Least attractive of all would be a forced sale due to warring partners, perhaps involving a judicial factor, where seldom if ever is there a satisfactory outcome. The one thing that is certain is that none of these options would maximise any value in the asset being sold.
Assuming that the foregoing matters are all resolved and that you are able to proceed with a sale of your interest, there are other practical matters to be considered. Not least you need to find a purchaser for your business, then persuade them that you have something of value and that they would wish to acquire it.
Let’s consider these points in general terms for both sole traders and partners.
Do you have something of value?
Well, it’s for you as seller to present what you have in the best possible way. As the old adage goes, you never have a second chance to make a good first impression. It’s worthwhile therefore spending some time considering how to present your business to any prospective purchasers.
Accounts and trading history will be important, and so you should collate information such as trends in turnover and profitability (both gross and net), and relevant ratios of staff to fee earner etc. If there are weaknesses in your accounts, such as that you cannot show year on year improvements in profit, then address the reasons for these as part of your presentation of the figures (for example, “profits went down that year as I took on additional staff to gear up for new workflows”, and demonstrate the evidence in the following years’ figures).
Look at work types that you undertake, and the sources of that business, and try to categorise them. Can you show what percentage of turnover comes from which part of the work you undertake, how much of your business is from existing clients, and how much introduced from external sources? Are the clients that you act for all personally introduced or do you rely heavily on introductory sources such as banks, brokers or insurance companies? Do you hold a large number of wills or title deeds (although neither is perhaps as important as once they were)? Can you easily identify your clients, their current addresses and the work you have carried out for them? Are there specific areas that you are known for and that your clients require? This might be very important when looking for a prospective purchaser, as this might either add to or compliment their existing business profile. Most importantly, can you show you have work types that are recurring, and better still are not dependent on you as an individual?
Consider how your staff and, if applicable, offices might be viewed by a purchaser. Do you have key members of staff that your business couldn’t do without? Do you have members of staff who could operate your business without you? If so, do you have proper contracts of employment in force? Are your premises important to the business? Do you require a presence in a particular geographic area? Do you have a fantastic site which guarantees high levels of passing trade, or could your business operate from any location?
Just like selling your car, you need to get your business into shape for selling. You need to have a good look at it, not from your tired eyes but from the eyes of a prospective purchaser and, just like the car, you need to give it a good polish and service so that it looks in the best possible condition for selling.
Finding a purchaser for your business
To the best of my knowledge there is no dedicated estate agency for legal practices. There are a few firms offering either consultancy or employment services who will dabble in this market, but few if any have a proven track history. The one major benefit they do offer however is a degree of anonymity, a way to explore interest without making your identity public in the first place.
Alternatively, there are publications such as this Journal where adverts can be placed, but generally advertising a business for sale can have many potential drawbacks. The responses to anonymous adverts inviting prospective purchasers to reply to a box number are few, as solicitors as a group are all a little suspicious of writing to anyone who won’t identify themselves. On the other hand advertising who you are has some major worries in itself. It puts your thoughts into the public domain. Staff may become aware of your intentions much earlier than you would have wished, and you may lose key members through uncertainty while you try to plan your own exit. Clients may become aware of your intentions, thus making client retention and a smooth transition more difficult.
There is good old word of mouth. Many solicitors will have retained close contact with others within the profession, perhaps old university friends or other individuals within their faculty who might be able to act as a matchmaker. Potentially this is the best source of introduction, as people in these situations tend to have less of an axe to grind; they are assisting a friend or colleague and are probably familiar with the foibles of the parties and their businesses, and therefore have at least an idea that the match might work. They are also unlikely to be motivated by a financial commission.
There is perhaps one other approach to be considered, which is to speak to people outwith the profession but who regularly deal with it. IT consultants, suppliers, accountants etc are all dealing with a wide group of legal firms on a daily basis and might have useful information of firms on the acquisition trail.
The success of one or all of these approaches will depend on the individual’s thoughts and preferences, and the timescale to which they are working. Generally a more measured approach will bring the best results, but the timescales may be considerably longer.
Part 2 of this article will cover negotiations for the sale, what happens after retirement and some reflections on the whole process with the benefit of hindsight.