Rule No 1
Do not negotiate your own transaction
Lawyers can be "transaction killers" when left to their own devices - gross over-valuation of their practice or a belief that goodwill does not exist will kill any possible merger.
The problems arise when Lawyers see themselves as business negotiators whose mission is to get the "best deal". They frequently forget that the "best deal" has to involve both parties, the buyer and the seller, and that compromise is usually the best solution. Lawyers generally have a very difficult time with compromise in this type of situation.
Usually, an attempt at a lopsided deal for either party will result in "no deal" at all.
Rule No 2
Caveat Emptor - Let the buyer beware!
As a matter of basic principle, all brokers dealing with Lawyers are bound to be honest and forthright in their conduct concerning the businesses that they represent for sale.
They must present a Law firm for sale in its "best light" without misrepresenting any significant facts but at the same time not pointing out all of the potential pitfalls. This usually establishes an adversarial relationship between the buyer and the broker as well as between the buyer and the seller. The best course of action for a buyer is to trust only what they can verify during a rigorous due diligence process and the best approach on the part of the seller/broker is full disclosure of all pertinent information.
Rule No 3
A Law firm is worthy only what someone is willing to pay for it!
Buyers and sellers are natural adversaries; the sellers want as much as they can get and the buyer wants to pay as little as possible.
Any broker is intensely interested too, because the commission amount is usually based on a percentage of the total sellling price. So, what process should you use to value a Law firm?
With the exception of existing WIP and Debtors what is a Law firm worth - a third of turnover?
What value would you place on goodwill?
Finding the right match is crucial in maximsing your return or minimising your risk of paying run-off cover.
Rule No 4
A Law firm buyer is really buying a client base.
Most Law firms provide transactional service and there is therefore no guarantee that the turnover you are buying will return each year. The assets of the business are just the tools of the trade that enable an earnings stream to be realised. Without the earnings stream, the business essentially has no value.
Rule No 5
Most sellers stretch the truth.
This is not completely true law.
Most sellers are honest people trying to get the best possible outcome for themselves - and who could blame them?! However, a buyer should approach all information provided in the sale with some scepticism. Buyers are making a major financial decision and should carefully consider all information presented during a detailed due diligence process.
A purchaser should approach the acquisition of a business with a good healthy dose of "prove it to me".
Rule No 6
If a seller is desperate to sell, maybe you shouldn't buy!
Whenever you look at a Law firm for sale, you should approach the situation with a great deal of caution. You should make it your business to verify all of the facts possible about the business, including determining the reason for sale. There are some very good motivations for sellers to sell and other ones that are not so good. Usually, the best reason for a sale from a buyer's perspective is the planned retirement of the Partners or a sale necessitated by illness.
Be aware of a Law firm having their banking facilities reduced, or even removed and they are seeking a new funder with additional balance.
Rule No 7
Always assume there are skeletons in the cupboard!
Most business, including Law firms have some negative feature(s) that the seller will be reluctant to talk about. You can be sure that any problems will come out later as the purchaser begins the due diligence process, and it could stop the sale if the problems are perceived as cover-ups.
This is because purchasers will logically ask themselves "if they hid this fact from me, what else are they hiding?". If the negative aspect(s) is clearly presented and discussed with the buyer, it may not be a serious problem because the buyer may feel that it can be overcome, avoided or changed. The seller should strongly consider this and determine all of the possible negative factors that could affect the sale of the business. We all know of many examples when Professional Indemnity insurance claims appear in later years causing an immense increase in indemnity premiums.
Rule No 8
Be prepared for someone to get "cold feet" just before the signing of the agreement!
