This article originally appeared in Solicitors Journal.
The rewards are great if the process is skilfully managed, say Tina Williams and Daniel Sutherland
Many law firms are strange beasts: conglomerates of different practice areas and/or offices, each with its own client base and business model, sometimes held together by habit alone.
Partners in a particular practice group or office may find themselves pulling in a different direction to the rest of the firm and be willing to buy their freedom.
Competitors building market share may be prepared to offer a good price for them. There are myriad reasons why a firm might consider selling part of its business, including the need to reduce debt or to generate cash to invest in other parts of the business.
Whatever the rationale, the proposition is far more complex than selling the firm lock, stock and barrel.
Any practice that is a discrete part of the firm is a potential candidate for sale. Nor is it impossible to sell part of a practice area the balance of which remains with the seller, although in this case post-sale mutual restrictive covenants and the ability to police them then assume fundamental importance. Ultimately, provided both buyer and seller understand what is being sold and agree on the mutual protections required, the rest is down to careful drafting.
It goes without saying that a sale can be dead in the water if the partners in the practice area being sold are unwilling leavers. Accommodation of their concerns is essential in that scenario.
Unless the partners’ sole objective is to pocket a capital gain, a firm should, before embarking on a partial sale, undertake financial modelling to ascertain not only that it will be viable afterwards but that it will have a better potential future than before.
A firm which sells part of its business is unlikely to see its overheads reduce in the same proportion and the impact of this and similar issues needs to be understood at the outset.
It may even be attractive for a firm to accept a cash-free deal if the buyer is willing to take on a proportion of the firm’s liabilities. Irrespective of whether cash is changing hands, it is essential to be clear from the outset where potential liabilities will end up and, in particular, which firm will purchase any required run-off insurance coverage or be designated as the successor practice for claims purposes.
Even if the financial case is sound, likely client reaction to a de-merger will need to be tested, as client wishes will ultimately trump any division of clients agreed between seller and buyer. Agreeing how best to notify clients, the division of CRM and marketing information, continuing access to client files and, crucially, the scope of any restrictive covenants can all become thorny issues.
An additional risk for selling firms is that the practice, once sold, may be sold onwards to another buyer not bound by covenants unless appropriate protections are in place.
Negotiating points often arise in connection with areas of overlap between the part of the firm being sold and the remaining part. For example, which general support staff should transfer? Which entity bears the cost of any redundancies? How should a retainer which requires servicing by all parts of the firm be addressed? Will the buyer be able to take over panel memberships? How are CFAs and undertakings to be dealt with? The key to resolving the numerous issues that will inevitably arise is to address them at an early stage through detailed heads of terms.
Once final agreement is reached, time will be needed to allow the separation of the part of the business being sold. Where the sale is to partners setting up a new firm, the sale will need to be conditional on SRA recognition of the new firm. This can take many months to obtain.
Even where being absorbed into an established firm, time should be allowed to deal with the numerous IT, personnel and client issues that separation entails. A gap between exchange and completion makes more sense in this context than for many business sales.
Although complex, the issues raised by selling part of a law firm are almost always surmountable. The rewards can be great if the rationale is well considered and the process skilfully managed.
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