What is going on with mergers and acquisitions in the legal sector? This year alone we have been contacted by a record number of firms where the owners are looking to exit. We’re not talking top 500 firms here, but high street practices that have been around forever and have now had enough. The pandemic has played a huge role in all of this. It has definitely forced business owners to assess what is important to them. Professional Indemnity Insurance premium hikes are another massive contributory factor. The war in Ukraine is probably not helping either. The world is once again full of uncertainty and with that in mind, firms are starting to draw up new plans.
At Financial Eye, one of the key areas that we have always helped law firms with is business planning and we are always delighted when we help these plans through to the desired conclusion. One perfect example of this is when we were contacted by a firm to see if we could help them tackle a set of business challenges they were setting themselves. They were, and still are, an established and successful high street practice and had always taken their regulatory obligations very seriously.
The firm wanted to change their practice management system, change to an outsourced book-keeper, and put in place a proper exit/succession plan which ensured an ongoing business could be transferred in the most tax efficient manner. Along with this, they wanted to ensure they were complying with their COFA regulatory obligations.
As part of our COFA compliance support programme, Financial Eye carried out a review of their existing business and quickly put into place the documentation and controls suitable for a firm of their size. We introduced an outsourced book-keeper who immediately streamlined the way they operated their client account so that errors were eliminated and adherence to the Accounts Rules became second nature. Regular, timely Management Accounts were introduced in a format the fee-earners all understand and we also introduced an integrated financial model which has aided budgeting and cash flow forecasts – all essential not only for running a successful business but for what was about to happen next.
We helped the sole equity Managing Partner to define the business plan including the succession plan which would lead ultimately to the exit, on a 5-year timeline. We introduced a firm which specialise in tax planning for firms of their size, and they had already identified two fee-earners within the business that appeared to have the necessary qualities required to drive the business forward.
Add to this the normal business challenges like relocation/refurbishment questions, changes in bankers as well as the system change, and you have some time-consuming challenges for any firm. In the words of the managing partner “whilst we had a good idea of what we needed to do, the guys from Financial Eye were always on hand to provide practical guidance based on years of experience. They have also made introductions to other firms who have the technical expertise to help us.”
The business saw an increase in fee-income and profitability and in due course, equity was released in accordance with the plan. Throughout the entire process, Financial Eye had been on hand to lend support and guidance to everyone involved and ensured that the business was compliant and in good financial shape for the new owners. The original owner has been able to exit in the most tax efficient way, did not require run-off insurance and is now enjoying an early retirement. Financial Eye was delighted to be involved in such a hugely successful story and continue to work with the new owners to achieve even greater things.
Key areas to think about are:
- What is the current ownership structure? Is it the most suitable structure for what you are trying to achieve?
- What do you actually want to hand-over and when? As part of the process, you will need to consider whether it is a phased sale or an immediate transfer.
- Do you have people in your business to hand-over to? You may have identified these people but have yet to speak to them.
- How do you achieve your goals using the optimum allowable tax regime? This is so important as every seller has a unique tax position that needs to be thoroughly examined to ensure it will satisfy HMRC.
- What are the insurance implications? In order exit without being stuck with a hefty run off premium it is essential you work with your advisors and insurance brokers.
- What areas of regulation do you need to address before undertaking a transfer? How are your Residual Balances as these will need to be cleaned up, along with cleansing WIP and Debtors?
- Do you have the resource and knowledge to do this yourselves?
Being involved in a transfer of a business can be quite stressful, not just for the owners but for all the staff involved. Financial Eye has a wealth of experience in planning, financial risk management and compliance and work with chosen specialists in the field of tax planning, talent management and insurance advisory. You won’t be the first firm to ask for help and given how the year has started you won’t be the last!
David Thorpe
Director – Financial Eye