Planning for a sale
- Subtitle: Law Office Management
|Illustration: Jeannie Phan|
The deal saw the well-established Carlyle Peterson absorb his practice, which involved real estate, estates, and some corporate work, and buy him out over a period of time, depending on the income generated. Having not rushed into the deal and being part of the transition made the whole process smooth, even from the regulatory point of view. Now in his annual filings with the law society, Phillips files as an associate instead of a sole practitioner.
Many Canadian law societies post guidelines that should be followed when closing or selling a practice. In Ontario, the Rules of Professional Conduct demand that a lawyer not withdraw from active representation of a client without good cause and reasonable notice. There are also rules involving the sharing of fees or referrals, but as long as they comply with the rules, lawyers may make an arrangement to pay for a percentage of revenue generated from a sold practice.
Alberta’s checklist for winding up a practice includes dealing with any will that names the selling lawyer as executor or trustee. Documents held on undertakings or trust conditions will also require instructions from the necessary parties. British Columbia has one checklist for winding up law firms and another for sole practices. They include notifying the law society of date of termination, disposition of open files, closed files, and corporate records, as well as valuable documents and wills. Generally, the selling firm must lay out all options for the clients so they know they can go elsewhere.
Law societies may have different requirements about trust accounts. They can be closed and transferred to a new lawyer or the selling lawyer can transfer the signing authority over to the new lawyer. The due diligence must also include vetting for possible conflicts in the client files. And, as in the sale of any business, it is subject to applicable privacy legislation concerns. Attention must also be given to closed files so they are kept for the required amount of time and properly disposed of after that.
The tough part, says Allan Fineblit, is a law firm doesn’t have the same value it once had. Fineblit is counsel to Thompson Dorfman Sweatman LLP on practice and ethics matters, after having served as executive director and CEO of the Law Society of Manitoba for many years. “I think the world has changed in regard to selling practices,” he says. Clients aren’t compelled to follow along to the purchasing lawyer, and the will vault no longer has the value once attributed to it, if it exists at all anymore. Physical libraries, as well, are becoming a thing of the past.
The question for lawyers then comes down to: What is it that they’re selling? Then, what is the practice worth?
When he prepared and moderated a webinar for the Canadian Bar Association-British Columbia branch as legislation and law reform officer two years ago, Stuart Rennie, a sole practitioner in information law and public policy, learned the sale of a firm breaks down into three integral parts: what happens before, during, and after the sale. He notes coaching, as well as the services of an accountant, can prove quite useful. “Part of the problem is that there is no guidance, really” in Canada, he says.
The valuation of a firm is more of an art than a science, says Edward Poll, a U.S. lawyer who has authored several books, including Selling Your Law Practice: The Profitable Exit Strategy. There is no public market. The discussion on whether non-lawyers can have ownership in Canadian law firms is ongoing, but currently prohibited. And firms aren’t traded on the stock market. So the market is limited.
But the value of the firm could well lie in the eye of the buyer who may look at the purchase as a strategic one, beyond the goodwill of what the sellers have established over the years. It could be the additional revenue it could generate, the additional personnel and/or their expertise, the particular market in which they’re practising, or even the physical facilities could prove attractive. “Every firm is worth something,” maintains Poll.
Alan Litwack advises anyone selling a practice get in gear well in advance. “If you wait until you retire, it’s too late,” says Litwack, of Dickinson Wright LLP, who has also chaired the Law Society of Upper Canada’s program on the purchase and sale of legal practices. The outright cash purchase of a firm is rare. It is more usual to see a gradual buyout based on an earn-out, which often sees the parting lawyer bowing out over time. That allows clients to get used to the new arrangement and transition to another lawyer.
The arrangement will include some sort of calculation of the earn-out by determining the annual amount of the fees generated, minus the agreed-upon overhead, and then determining how the resulting profit is split. Consideration has to be given to whether overhead contribution is based on a per-lawyer or incremental basis and other costs to accommodate the additional work, or something in between. As a rule, he says, the higher the revenue, the higher the percentage the selling lawyer would receive.
Litwack adds that typically, where the selling lawyer continues to work with the successor firm, he or she would receive compensation according to a tiered relationship where the percentage of billings varies depending on whether the work is for a client of the selling lawyer, who does the work if the work is done by a member of the successor firm, or the work is done by the selling lawyer for a client of the successor firm. The percentage may decline each year to about five years.
In Phillips’ case, his practice became part of Carlyle Peterson and he became part of that brand. But Fineblit points out that the name of a firm may carry with it a great deal of value. “In Manitoba, there are a number of firms with historic names,” he says. “People see value in those historic names.”
Alexandre Thibault’s family practice started by his father, Gilles, also included the technology business Edilex, based in Laval, Que., when Therrien Couture avocats s.e.n.c.r.l. came calling. “For them, it was a strategic acquisition because they were looking for an office north of Montreal,” he says. Thibault describes it as very much of a business deal, but when it came to the firm, the assets were all about its people, which included five lawyers. The larger firm, which describes itself as the fastest-growing in Quebec, offered the lawyers equity, and the senior Thibault accepted an of counsel position after the amalgamation.
The process, which followed a year-long courtship, began with a letter of intent, as well as conflict searches as part of the due diligence. The Thibaults’ checklist included a risk assessment and an examination of the larger firm’s client base to ensure it was consistent with their approach of diversity and not reliant upon a handful of large clients.
Phillips suggests lawyers, particularly sole practitioners, start a succession plan early. For him, selling the practice means he no longer has to worry about the future of his clients or staff and has the benefit of continuing to work when he wants to. Because he executed a succession plan, if something suddenly happens, he knows everything’s taken care of.
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