Rourke: Goodwill payments are achievable in certain situations
Law firm mergers and acquisitions are increasingly based on net assets rather than a multiple of income or profits, as many do not have any inherent goodwill, a leading adviser has said.
The lack of goodwill is a particular problem for small, traditional high street practices.
Rosy Rourke, legal sector director at accountants Armstrong Watson, said that, with an ageing partner population, an acquirer was unlikely to pay for any goodwill “as many of these firms have real succession issues and no other viable options”.
She continued: “However, some firms do have goodwill within them, and those firms tend to achieve values based upon profit or fee income multiples.
“Those firms tend to be boutique firms specialising in niche or growing areas of law and are sought after by acquirers including private equity backed firms and consolidators, hence the higher values.
“In these cases multiples in the range of 4-5 can be achieved, and even higher for corporate firms selling to the newly listed acquiring entities, although 3-4 is probably more common in practice.”
Succession is a real issue for many law firms, with partners wanting to exit without having to pay run-off cover, and happy to recover their capital rather than sell their goodwill. As a result, Ms Rourke explained, “it is therefore far less likely for a multiples based approach to be taken for internal succession purposes”.
She continued: “That being said, it shouldn’t automatically be assumed that a payment for goodwill is not achievable. Some firms with above average profits may still expect goodwill to be paid when a new partner comes into the business.
“We do see goodwill being paid in some circumstances, and the partnership or members’ agreement will tend to govern how this goodwill is valued. When owners pay goodwill on entry, they tend to also look for goodwill to be paid to them on exit.”
Ms Rourke urged firms to consider succession planning from early on and keep it under review, rather than only turning to it just before exit or retirement.
We have reported on several mergers in recent weeks (see here and here), as often happens around the time that most firms still renew their professional indemnity insurance.
Since then, Woodcocks Haworth & Nuttall (WHN) Solicitors has strengthened its presence in Accrington with the acquisition of Rosthorns.
The latter’s founder, David Rosthorn, who set up his firm in 1986, has joined WHN’s conveyancing team as a solicitor.
WHN has eight offices in Lancashire, employing 100 staff.
Meanwhile, in Sheffield, Bell & Buxton has merged with Ironmonger Curtis, a commercial firm with particular expertise in working with dental practices.
Four-partner Bell & Buxton has a broad private client and business practice, and managing partner Alex Ross said he had been looking to increase its commercial offering.
Trevor Ironmonger, co-founder of Ironmonger Curtis, added: “The merger consolidates our leading position in South Yorkshire and enables us to offer our clients a far wider range of business and personal legal services where they require it.”
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