The Trials and Tribulations of Buying A Practice - Part Two

Last issue we broke off at item number six to consider when buying a practice. This issue we continue with the next six items and draw some conclusions.

7. Due diligence

A thorough inspection of the seller’s working paper files, correspondence and practice inspection notes should take place somewhere between signing a letter of confidentiality and a letter of intent. Indeed many due diligence visits take place after the letter of intent and the letter states that ‘subject to a satisfactory due diligence inspection…’

8. The outgoing party - Whatever happened to George?

The reality of the transaction is usually that the retiring partner, let’s call him ‘George’, has little involvement in the ‘new’ firm, and although many deals are positioned as a merger, the truth of the matter is that firm ‘A’ has acquired firm ‘B’ and the new practice will continue to use the name of firm ‘A’ and that firm’s culture will prevail in the enlarged firm.

George keeps a high profile with his clients for the first few months, makes the introductions of the new partner(s) to his old clients and does all within his power to give the impression that they are still very much involved in the client’s affairs.

The reality, however, is that George usually only turns up at the office (after the first few months) when clients are coming in – but clients need not know this.

9. The ‘brain-dump’

One part of the process is to ensure that the seller transfers all the knowledge that the practitioner carries around in their head about their clients. These are often details that never make it to the file. Such items as:

· Recent discussions held with the client that are not memo’d in the file
· Who the clients lawyers are
· Names and ages of children
· Life insurance details
· Succession issues discussed with the client – for example, are they planning to bring their children into the business in the next few years?

A session with a dictating machine, going through each file one by one, is a tedious but necessary exercise.

10. Non-compete

Even though the seller might be retiring, the buyer needs to be commercially aware and a non-compete clause is a necessary and sensible precaution to take.

11. The earn-out

Usually somewhere between three to five years is the ‘norm’ for an earn-out period. This should not need explaining, but I will clarify one or two issues here.

· Only clients that are retained each year qualify for a payout to the seller
· He average retention rate is around 85%
· Don not pay too big a deposit on closing, unless the price is being discounted, 20% to 30% is the usual level of deposit paid on closing the deal

12. The announcement

A cheese and wine evening at the office, with fancy invites printed, is an ideal opportunity for clients to meet the new partners in a social environment and can often be an enjoyable event.

Announcements in the local newspaper and a direct mailing to all clients should be co-ordinated with the closing of the deal, and new signage, letterheads, web site content and business cards all need orchestrating on a timely basis.

Then the meetings begin in earnest, and the buyer starts to make their own mark on the new client base, integrating them into the newly grown firm, looking for opportunities to offer additional services and so on.

Potential Pitfalls & Conclusion

They say that the road to hell is paved with good intention, and there is a lot of truth in that saying. Some of the common pitfalls that await you include:

· Disparity in charge-out rates and thus fees between the previously separate firms
· Constant write-offs in the new client base, hidden from view
· Unattainable turnaround times expected by newly acquired clients
· Inexperienced staff whose skills were ‘oversold’ by the retiring practitioner
· Disparity in salaries of the ‘old’ and ‘new’ staff
· Differences in ‘practising styles’ between the two parties
· Differences in culture between the ‘old’ and the ‘new’
· Polarized expectations of staff, partners and clients
· Insufficient experience at the ‘new’ firm in niche markets served by the ‘old’ firm
· ‘Skeletons in the closet’ – Professional indemnity issues from earlier years surfacing later

The only real solution to these issues, and others, is to make sure that you ask detailed questions, conduct a thorough due diligence inspection and engage in frank and open discussion at all times during the process.

Sometimes practitioners can get carried away in the excitement of being able to ‘do a deal’. Don’t.

‘Act in haste, repent at your leisure’ is another old saying that has been around for years, and with good reason. It is very rare for the first potential deal to come to your attention to be ‘the one’ and patience and perseverance truly are virtues.

The process can be both exciting and frustrating, fast moving and devilishly slow, high stakes and seemingly safe all at the same time.

Don’t let your desire to grow fog your lenses and make you commit to a substantial project and investment. Take your time, listen to available advice and make the right move when the numbers and all other factors make sense, rather than bringing a deal to closure simply because you can.

At the end of the day it is mostly about ‘fit’. Making sure that the clients are a good fit for your practice, the billing rates are a good fit, that the people will fit and so on.

Go for the right fit and the dollars really will look after themselves.