Why finance a legal practice purchase?
Although there is often significant cost involved with purchasing a law firm, there are many reasons potential buyers opt to do so, despite the potential problems with financing the purchase of a legal practice. An obvious example is a lone qualified lawyer who strives to operate his or her own firm and wants to finance a legal practice purchase rather than build a new firm from scratch. Whilst this seems a more costly option, the advantages associated with the purchase of an existing firm can reap higher rewards far quicker than starting a new firm. However, unless the buyer has savings or personal income which allows them to fund the purchase, it is likely they will need to seek financing in order to purchase a legal practice.Even established companies who wish to take over another firm may not have the capital freely available to do so. Despite being established and successful, existing firms may also need to obtain legal practice financing. Fortunately for potential buyers there are a number of ways they can obtain legal practice financing in order to fund the purchase or acquisition of a law firm.
Forms of financing
The forms of legal practice financing available will depend on the type of buyer and their circumstances. For sole practitioners or smaller partnerships, personal savings or inheritance are often used to finance the purchase of a legal practice. Alternatively, they may use their own credit history and borrowing capability in order to obtain legal practice financing.If this option is not viable, they may seek out investors to provide legal practice financing. Investors may be family and friends who have the financial ability and interest in investing in the firm or they could be from external sources. For example, there are a number of investment companies and networks who provide an opportunity for those seeking investment to liaise with potential investors and mentors in order to try and obtain funding. This may be a viable option for some potential buyers seeking legal practice financing but they may be required to give up some interest or control of the firm in order to gain the investment.
Alternatively, potential buyers can rely on banks and lenders for sources of legal practice financing. Of course, this form of legal practice financing is open to many variations and the advantages and disadvantages are dependent on the specific nature of the financing available which, in turn, is likely to be dependent on the circumstances of the buyer. For example, buyers with a relatively poor credit history may struggle to obtain this form of legal practice financing or find themselves faced with higher interest rates when compared to buyers with an unblemished credit history. The plethora of loans available needs appropriate examination to ensure the buyer achieves the best rate and terms possible and it’s advisable to seek professional advice before entering into an agreement.
In addition to the banks and generic lenders, there are firms which specialise in legal practice financing. Whilst they may have terms available which are of specific appeal to legal practice buyers, they should also be approached with caution. Terms and rates will vary depending on the lender, type of loan and circumstances of the buyer. They often share the same disadvantages as traditional bank loans so should not be entered into in haste. As with all aspects of financial planning, business purchasing and legal practice financing, it is worthwhile obtaining independent financial advice before entering into any agreements or contracts. The purchase of a thriving business could lead to financial difficulties if the wrong form of legal practice financing is employed from the outset.
Whilst existing law firms may also seek funding from external sources, they may be able to use capital from their own business in order to fund their expansion. If this is not possible and legal practice financing is required from elsewhere, then the existing company can be used as security in order to obtain optimum interest rates or collateral to secure a loan.
With the introduction of the ‘alternative management structure’ legal practice financing may become more commonplace. Indeed, we may see law firms in the UK floating on the London Stock Exchange in order to release capital to fund further acquisitions and expansions. As expected, the more collateral a business or person has, the more options they have available to them when it comes to legal practice financing.
Which form of funding should I use?
When determining which form of legal practice financing is most appropriate it is always advisable to undertake a significant amount of research and engage the services of professionals experienced in this area.For some potential buyers, the forms of legal practice financing available to them may be limited. For example, many do not have access to sufficient funds to buy the law firm independently or cannot seek investment from investors known to them. They may be forced to rely on unknown investors or commercial loans in order to finance the purchase of a legal practice.
Others may prefer to avoid investment all together and prefer to have the sole responsibility and control of the firm. This potentially leaves them with a larger amount of financing to secure if they cannot finance the purchase from personal savings or alternative sources. Conversely, potentials buyers may welcome the opportunity team up with an investor or a team of investors. In addition to the financial investment which will enable them to finance the legal practice, investors often offer business advice and support or act as a mentor which many find invaluable.
It is evident, therefore, that legal practice financing isn’t merely about the figures. Whilst the figures are pivotal in determining the most viable forms of legal practice financing there is more than just the bottom line to consider. Family investment, for example, may provide enough finance to enable to purchase to go ahead but may prove difficult further down the line when it comes to the role of investors in the day to day activity of the firm. Similarly, the relatively inflexibility of commercial loans could prove difficult should the firm lose business or suffer a downturn in profits. Legal practice financing is not only relevant to the purchase of the business as it will have an effect on how the firm operates and can ultimately affect how successful the business is. Potential buyers should fully investigate their legal practice financing options prior to beginning the purchase process. Entering into the wrong legal practice financing agreement can prove costly and, in worst case scenarios can result in the buyer losing the business further down the line. Companies such as Business Brokers UK offer support and advice regarding various aspects of legal practice financing and legal practice purchase. Any potential buyers considering buying a law firm or securing legal practice financing should seek out experienced professionals to provide advice and facilitate the process of obtaining legal practice financing. The effect that the choice of financing can have on a business is far reaching should be carefully considered before being agreed upon. Whilst it can be tempting to obtain funding quickly if it’s offered, it is advisable to take a significant amount of time and ensure that you are obtaining the appropriate and most cost effective form legal practice financing. Contact us for a free no obligation quote as we work in partnership with lending firms on a regular basis.
