How Much Is a Law Firm Worth? How UK Law Firms Are Valued

Why there is no single price for a law firm

Owners considering a sale, and solicitors considering their first acquisition, often ask the same question: what is a law firm worth? The honest answer is that it depends on who is buying, what they are buying and how the deal is structured. A firm is worth what a well-informed buyer is prepared to pay for the future profits it expects to earn, adjusted for the risks of earning them.

This guide explains how valuations are usually approached and how buyers typically fund the result. It does not replace a valuation from someone with experience of the legal sector, which most lenders will want to see. For the wider costs of a purchase, see our guide to buying a professional practice.

Starting with maintainable profit

Most valuations of established law firms begin with profit rather than turnover. The aim is to work out the firm’s maintainable profit: the level of profit a new owner could reasonably expect to earn year after year. A multiple is then applied to that figure, reflecting how secure and how transferable the profit is judged to be. Some valuers work from profit before tax, others from EBITDA (earnings before interest, tax, depreciation and amortisation), but the logic is the same.

The adjustments matter as much as the multiple. In a partnership or LLP, the reported profit is usually shared among the equity partners before any of them is paid a salary. A buyer will need to employ someone to do the work those partners do, so a valuer will normally deduct a market salary for each working partner to arrive at a true picture of profit. In a company, directors may take a mix of salary and dividends that needs similar treatment.

Other common adjustments include removing one-off income or costs, such as an unusually large matter or a one-off regulatory expense, normalising rent where the premises are owned by the partners, and reflecting any costs the new owner will face that the seller did not, such as a higher PII premium or new systems.

The figure that emerges is for goodwill: the value of the firm as a going concern. Tangible assets, WIP and debtors are usually considered separately, and whether the transaction is an asset purchase or a share purchase changes what the buyer takes on. See goodwill finance for how this element is typically funded.

Why fee multiples can mislead

You will sometimes hear law firms described as being worth a proportion of their annual fees. Fee-based rules of thumb are quick, which is why they persist, but they are a poor guide to what a buyer will actually pay or what a lender will support.

The problem is that turnover says nothing about the cost of earning it. A firm with high fees and thin margins, heavy reliance on referral fees or marketing spend, or a large salaried team may produce far less profit than a smaller firm with steady, well-priced work. Turnover also ignores risk: fees that depend on one partner’s relationships, one referrer or one area of law exposed to regulatory change are worth less than the same fees spread across a broad, loyal client base.

Lenders assess affordability from profit and cash flow, not fees. If a price has been agreed on a fee basis, expect the lender to test it against maintainable profit.

What moves the value up or down

Within the broad method, a number of factors push the price one way or the other. Buyers, sellers and lenders tend to focus on the same list.

• Work type mix. Some areas of law carry higher claims risk, longer lock-up or more exposure to policy change than others. A balanced mix is usually viewed more favourably than heavy concentration in one area.
• Recurring versus one-off work. Private client, commercial retainers and repeat corporate clients tend to bring work back. Firms reliant on single transactions must win new clients continually, which buyers price accordingly.
• Key-person dependence. If the clients follow a particular partner, the value depends on that partner staying through a handover. Buyers often address this with consultancy periods, restrictive covenants and deferred payments.
• Lock-up, WIP and debtors. Long lock-up ties up cash and suggests billing or collection problems. Short, well-managed lock-up supports a stronger price. Our guide to reducing lock-up explains the measures involved.
• PII claims history and run-off. A clean claims record and well-documented risk management support value. A history of claims, or notified circumstances, raises the question of who carries historic liabilities.
• SRA compliance. Buyers will want to see the firm’s regulatory history, client account reconciliations, accountant’s reports and complaints record. Unresolved issues reduce value or stop a deal.
• Premises. The length and terms of the lease, or the position on a freehold owned by the partners, affect both the buyer’s costs and the security of the firm’s location.
• Team retention. Fee earners and support staff carry client knowledge. A stable team, with the key people committed to staying, makes the profit more transferable.

WIP, lock-up and debtors at completion

Work in progress and unpaid bills can be a substantial part of what a law firm holds at any moment, and they are normally dealt with separately from goodwill. There are two broad approaches. In the first, the seller keeps the WIP and debtors, bills and collects them after completion, and the buyer starts with an empty ledger. In the second, the buyer pays for WIP and debtors at completion, usually at a discount reflecting the risk that some will not be recovered, and collects them for its own account.

Each approach has consequences. Where the seller keeps them, the buyer pays less on day one but faces a gap before its own billing produces cash, which usually needs a working capital facility. Where the buyer acquires them, the price rises but cash starts flowing sooner. Valuing WIP on contingent or conditional fee matters needs particular care, because recovery depends on the outcome of each case.

Funding is available for both. WIP finance can release value from unbilled work, and our guide to WIP finance for law firms explains how lenders approach it.

PII, run-off and successor practice

Professional indemnity insurance is one of the issues that most distinguishes a law firm deal. Under the SRA Indemnity Insurance Rules, a firm that ceases without a successor practice must have six years of run-off cover for its past work. Where the buyer is treated as a successor practice, its own insurer may instead pick up liability for the prior practice’s historic work, which can change the buyer’s premium and its risk.

Whether a transaction creates a successor practice, and whether the seller’s firm will instead buy run-off, is a question for the parties’ solicitors and insurance brokers. It belongs in the valuation discussion because it affects what the buyer is really taking on. Our guide to solicitors’ run-off cover covers the rules and costs in more detail.

The SRA has also published a warning notice on mergers, acquisitions and sales of law firms, which highlights the importance of proper due diligence and of obtaining informed client consent before files and client money are transferred.

How buyers fund a law firm acquisition

Few buyers pay for a law firm entirely from their own resources. A typical structure combines several elements, each matched to the part of the deal it is designed for.

• Acquisition finance for goodwill and the completion payment, usually a term loan repaid from the enlarged firm’s profits. See practice acquisition finance.
• Deferred consideration, where part of the price is paid to the seller over time, often linked to client retention or fee targets. It reduces the day-one funding requirement and keeps the seller engaged, and lenders usually expect it to rank behind their loan. Our guide covers deferred consideration and earn-outs in more detail.
• WIP and debtor funding where the buyer acquires the ledger, or a working capital facility where it does not.
• Premium finance for the PII cost of the enlarged firm, through professional indemnity finance.
• The buyer’s own contribution, which most lenders will expect to see in some form.

Lenders will look at the target’s accounts and lock-up, the buyer’s experience and existing firm, the PII position, the deal structure and a forecast showing that repayments and deferred payments are affordable. Anyone becoming a manager or owner of an authorised firm must be approved by the SRA before taking up the role, and lenders usually make that a condition of releasing funds.

Law firms for sale: finding one and what to check

If you are looking at law firms for sale, many are not advertised widely. Some are marketed confidentially through specialist brokers and agents who keep registers of buyers, and many change hands privately, through approaches between firms, introductions from accountants and other advisers, or a sale to partners or senior solicitors already in the firm. Expect to sign a confidentiality agreement before you see a firm’s name or figures.

When you look at a law firm for sale, ask for the information a valuer and a lender will want: fees by work type and by fee earner, maintainable profit after a market salary for each working principal, lock-up and the treatment of WIP and debtors, the PII claims and notifications history, and who will stay after completion. The SRA’s warning notice on mergers, acquisitions and sales of law firms highlights the importance of proper due diligence and of obtaining informed client consent before files and client money are transferred.

Plan the regulatory steps early. The SRA’s guidance on adding a manager or owner says that, other than in the cases it describes where a firm can add a manager directly, a manager or owner must not take up the role until approved, and that the SRA aims to decide within 30 days but can take up to 90 days for some applications. Lenders usually want the approvals in hand before they release funds, so run them alongside the finance application.

Preparing for a valuation, as buyer or seller

Sellers who prepare early tend to achieve a cleaner process. That means several years of tidy accounts, a clear breakdown of fees by work type and by fee earner, lock-up figures, a summary of PII claims and notifications, and a plan for how client relationships will be handed over.

Buyers should ask for the same information and test it, and should take finance input before heads of terms are signed. The price, the split between goodwill and WIP, the deferred element and the treatment of run-off all shape what lenders can support.

We arrange acquisition finance for law firms across the whole of the market, with access to 300+ lenders. We structure the funding around the deal, approach suitable lenders and manage the process to completion. Finance is subject to status, lender criteria and approval. Where the borrower is a sole trader or a small partnership, finance of £25,000 or less can be regulated consumer credit, and we will say at the outset if that applies. See our work with solicitors and law firms or make an enquiry.

Common questions

This guide is for general information only and should not be treated as legal, tax, accounting or financial advice. Funding availability and lender requirements depend on individual circumstances.