Acquisition of Practice and Retirement
Help on how to start up your practice and retirement information
Acquisition of Practice

You may think of starting in sole practice by acquiring the practice of another solicitor who is retiring or otherwise disposing their practice, as opposed to starting from scratch yourself. Whilst the Law Society’s “Toolkit” contains a “starting in practice” section which may assist to some degree the basic points you need to consider and where necessary question the Vendor are as follows:-

1. Find out the history of the firm.
What is the reason for the sale.
How many hours a week does the Vendor work and on what days?
How many weeks holiday does the Vendor take every year?

2. How much is the Vendor seeking by way of a sale price?
If the sale price is to be paid by instalments the number and amount thereof with commencement date and method of payment with or without VAT must be established. What security for payment, if any, will be required and what will be the consequence of default in any one payment or of late payment?
What will be the apportionment of the purchase price between (a) property {lease} (b) goodwill (c) fixtures and fittings/equipment for tax purposes?
Examine selected paid invoices against files.
How will work in progress be dealt with? It may be necessary to agree with the Vendor a percentage of money to be paid for this and unpaid invoices existing at the date of completion, liability for cost of recovery and within what period of receipt it is to be paid.

As there is no set method of valuation of the purchase price, take accountants advice and require last 6 years disclosure of accounts.
See also “Profitability and Law Firm Management” by Andrew Otterburn.

3. Office – (if taking over existing premises) If seller retains freehold a lease to you will have to be granted. If property is held by Seller on existing Lease examine it and office carefully if you plan to take over the work there. The building and offices should be surveyed to check state of repair/decoration and possible liability for dilapidations. If necessary agree a retention or reduction in the purchase price.
Will further space be available if you move in and the practice expands?
Examine the Lease – who is the Landlord? – assess the liabilities under it Will the Lease be difficult to assign/renew?
Consider lease position if practice contracts i.e. subletting or assignment of part, disabled, toilet, kitchen, storage and parking facilities and possibility of Landlord refusing a renewal or grounds of own occupation or development.
In Licence to assign limit liability for period of occupation only, examine position of Landlord, planning, building regulation and any other required consent.
Raise enquiries before contract using possibly CPSE enquiries which will cover VAT situation.

4. Clients and type of work
What type of work is done? Ensure that you have the necessary expertise to provide a perfect service, avoid negligence claims and make an adequate net profit.
Is there scope for other work?
Are referral fees paid? Consider if you will do so and what will be involved (including compliance with rule 9 of the Code).
Will professional contacts be introduced to you?
Are there any fee sharing agreements with service-providers under rule 8 of the Code?
Will Clients stay or go – retention of Clients can never be guaranteed but as the vendor must notify clients of the sale of the practice this is an opportunity for you to persuade Clients to remain with the practice.
Where do the Clients come from?
Does the firm hold any Legal Aid Franchises? – If so full details must be provided.

5. Sale agreement
Vendor must covenant in sale agreement not to practice in competition Agree the lawful radius and period and obtain a covenant by the Vendor to pay all outstanding debts including VAT with retention.
Will Vendor want consultancy and if so will this be useful to the practice If so ensure that the Vendor is an independent contractor holding his/her own PII Insurance agreed in a written contract providing for a fixed term, termination etc. Note however that if the vendor joins another firm then usually that firm will be the successor practice within the definition at clause 8.2 of the Minimum Terms and Conditions in the Solicitors' Indemnity Insurance Rules. If so, run off cover to the ceased firm will be provided through the new firm's insurance rather than through the Vendor’s own run off insurance.
Be clear what is included in the sale and what is not.
Is anything leased or otherwise not the Vendor’s property to sell?
What about other potential Buyers of the practice?
Agree arrangements for vendor to notify all clients of the sale, and as to taking instructions on current retainers.

6. Accounts
Who are the practice accountants?
Is the practice subject to any mortgages or financial liabilities?
Ask to see existing bank documentation, pass sheets, number and types of bank accounts, Clients and Office Ledger sheets, get details of bank charges, overdrafts any guarantees and indemnities, leasing agreements and VAT returns. If the acquisition proceeds new Clients and Office Accounts must be set up [or arrange with bank for takeover of existing accounts?] and existing Clients Special deposit Accounts must be taken over or the proceeds thereof placed in a new Clients Special deposit Account...
Take own accountant’s advice on client account matters:
  • Check reconciliations (6 years).
  • Reporting accountant’s checklists (3 years).
  • Most recent Accountant’s report.
  • Ensure procedures and systems in place as per Appendix 3 Solicitors’ Accounts Rules.
  • Actual confirmation of bank balances and comparison with accounting records at completion.
7. Clients deeds, wills and files and powers of attorney
How many deeds and wills does the practice hold and where?
Up to date records of contact details/ownership of deeds and other documents held.
Where are old files stored?
Does practice have a terminal to do bank TT’s.
If the acquisition proceeds Clients will have to be written to and given the option of collecting their deeds papers etc or allowing you to take them over (similarly for Clients monies).

8. Professional Indemnity Insurance
What is the claims history post Solicitors Indemnity Fund (September 2000 onwards) [note that a firm’s history prior to September 2000 is unlikely now to be helpful to the Qualifying Insurers] Who is the firm’s current Qualifying Insurer?
What are the details of the current office insurance?
Get a letter of authority from the Vendor to SIF in respect of potential circumstances notified and not yet dealt with prior to September 2000 (if any still exist now) and also to the practice current Qualifying Insurers and to any other insurers of the practice since September 2000 to whom claims have already been notified [note, again a firm’s history prior to September 2000 is unlikely now to be helpful to the Qualifying Insurers. Also, because of the claims made basis of indemnity insurance it would normally be necessary to notify only the firm’s current Qualifying Insurers in relation to any potential negligence action].
Bear in mind that if you take over the practice your insurance will bear claims for work done by the Vendor subject to the excess agreed by you with your insurer under your own policy [note – this will only be relevant if the vendor's circumstances fit within the definition of successor practice. You will need to reach an agreement with the Vendor about payment of the excess and maybe make a retention or hold security for this. Examine all insurance certificates and claim forms for outstanding claims.

9. Staffing
Obtain the details of all staff e.g. copies of standard contracts; working hours (including details of any flexible arrangements); pay; holidays; pensions; notice periods; details of any staff on maternity leave; long term sick leave; any existing disputes or claims. If TUPE applies (see below) the regulations oblige the transferor to provide you with “employee liability information” not less than 14 days before the transfer date. This information includes:
  • Identity and age of employee.
  • Particulars of employment as required under section 1 of the Employment Rights Act 1996.
  • Details of any disciplinary procedure brought against an employee/grievance procedure commenced by an employee in the previous 2 years.
  • Details of any employment case brought against the transferor in the previous 2 years.
  • Details of any claim arising out of employment with the transferor that the transferor has reasonable grounds to believe will be brought.
  • Details of any collective agreement that will apply after the transfer (probably unlikely to apply to small legal practice).
If you are taking over some or all of the Clients of another practice, whether or not you are also taking on premises and equipment, it is quite probable that the Transfer of Undertakings (Protection of Employment) Regulations 2006 (“TUPE”) will apply.
The effect of TUPE is that all employees working in the undertaking/part undertaking immediately before the transfer will automatically become employees of the acquiring business on their current contractual terms and with continuity of employment preserved (unless the employee objects). TUPE limits the acquiring employer’s ability both to change terms and conditions and to dismiss transferred staff unless they can show either that the changes/dismissal have nothing to do with the transfer or that there is an “economic, technical or organisational reason involving changes in the workforce”, which most typically manifests as a need to reduce headcount.

The transferor practice has an obligation to inform and consult staff and the acquiring practice will need to supply information about any “measures” it intends to take post transfer. If the proposed transfer is likely to impact any of your existing staff then you are also under an obligation to consult with them.

As dismissal “in connection with” a transfer is automatically unfair you should seek specialist advice before asking the vendor to dismiss staff prior to the transfer. If any staff are made redundant prior to transfer you should ensure that the terms of any compromise agreement also include a waiver of the right to bring a claim against the successor practice.

If TUPE applies you will inherit all obligations and all liabilities (with the exception only of criminal liabilities) in respect of transferred staff so careful employee due diligence and indemnification from the seller where appropriate is essential. It may well be appropriate to make a retention for accrued redundancy, holiday and sickness payments.

Examine Vendor’s and any qualified fee earner’s practising certificate and also any correspondence with SRA and LCS and their predecessors. In relation to matters that remain unresolved and the professional standing of the firm.

10. Consider cost of file and other storage, other office expenditure and parking.

11. Supervision of office considerations
See Rule 5.01 (supervision and management responsibilities) and notes 2-40 , note 32 and page 40 of the Companion to the Code [note a second edition will be published shortly by the Law Society (probably early August) and the LS indicates that the reference should then be to pages 37-38 in chapter 5 of second edition of the Companion to the Solicitors’ Code of Conduct 2007] together with SPG Guidance on supervision of offices.

Is locum cover arranged or available? If so obtain full details of arrangement with locum, examine his/her credentials, check with SRA and take up references for him/her.

If not appoint a fellow solicitor through a Lasting Power of Attorney who can take over immediately as solicitor manager should the situation arise. (See SPG Guidance on protecting your practice in emergencies.)

Is there any back up of staff in times of illness or other emergency.

These notes are produced by the Sole Practitioners’ Group and the advice given is intended to be general guidance only. Members are advised to seek specific advice on the detailed application of any points mentioned in relation to their particular circumstances. The Employment Law advice given in paragraph 9 is at 31 December 2009.

RETIREMENT

Queries about closing a practice are dealt with in a guidance note on the SRA's website issued by the ethics guidance team at www.sra.org.uk/solicitors/code-of-conduct/guidance/Closing-down-your-practice.page. The note also contains details of other sources of help such as LawCare and the Solicitors Assistance Scheme.The guidance team can be contacted on 0870 606 2577 for further help.

Also see the “Small Legal Business Toolkit” recently issued by the Law Society pages 77-101 and contained in the Knowhow Section of the SPG Website.

Note that both “Vendor” and “Seller” are used in the text.