Building Capital Values Peter Scott Peter Scott Consulting

PETER SCOTT CONSULTING “Value” Desirability The amount of money ….. for which a thing can be exchanged

PETER SCOTT CONSULTING What does a lawyer have to sell? On retirement? On merger? Sale?

PETER SCOTT CONSULTING What does a lawyer have to sell? Services / labour? Hard assets? Goodwill? (the difference between the net hard asset value and a total price)

PETER SCOTT CONSULTING What do you have to do so you have something to sell? Need to create something of value: which someone else needs which they cannot provide for themselves The value of which does not depend on your remaining in the business

PETER SCOTT CONSULTING Three elements to creating something of value in a law firm The nature of the business you create Your relationship with that business The need to find a buyer Above all you need to create a business

PETER SCOTT CONSULTING 1. Need to build a competitive business Providing clients with what they need At prices THEY consider value for money Do this better than the competition

PETER SCOTT CONSULTING Need to build a business providing clients with what they need Focus is all important Focus on work types / client types Sectors where there is / likely to be growth It is about picking winners

PETER SCOTT CONSULTING Picking winners Research / analysis of the market What kind of law firm should we be building….. to create capital value? Strategic planning to achieve objectives Implementation

PETER SCOTT CONSULTING Need to build a practice that is showing a pattern of… Increasing turnover Increasing profitability On a sustainable basis With a stable and growing client base

PETER SCOTT CONSULTING 2. Your relationship with the business You need to separate two elements: - your ownership from - your operational involvement To reduce / eliminate the dependence of the business on your skills and labour for its continuing well-being Recent service sector examples? - recruitment agencies - consolidators in accountancy?

PETER SCOTT CONSULTING If you do this in a way that… The business can continue without you With a sustainable income stream With sustainable profitability - then you may have something of value to sell

PETER SCOTT CONSULTING How can you achieve this? Build a team around you of professionals and managers Delegate – NB leverage Retain ownership

Owner delegation and leverage Lawyers Managers

PETER SCOTT CONSULTING Divorce your ownership So you can walk away from the business with your value either… - immediately on sale or - after a bedding in period linked to an earn out arrangement

New Owner delegation and leverage Lawyers Managers

PETER SCOTT CONSULTING Retain ownership Ensure all those who could take away something which could not be replaced are included Keep equity tight - to enhance ownership value - to ease decision-making But do you all want the same thing? Working capital issues?

PETER SCOTT CONSULTING 3. Need to identify a buyer With whom there is a strategic fit Who needs what you have Who has the resource to continue the business (particularly if receiving your value depends on an earn out) You may need to sell the vision of putting the two businesses together

PETER SCOTT CONSULTING Three elements… The nature of the business you create Your relationship with that business A buyer

PETER SCOTT CONSULTING Ensure you receive your value The terms upon which you sell How you structure the sale / merger Take advice

PETER SCOTT CONSULTING A case study A law firm 1 equity partner 1 salaried partner 2 other fee earners No lease obligations

PETER SCOTT CONSULTING The nature of the business? Focus on… Growing sector - nationally based Narrow areas of work Broad range of existing and growing clients Owner had built a reputation / brand

PETER SCOTT CONSULTING A sustainable business? A steady increase in turnover over several years Corresponding increase in profitability Cash flow was strong

PETER SCOTT CONSULTING Do I have something to sell? Nature of the business? Owner’s relationship with that business? Potential buyers? Basis of valuation?

PETER SCOTT CONSULTING Any questions?