Why do your due diligence on your firm?

It’s a great feeling being asked to join the partnership. However, before you agree to become an equity partner, whether fixed share or full equity, you need to do your homework on your firm. After all, ‘buying-in’ is just a fancy term for buying a stake or slice of equity in the business. If your firm folds you could be left with a large amount of personal debt, which may impact your ability to practice (particularly if you are lawyer) in the future.

What level of money will I be asked to put into my firm?

Every firm is different, and will be capitalised differently. There is no set amount of money needed to buy into a firm. However, expect to be paying a minimum of £30k and up to potentially £250k to buy into your firm. Whilst most firms will organise a bank loan on your behalf to pay for your stake in the firm, you will still be liable for any interest or capital repayments. This is immaterial if your firm is doing well. However, there are no guarantees that your firm will be profitable in any one year and that you, as a partner and owner of the business, will actually be paid anything…

What due diligence should I do on my firm before buying in?

These are some of the basics you need to ask your firm, and for a full list of question download our free guide to doing your due diligence on your firm. 

Balance sheet health:

Is your firm, at a very basic level, profitable? Both now, and also if it maybe lost 25% of it’s revenue. If your firm folds in the next 5 years, you will lose your capital stake in the firm.

Level of debt:

Your firm probably has some debt, and you would expect this. However, how near has your firm come to breaching any banking covenants in the last 2-3 years? What is the level of debt like compared  to the firm’s annual revenue? How will your capital to be used? If it will be used to shore up an ailing balance sheet then be very afraid.

Resilience:

This is a measure of how well your firm would cope if it lost it’s 3+ biggest clients. You don’t want to be in a situation where your firm is reliant for its profits on a handful of clients.

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Business Development strategy:

Does your firm have one – to either stand still or grow? What will be your role in delivering this? What will be the support  given to help you deliver the clients you have promised in your business case?

Partnership agreement:

This is a pretty important document (slight understatement here!) which sets out the rules of the partnership. Before you sign any agreement to buy into the partnership you need to know what is contained in it. For example you may find out that until you have been an equity partner for five years, you will be working your butt off to line the more senior partner’s pockets. So it is very important that you find out how are your partner’s remunerated. At this stage you may not want to think about exiting your firm, but you need to understand this now. After all, you could be exited on a whim and not be entitled to your capital back… (Unlikely, but if you haven’t read the partnership agreement, how would you know?)

As stated earlier, these are some of the basics you need to ask your firm, and for a full list of question download our free guide to doing your due diligence on your firm. 

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