Do your plans for 2022 include expanding your law firm? If so, have you thought about buying a law firm as a way of expanding your revenues, your practice areas or your geographic footprint? One of the first questions asked is how does financing the purchase of a firm work?
Financing Options
There are multiple financing options including seller financed, lender financed, and Small Business Association loans. Your law firm broker will be able to assist you in finding the financing option that will work best for you.
Seller Financing
Seller financing occurs when the seller offers a loan to the buyer that covers some or all the total purchase price of a business. The buyer repays the seller in installments, often with interest. This method of financing offers benefits to both buyers and sellers and is often used when someone inside the law firm is purchasing the firm.
Seller financing involves many of the same characteristics as a traditional business loan. Sellers offering owner financing will need the buyer to supply personal and financial information as a bank would request:
- A credit report/credit score
- verify income
- review past payment history
- understand the buyer’s outstanding debts
- calculate a debt-to-income ratio
Once the seller has agreed to finance the purchase, a business lawyer can create the contract that specifies the terms of the loan and outlines any collateral needed to guarantee the loan.
Once the buyer and seller negotiate the terms and sign the agreement, the deal is done, and the buyer takes partial or full ownership of the law firm.
Lender Financing
You probably have banking relationships, perhaps with your current law firm, via your mortgage provider, or referral relationships with bankers. Community banks are often a great source of financing for small business owners looking to finance a law firm purchase. The seller of the law firm may also have banking relationships who are eager to loan you money in order to keep the firm’s banking business in place.
- Your law firm broker can also facilitate introductions.
- Business loan requirements vary by lender, but be prepared to provide these documents:
- Business plan with details on your growth and marketing strategies
- Business legal documents (e.g., articles of incorporation, commercial lease, franchise agreement)
- Personal credit reports and scores from all three major credit bureaus. The lender will obtain their own copies but it’s good for you to see the reports first so there are no surprises.
- Business forecast with details on future cash flow and costs
- Tax returns and supporting IRS documents for the law firm you are acquiring and your personal tax accounts
- Any applicable licenses and registrations for doing business in your state
- All financial documents that would be deemed relevant (including bank statements, credit card sales, unpaid invoices, and accounts receivable)
- Any legal contracts that would be relevant
- Bank account information to deposit the loan proceeds into
Small Business Association Loans
The U.S. Small Business Administration is a financing option at reasonable rates and fees when traditional financing might not be a fit.
The SBA does not make the loans themselves. Instead, they make the rules and commercial lenders such as banks and credit unions develop the process and procedures and then fund the loans. This splits the risk between the SBA and the lender.
Your lender will require:
- personal financial statements
- business plan with at least three years of projected revenue and expenses
- for business acquisitions, the most recent three years tax returns plus current year-to-date financial statements from the seller
- additional information as required by individual lenders
Once the loan is approved, the bank sends a commitment letter. Upon your review and acceptance of the terms, the commitment letter is signed and returned to the bank, and you begin working toward a closing date. This may be a slow process, keep in mind that flexibility and patience are the characteristics you are going to lean on during this process.
Navigating the process to purchase a firm will be time consuming and it can be frustrating but knowing what to expect before you embark on the process can help adjust your expectations.
