How Do I know When to Stop Negotiations with a Buyer?
During Ep. 40 of the Ask the Law Firm Seller Show, Jeremy E. Poock, Esq. addresses the following: How do I know when to stop negotiations with a buyer? At the outset, Poock points out that Senior Attorney owners of law firms may consider not even starting negotiations with their key employee lawyer(s) because most key employee lawyers: 1. Only want a job; 2. Went to law school and not business school, i.e., they do not aspire to own a small business law firm; 3. Cannot afford to purchase their boss’ law firm; and 4. Assume that their boss will never retire If a Senior Attorney owner believes that key employee lawyers at their firm actually do have interest to purchase the practice, Poock then asks: (1) When you ask a key employee attorney about their interest to purchase your practice, how did the key employee attorney respond? (2) How often do key employee attorneys at the firm approach the owner with ideas for who to grow the practice? (3) How much business do the key employee attorneys already generate at the firm? If none of those answers point toward key employee lawyers indicating an interest to become internal successors, Poock suggests that law firm owners consider not starting a sale conversation with their key employee lawyers. Regarding Growing Law Firms as the more typical purchasers of law firms, Poock shares the following tips for when to know to stop negotiations. 1. Importance of Establishing a Timeframe: Poock suggests that the seller and purchaser agree to a timeframe for due diligence and preparing a letter of intent or other form of an offer. By setting that timeframe, the parties can determine whether to continue or stop negotiations during their agreed-upon timeframe to reach a letter of intent or offer. If the parties do not pre-establish a timeframe, though, Poock points out the following: If months pass without the parties completing due diligence or agreeing upon terms for a letter of intent, such passage of time typically indicates that a seller should consider stopping negotiations before even more time passes with a buyer who likely does not intend to purchase a seller’s law firm. 2. Protracted Negotiations: Poock explains that when negotiations become protracted, a “pretzel effect” can occur, namely, that when negotiations over certain terms become analogous to pretzel making, the selling law firm may consider stopping negotiations before weeks or months pass by in advance of the proverbial pretzel breaking, i.e., negotiations breaking down, followed by the seller needing to pursue another buyer. As key takeaways about knowing when to stop negotiations with a buyer, Poock summarizes as follows: (1) Selling law firms should consider whether to even start negotiations with key employee lawyers if those key employees prefer to have a job rather than become owners of a small business law firm. (2) The importance of defining a timeframe for due diligence and preparing a Letter of Intent as a means for determining whether to stop or continue negotiations with a buyer. (3) Recognizing that if protracted negotiations become analogous to pretzel making, a seller may opt to stop negotiations before the pretzel breaks and either the seller or buyer then decides to stop negotiations, which could occur weeks or months later.
