Building, Growing, and Exiting a Law Firm: Insights from Jay Sahota

I’m Darryl Bates-Brownsword and today I’ve got a great guest. I’m really looking forward to this conversation. I’ve got Jay Sahota joining me, and Jay has exited from a legal practice, which I don’t get too many people wanting to share their stories about exiting a legal practice. So, Jay, thanks for joining me and welcome to the Exit Insights podcast.

Thank you, Darryl.

Lovely to see. I’m not surprised that you don’t get many lawyers wanting to share because lawyers are not as queer as lawyers. Lawyers are a weird bunch, and they don’t like sharing anything.

So, I’m a rarity, I think.

I think you are. And I’m an engineer and engineers tend to be fairly shy as well. So, I wasn’t a good engineer, let’s say. So, Jay, why don’t you frame it up for us and just give us a bit of a heads up. You built your own legal practice. I won’t interfere. Let’s get the background, the backstory from you.

Yes, of course. So I’ve always been a lawyer? Well, I wasn’t when I was a child, obviously, but I was a lawyer by dint of what I wanted to do, I suppose I knew that I wanted to be a lawyer from an early age. Don’t worry, I won’t go too far back. You’ll get bored. So, I studied law at Cambridge, knew that I wanted to go into the legal profession. Started in the city. So I was at Alan Nobry, which is a big city law firm. Had a horrendous time there. Not because of the hours or anything like that, but it was more because of the culture, which obviously, I know we’ll talk a bit about, but the culture to me is really important. You’ve got to enjoy working. Didn’t really enjoy it, love the work. But the people were just the sort of people who would call over their dead grandmother to be ambitious and get to the top, really.

But anyway, spent a number of years in the city, active for the likes of Man United, Ryanair, Sainsbury’s, Tesco, Chanel, Speedo. Did lots of litigation work, which I love. I love my litigation. I do miss it. But I was moving around my career, big firms, small firms, medium sized firms, and I thought, there must be a reason I’m doing this, you know, God, I’m very religious.

God does everything for a reason. And it was one of my bosses at Pitman’s, the law firm Sue O’Brien, who said to me, you’re not going to be happy until you’re doing this yourself one day. And I thought, okay, that’s. I don’t actually know what you’re talking about. And she knew before I did, if that makes sense.

Yeah.

Sometimes people see things in you that you don’t see yourself. And she said to me, you’ve got this unique set of. I still remember her saying it. She sounded like Liam Neeson in taken.

She said, you’ve got a unique set of skills, knowledge and experience, and you need to apply that to running your own firm one day. So that stuck with me, Darryl. And it was good that I’d seen different size and types of firms, knew that I’d had the background experience of how to do things in a big firm, how to do things that small, how not to do things importantly. That’s the big thing. As we know, you learn from your mistakes.

So, my firms became progressively smaller, different work types. I started managing teams, growing departments, bringing in work, training up people, growing those departments in turn. And then there’s actually another bit of story that I probably haven’t told you. So, I set up my very own law firm from scratch in 2015 and made the mistake of taking on two, excuse me if I swear, two lazy ass partners who were my previous employees in my old firm. And we did very well financially.

But again, business alignment in terms of goals and ambitions, it was never going to work because they were lazy. I was the one doing all the work. Hope they don’t watch the podcast. I was doing all the work, bringing in the work, etcetera, and they were very happy to be employees, effectively, which they weren’t equal partners in the business, so it was never going to work. So, I exited that I sold my share back to the.

Made some money, learned a lot from it, mainly not to do it with partners again. I want to do it myself this time.

So, you got out of that first one that you started in 2015. So just a bit of a quick recap for listeners. You extracted, so you realized that you weren’t a match. The partners weren’t aligned, they had different objectives and outcomes. So, you’ve gone, this is not a fit. There’s two of them and one of me. I’m the odd one out. I need to extract myself. You just sold your equity back to them, or how did that work? Just quickly, correct?

Yeah, that’s a good question. Because it could have been the other way. I could have bought them out. Some people said, buy them out. And I thought, well, that’s going to be messy. It’s much quicker and speedier for me to get myself out. I’ve made some money on my equity share because we’ve grown. We did.

I don’t mind talking figures. In our first year, we did. I think it was 280k turnover from scratch, which is really good for a brand new law firm. And I knew that it was going to probably double in the next year had I stayed double, etcetera, etcetera. But I knew that there was value in, yes, my equity share, so it was easier to sell it back to them.

Take the skills and knowledge and experience and the learnings that I take from that business and apply them to my new business. And it was funny because I didn’t know at the time what to do next. I left. We left in a big dispute. I sold my share back to them and left. And I thought, what the hell do I do now? So it was quite a difficult time.

So, one quick question before you move on and continue with the story. How did you value your equity or the valuation of your shares Jay?

That’s an interesting question. Which I know we’ll talk about again later in the context of the other. And this is very interesting, not only in terms of valuation generally, but how the law firm sector works differently. Sectors most lawyers think to themselves, and I did a lot of research around it at the time. I had some idea of how law firms are valued, but not really. So, I did a lot of research around it at the time.

And you know what? I couldn’t find a straight answer, Darryl, as to how to value shares or equity or a law firm per se, as a whole entity. And I looked at, you know, the usual EBITDA model for accountants or financial advisors. Five times profit, two times profit, three times profit, whatever, 510 times turnover. I couldn’t find a straight answer for a law firm, and I came to the conclusion that, number one, in a general law firm, you might find this surprising. A general law firm is worth zero because there is no guaranteed repeat goodwill or business in a law firm. The problem is, it’s usually attached to the person, not to the firm as a whole.

Yeah, I’ve got those sleeves up those. Questions up my sleeve, rather.

So that’s an issue. So, I did a lot of research and looking around, and actually I started there, and they started there, and then we had to kind of do a bit of a dance in the middle, as usual, negotiations. But I said to them, I want at least one times turnover and then split divided by three, which is actually what I got in the end there, or thereabouts. That’s what I got.

So, we ended up at about one times turnover, which is not unusual for smaller businesses. We don’t get into EBITDA multiple type valuations until we’ve got more of an established business.

And at the moment, as you’ve effectively said, it’s three partners in the business, all selling their time. And I take it you didn’t take any of the clients with you.

I wasn’t allowed to. So, I had restricted covenants in place. I wasn’t allowed to, funnily enough. Again, this is a point why I could cover in a whole separate podcast. Restrictive covenants will nearly always say you can’t take clients with you, but they don’t often say that if a client comes to you, you can’t work for them. So, actually, because I drafted that bit myself, and being a litigator and they were litigation, I sort of played them at their own game. So, they’re called push and pull, restrictive covenants. So, I made sure that those kind of pool, restrictive covenants were in there. But the pushed one wasn’t. If a client approached me, they could. And many of them did. Many of them did.

And what I hear anecdotally, and you’re in the sector, those type of arrangement, restricted covenants. Arrangements are pretty hard to enforce anyway, as I understand. What’s that, your..

Yes. Yeah. Judges generally take the view that they would. They’re a restraint of trade. So, all sparing love and war and competition of business, effectively. So, yeah, they tend not to. I mean, the law is ever changing. They’re getting a bit more savvy, I suppose, with enforcing them in particular circumstances. But to apply broad brush covenants is very difficult. Yeah.

So, you left your clients there, you agreed not to take them. There was a projected doubling in size the next year even without you being there with the two lazy guys. And you still managed to get one times revenue. So that’s not a bad deal.

Yeah, it’s not bad. I think particularly considering that generally, as you said, you apply a discount for a kind of nascent law firm, which it was. We didn’t, you know, we projected the results. We didn’t know what was going to happen next year.

Sure.

And that counter argument, which is not a bad argument, is that I; by leaving, I was taking the value of the firm with me because a lot of the value was dependent on my work coming in. I threw it back at them and said, if the value is dependent on me, you’re not building value in the firm anyway. It’s the point I came, I denoted earlier. So, it’s a tricky, tricky complexion of calculations, really.

Yeah. But where we’ve arrived is effectively when the valuation is based on the individual’s time and effort, it really is a low valuation because if you get sick, the revenue drops, the value drops. It’s very transactional, depending on how many hours you’re putting in. And so, the lesson is, the more we can get away from that model selling time, the better we are, because selling time is attached to the individual, which really is a deterrent or a devaluer.

Yeah, you’re right. And the other factors, of course, which mean that law firms in particular aren’t valued very highly, Darryl, are that one, valuing on time.

So, it’s a…

It reduces the value automatically. Two, there is no automatic repeat business or goodwill in a law firm as opposed to the individuals.

And three, generally when people are buying a law firm, I know of stories, people don’t go and comment it later. I don’t want to predict too much where people have said, I’ll give away my law firm, or I will pay you to take it off me. Because you’ve got so many liabilities. Professional indemnity, insurance. You’ve got compliance and regulation.

You’ve got all the liabilities of running a firm. You’ve got run off cover. A big one is run off cover that you have to pay for firm. You become a successor practice. If you buy a law firm, all those sorts of things generally mean that you start to zero and then add in value where you can, which is usually not very much, actually.

Yeah. Okay. So, we exited. You exited the business. You weren’t sure what you were going to do next. What happened?

Well, I prayed, as I usually do when I’m not sure of what’s going on. And I met an old dude. I could call him other things, starting with d, but I met an old dude, networking, and he said, a lot of this is wrapped up in litigation, past litigation. So, I, you know, I don’t mind being transparent about it, but I just hope they’re not watching it. A chap who said, I’m gonna. I’m gonna sell my law. I want to sell my law firm. I’m retiring. He was 55ish at the time. He said, I want to retire and sell my law firm. No, sorry, 65, 65. And he said, I want to sell my law firm. And therein lies the issue. As we’ve already identified, he hadn’t done the exercise of building value in the firm.

He was hoping to get x for it and wanted to sell it but hadn’t planned ahead. You know, you need to plan right at the start to exit in due course. Basically, he’d done none of that at all. So, he. I met him networking.

He said, oh, I want to sell my law firm. Do you know of anybody? And stupidly, at the time, I thought. I think it was a mixture of stupidity, arrogance, and greed. I thought, oh, buy a law firm.

Why not? And I came home, my wife, and said, I’ve just done a handshake on buying a law firm. She said, you idiot. Why have you done that?

Wise woman.

Well, very. Oh, she’s always. They’re always right, aren’t they? They’re always right. Unfortunately, I’ve done that over the years. I don’t question her anymore. I just do that. But, no, she’s been a great source of support and wisdom. She’s fantastic. She’s a background in the law herself. DLA Piper. She was an accountant. But anyway, so I thought, yes, I’ll buy the law firm. Not really knowing what I was doing. But harking back to the words of my partner, who said, do this yourself, as in not being racist.

As Indians. I had an entrepreneurial flair anyway, you know, entrepreneurial flair in my family. Have your own business, do this yourself, etcetera. Don’t have any staff. Not, don’t be a staff member. I mean. So, I thought, why not? I thought, why not? I was ambitious, young, wanted to do something for myself, wanted to grow something and put a mark on the Kent legal market, I suppose. And why not?

Right, so this time you’re buying a practice. How did you value it?

That’s an interesting question. Again, we went back to square one and thought, right, how do we value it this time? And this, we adopted quite an interesting model because I effectively wanted it to be. And again, this is turning the lens on myself. This time I effectively wanted to be a cost neutral purchase, and I wanted it to be an earn out whereby the old owner would stay on for five years and I would, because he had a lot of contacts, reputation in the industry, so I wanted him to transition the handover properly and maintain those contacts and relations with the firm.

So, the business. The business was really dependent on him as a key individual, by the sound of it.

Yes, it did very much. I think he was the one who had the clients, the contacts. He was the one doing the billing. There wasn’t much intrinsic value in the firm, which obviously was in my favor when buying the firm. You weren’t the opposite when you’re selling a firm, obviously. So, I.

That’s it. That’s what we’re here to talk about. We’re talking about understanding the value, how to value a business. And from a business owner’s perspective, how do we create that value so that we can walk away without a five year earn out? Ideally without an earn out as well. What do we have to do to our business to reduce or eliminate owner dependence and create value and have a successful earn out? A successful exit without an earn out. So, this is great information.

Yeah. So, no, the way I did it with him is that I structured it so that, effectively, it was cost neutral. I was paying him a certain sum every month, which was less than the sum I knew that he would bill every month. So effectively, the money came from his billing anyway. There are some other elements, but I knew the money would largely come from his billing and I would be able to wipe my face. It was a neutral deal, effectively. Again, there were other more complex elements, but generally that was the equation that I used here.

Yeah. And so you’re now back in practice so you could find new clients while you’re transitioning him out of. Out of his existing clients.

Exactly right. Exactly right. And growing it. I mean, what I didn’t appreciate was the amount of rubbish I had to clear up when I took over the firm. So, I mean, it’s good. I wasn’t paying a huge amount for the business, but I had a lot to clear up and I was improving it and growing it all at the same time. But again, I could put my own market at the advantage of it not being a massive practice.

And the fact that he hadn’t put his dent on it so much that this is how the practice was structured, it was more about him, meant that I could build the practice in my own light, effectively.

Yeah. Okay. And magnitude of this practice, was it smaller than the one you left or bigger? How did it compare?

So, we had, when I took over, we had nine staff in 2017, summer 2017. And I knew that I wanted to grow it, improve it, and I knew that the Kent legal market was quite poorly served by that size of firm which could offer really exceptional client care. Big, but not too big. Really good protocols and procedures, fantastic staff, really good team, delivering everything I could, train the staff up, bring them up in my vision. Because of my experiences in the city, I was very badly bullied in the city.

So, I knew that I could be an empathetic leader who would understand my stuff. It’s all about the people. The value is all about feeding at the end of the day. So, I want you to bring all that into my new firm.

Okay. So we’ve agreed a cost neutral way to acquire the business. Nice if you can make that work. You agreed a five year earn out for the founder of the business, who, if he’d prepared his business to better, wouldn’t have had to do that. How long did he last in his earn out? Given that most earnouts that we’re aware of, most earnouts in that type of size and magnitude, they’ll work a bit, and they’ll think at the time that, yeah, I can do a five year earn out, no worries. But if he’s already 65, how long did he last?

Well, two answers, really. Two prisms to the question. One is that he lasted as long as I lasted, effectively. So, he did last. He went the course because he wanted his money from me paying him every month. But I sold my firm. I sold the firm that I’d acquired before he’s earnout expired. So that made it slightly more complicated because I was approached to sell the firm. We had about.

I’m trying to think when I was approached. So, by the time I sold, we had 8000, 9200. We had about a year left of his earn out, basically.

Okay, so about four years in. So just, again, in ballpark figures, you had nine staff when you. When you took the reins. How. How much did it change over the period of four years?

Dramatically. So, our turnover went up from. I’m trying to remember the figures now. Let’s say it went up multifold. And we went from nine sar to 53.

Nine to 53 in four years?

Yeah. Actually, that was within. Most of that growth was within two years. It was in just over two years. One mistake I made probably was to grow it too quickly. So actually, it was bigger than that at one stage, and then I reduced it slightly.

So, at the point of selling it, we had 50. Sorry, 52. 52 star.

So, what did you focus on? Because if you’re growing that quickly, you’ve got marketing, you’ve got recruitment, you’ve got systems and infrastructure, you’ve got premises even. You know, I get that half of it was through, through lockdown and what have you. But. So, there’s a whole lot going on there for a business owner with such fast growth. What were your priorities?

At first, I wasn’t sure what they were. And it was all a bit, oh, I just want to grow. I mean, I’m the first to admit I had made mistakes when I was growing the firm. And I became greedy and ambitious and thought, I want to grow it for the sake of growth effectively and just be the biggest firm and do this better than that. And the other. So, I grew and then had to bring it back quite a bit and then focus on, as you say, the things that are really important.

And actually, the two things that were important were, one, the team building the right team, because I knew the right team would deliver such exceptional client care, I wouldn’t have to worry too much about bringing in ridiculous amounts of new work because they would get repeat work from delivering such good care. You know, the clients will give them repeat work and referrers, etcetera, etcetera. And the right team would stay with me and build value in the business. And the other thing I did quickly, within about a year of taking over Darryl, and hopefully you will endorse this, is that I knew that I had to get off the tools.

Yes.

Totally on the tools. So, I had to get off the tools quickly. I stopped litigating and I went out and my main job was to look for new work. And build those contacts. And I knew that once I did that, that would then in turn take the pressure off the firm, the mechanics, the cash flow, you know, the everyday stress of running a firm whilst I was building that really good team. So, the two things I focused on, in addition to all the usual stuff, money, people, marketing, etcetera, was building a really good team and then making sure I was myself bringing a lot of work to the firm.

But the caveat, I know I said earlier that if an individual brings in so much work, you’re not building intrinsic value in the firm. At the same time, I was trying to add what I called. Now, when I’m training my clients differentiators to the firm, such that I was building value in the firm at the same time. Things like the fact that our client care was different. We had a niche as a litigation firm.

We were city type service at non city rates. We had an exceptionally big litigation department for a small firm. We had a lot of repeat work, we had referrals, we were distinct in our territory, those sorts of things that added value to the firm. As I was going, effectively.

What did you do? Because separating someone out off the tools and not doing any operational work and just focusing on billing, on selling effectively, is a really structured, functional approach that you don’t normally get in professional services. And how were you getting the leads? Like, where were you getting your leads from? And, you know, we’ll keep it at one question at a time.

Now that’s a really good question, actually. And the answer is this, that I was on holiday with my family, and I jumped out of the pool. My wife thought I was having heart attack. And I said, other law firms, other law firms. She said, oh, you’re going mad.

And I actually made a list. I was about a year in, I made a list of, and this was almost a panacea moment, you didn’t get repeat work from clients, in existing clients and cross selling and upsetting all that stuff. And I thought, my best source of work is going to be other professionals. So, I actually sat there. But I still remember by the pool, I made a list of other professionals with whom I could cross refer work.

And they were accountants, IFAs, mortgage brokers, estate agents, and other lawyers. Other lawyers, and not many other lawyers do that. They don’t actively approach other lawyers to try and cross refer work. And I found that not blowing my own trumpet, but I’ll give you an idea. In the year before I sold my firm, about 1 million pounds of worth of work that I brought in came from other law firms.

Wow.

Which is unusual. I’m not saying I’m amazing or anything like that, but it’s unusual because most professional services aren’t proactive about referring work to each other. And I knew that I wanted that to be a differentiator in the firm.

A lot of professional services firm’s struggle referring to other partners in their own practice.

Yes, yes, exactly. Exactly. They’re doing this, doing that the whole time, aren’t they? We don’t want him to get the billing and all these years, and they’re not cross selling and upselling and thinking about other opportunities.

Okay. And so, when you’re doing this, so you’re out doing the sale, and a lot of professionals go, ah, look, the problem is, when I do the sales, clients buy me. They want to buy me. What was your approach for getting around that?

That’s interesting. I mean, I would always say to the referrer and the client early on, I know that, you know, clients would always phone up and say, oh, we want to use Jay because we’ve used him before.

Or the referral would say, we’re going to give it to Jay. And I would say, look; to enable my firm to run properly, I can’t deal with every single matter myself. I will be the client relationship director, so I will oversee the matter, which I did. But I can’t be on hands on with every single matter all the time. If there’s ever an issue, call me.

I know what’s going on. I kept a good eye on the matters that were going on department, where they were. Were the clients happy? Was the referrer happy? Really important that I kept on checking with my referrals and clients to make sure they’re happy.

If you left the referral on a perk somewhere, they would have no meet in the game anymore. So, I took them out for lunch, made sure they were happy, and kept everybody apprised of what was going on. But I told them early on that I couldn’t be working on the deal on the matter myself. But at the same time, as I said before, it was so important. I had a team in place who were trustworthy, and I could rely on that.

I knew when I passed the work to them, they were effectively doing it in my light and doing it as I would do it and keeping the clients and referrers happy.

Yeah. So, you described, mentioned earlier that you described the proposition city law firm style, regional rates, and what have you. So, you’re positioning the firm and trying to create some differentiation. You’ve talked about a team-based approach. When you’re in there selling. I’m trying to ask this as an open question, but you’re positioning the team is by the sounds. But did you use their names, or did you just mention the team?

Always. I would always use their names, yeah. And I always made it very personal, and I would make sure that everybody applied the same methodology when they were converting new clients, for example, or delivering client care or talking to clients. And I was always very, very good at showing the face of my team to prospective clients and referrers and vice versa. So, they come in, meet the team, they know who the team are, because it was about the people. For me, it was about the people. It wasn’t just, you know, clients want to see personalities. They don’t want to see a nondescript team. They want to see people delivering solutions to them.

Yep. And what you’re talking about there, by the sounds of it, is that they always had a relationship with more than one person in the business. So, you spread the relationship risk. So, if Jay leaves, they go. Yeah, it doesn’t matter. I can go talk to Tom, Dick, or Darryl or whoever else is in the practice who I’ve got a relationship with. The client doesn’t risk walking out. As soon as Jay or whoever accounts, heads, the account leaves, which is what happens in a lot of similar businesses.

Yeah. And that was deliberate, Darryl, because I knew that coming back to my old owner, the person who sold to me, the clients only knew him. They didn’t know anybody else. Whereas I want the clients to. And the other people were faceless. I wanted the clients, the referrers, to know my team so that, God forsake, I got hit by a bus, there would still be value in the business because they would have other people to refer to. They knew everybody was.

Yep. So, there’s a bit of forward thinking there. And at the moment, at the previous, it was basically. It sounds like a one owner and nine helpers in the background just to create. But everything went through him. He was like a hub in a bicycle wheel. Everything went through him, and it was all under control. But if anything should have ever happened to him, it all would have come down like a house of cards.

Yes. And I think he knew that. I think that’s why he wanted to sell it.

Yeah. Okay, so we’ve grown it from nine to 50 odd people over a short time frame. What about systems? And how do you make sure that you build, when you build something that fast, that it’s built on a solid foundation?

Very good question. I very soon after taking over the firm, I brought in a client relationship manager. And I knew that I needed a client relationship manager and effectively an office manager who was dealing with processes, systems, procedures, etcetera, because I was off busy bringing in the work and then managing the client relationships and managing the team.

So, I needed people to take the pressure off me by putting in place systems, processes, procedures. So, the client relationship manager would deal with the client side of process, making sure that, you know, clients were converted properly, they were followed up properly, they came into the system, into the firm. She checked in with them to make sure everything was okay. The clients went through a system, and they were happy. And then the office manager made sure that all the systems and processes of the firm were mapped out properly and they were implemented in a firm.

We’ve got regulation, compliance, the SRA, GDPR, computer systems, etcetera, etcetera. So, I made sure that the right people were delivering the right bits for their skill sets. What I didn’t want to do is just pretend I could do everything myself. Really

Awesome.

So, I was very keen to make sure that I had people around me, a lot of sometimes people who knew much more than I did about certain areas, and I didn’t have the arrogance at all, you know, more. You go and do that. Basically, I wanted people around me who were better than I was at the bits that they were doing, so, you know, so that they could take the burden off and I could focus on the bits that I needed to, and the other staff could do what they needed to.

Brilliant. Okay, so we’ve got the business, it’s grown, we’ve built a sustainable model, and I’m going to skip over a whole lot. We’re four or five years in, we’ve got it from nine to 50 odd people. At what point were you thinking about exit at this stage or what brought that on?

I wasn’t at all, actually, Darryl. I wasn’t at all. I was enjoying running the firm. Don’t get me wrong, it was stressful because it’s like running a nursery, isn’t it? 52 staff. It’s changing nappies and giving them milk all day, basically. No, they’re all good. Don’t get me wrong, they’re a good team. But I was made an offer to sell during COVID because a non-lawyer wanted to use the firm as a platform to take up other firms in Kent and take over other firms.

So, at first I said no, I said, I’m fine, thanks very much. And they persisted, came back to me a number of times and said, look, you know, we won’t interfere. We’ll let you get on with it. You’ll have a small earn out. It’s an offer you can’t refuse.

And I thought, you know what? Why not? I don’t see the kids enough. I want to be growing my lupins, which I get to do now, growing my lupins in the middle of the day and going to the temple and, you know, making my work fit around my life rather than the other way around. So, I thought, why not?

So, I sold, and I subject to, again, I’ve got to be careful, because I’m in litigation with the new owner, unfortunately. So, I’ve got to be careful about what I say, but not the easiest process, but I still don’t regret having done it.

Okay, so just at a headline level this time, how was the business valued?

A very interesting question. I knew well, it was almost shoe on the other foot, because I knew that I had in my mind a certain valuation. And I want, again, completely different dynamics, because we’ve looked at the different models so far. It can either be a portion of turnover or it could be zero. It’s never going to be Ebitda, et cetera, et cetera. So, I knew in my mind that I wanted a portion of profit, effectively a portion of the profit, because we were quite profitable by that stage. And I got what I wanted.

In a weird sort of way, they did all the running. I did very little of the running on the valuation. I let them do the running. And the cheeky bit here is, don’t tell anybody else is I knew that they didn’t know much about how law firms are valued, so I wanted them to think, actually, let’s value this as we would any other business and propose a valuation. And even the initial valuation, we have to get it up a little bit.

But even the initial valuation wasn’t far off what I wanted, actually, because they weren’t as entrenched in the mechanics of buying and selling law firms, which I am now. So, I’d rather them the same. And I thought, why not? We’ll let them propose that, and then we’ll come to agreement, which we did.

Okay, so we got the price, and the price is in around the right ballpark. What else did you consider about the deal, Jay? Was there, like you mentioned, a short earn out culture fit what they wanted to do with the business. What was important to you and your considerations?

The main thing for me was the money was obviously important. The fact that I didn’t want to be there forever was important. I wanted the staff to be happy. And so, I tried to, as best as I could, again, subject to what’s happening now. I tried as best as I could to make sure that there was a good fit in terms of where I knew they wanted to take the business and the staff, and also things like investment. I want them to come in and invest in the firm so we could take it to the next level. Their knowledge and skills of running a business and the continuity element in that respect.

I didn’t suddenly want it to be a much bigger firm or a much smaller firm. I wanted to be a firm of the same sort of ilk, regardless of what they did with it. And I, again, interestingly, talking about money, again, I didn’t want it to be an earn outlandish. I didn’t want it to be an earn out. I wanted it to be a payout, which, as you know, is very rare. But I wanted to. This is your money, regardless of whether. Okay, I had a bit of. I had to notionally stay for three years, but I didn’t want to have to hit certain targets to earn my money because I’d done my hard work anyway, effectively. So, it was a payout that they would pay me in tranches on particular dates, regardless of my performance and my billing, because I was working. I would always work hard anyway for the business, effectively.

The mistake I made is to take a small payment upfront and then take the rest of the installments with it structured, such as the biggest payment would be at the end. That’s part of the reason why we’re in litigation, because they got to a certain stage and then stopped paying me effectively, because I knew that I would still be chasing for the lion’s share of the money. So that created problems. So, my big advice point there is make sure the biggest payment is always at the outset, structure it as a payout, not an earn out, and make sure that you’ve effectively shoved a lot of the money upfront so you’re not dealing with installments and a big payment at the end, effectively.

And what about advice? Did you have a team working on the deal with you? Was this a DIY? Accountants, professionals  M&A consultants. Who was helping you with the deal?

It was DIY, actually. I did the agreement side myself. They had a, the buyer had herself and her advisor on the other side, and they had their lawyers in the background working on it. And I thought, you know, I’m just going to do myself. In hindsight, that was probably a mistake, actually, because I should have thought about the structure of the payment better.

I should have thought about the entities in the agreement. For example, the agreement wasn’t clear as to who the ultimate entities would be, luckily, given that I’m suing her. Luckily, I added her in her personal capacity, otherwise I’d be suing a firm now that, you know, isn’t doing very well or whatever, basically. So, luckily, I added her in as a personal individual. But the structure and the terms, the conditions, etcetera, weren’t as clear as they ought to have been.

What do they say about, you know, shoemakers and their own shoes? Effectively. But, you know, I’m a very good litigation lawyer. Don’t get me wrong. Am I the best corporate lawyer in the world?

Probably nothing. So, I probably should have got advice from a corporate lawyer to get it drafted better. My mistake was thinking, oh, I trust them. They’re wonderful people. Nothing’s ever going to go wrong, which is what I advise my clients never to do in the first place.

So, you know, mistake made, and I would never do that again, basically. Well, hopefully.

Let’s hope you’ve got a chance to never do it again. Let’s create that chance. Okay, so a bit of a summary and wrap up.

So, we’ve built the business to significant size. It’s. You’re approached out of the blue with someone who said, hey, I want to create this as a platform. You built the business initially to really service the Kent market because no one was really doing that in the style which you thought was missing. You’ve created that opportunity.

You got noticed by someone who said, oh, someone is now servicing the Kent market in the way it should be. We want to take that on as a platform. We’ll acquire it, constructed a deal that wasn’t based on earn out was a payout, and therefore the valuation wasn’t based around you because it was acknowledged the value you built. So, when was this? When did this all happen? A couple. Yeah. When did this happen the deal?

Yeah. So, January 2022 was the date. So, yeah, 17. January 22 is when I sold.

Okay, so 18 months ish ago. Yeah. Where’s the business now? What’s happening now? You’ve alluded to, hinted at a couple of things, so I think I heard a hint.

It’s not doing so well now. And you’re in your zone of litigation.

Yes, I’m suing them, unfortunately, because I’m not paying money. So that’s all still going on. The firm, I don’t mind telling you now, actually, the firm has actually been closed down by our regulator, unfortunately, because of dishonesty on the part of the new owner, which is open information time.

Very happy to share that. I don’t know what she’s done. There’s all sorts of rumors flying around. So I’ve got to be very careful what I say. So, there’s all sorts of rumors flying around as to what she’s done.

She’s been dishonest, suspected dishonesty, alleged dishonesty in some way. So, the firm effectively no longer exists, unfortunately. So, I’m, you know, I’m very sad about it. I have to be honest. I’m very sad, and I’m very gutted about it.

That was my baby in the firm I built up. So, you know, that is what it is.

And 50 odd families.

Correct? Correct. Yeah. So I was, I actually went through a period of mourning, Darryl, when I heard the news, I have to be honest, very, very sad news.

And that’s not uncommon.

Yeah, it’s. Yeah. Again, as you say, it’s not, you know, I know, I know that happening many, many times. People take over a firm, they run it in their vision, not in vision that it ought to be run in, and it starts doing that, that very, very, very common, you know, and I did think, could I have done anything differently? Probably not, because I didn’t know at the time what they were going to do, basically.

So let’s pull it all together, Jay. You’ve been through the process. You’ve started a business. You got out of it. You acquired a business, got out of it. What have you learned? What would you do differently if you were to do it all over again? If you were to build another business today in the same sector, let’s say, and you were going to sell it, what would you do differently? What do you wish you knew before that you started the exit process and putting a deal together? What do you wish you knew before you started that you now know and would influence how you do things differently moving forward?

It sounds like a very cynical answer, Darryl, but the biggest lesson I’ve learned, and sorry to be such a sour sort, is that never to trust anybody is never to trust anybody. You do not know what people are like. If you think about the first business, they were my old employees, friends, and it didn’t work out. In my second business, I thought they were going to be all singing or dancing, come in and be the world’s best solution to new owners of a law firm, and they weren’t. So, two things.

One, don’t trust people and make sure that you imbue that lack of trust into how you draft your documents in the first place, effectively. So, I think that’s really important. We presume everything’s going to be all right and that two things happen. We don’t plan properly at the outset because we think we’re always going to get on. It’s always going to be lovely jubilee.

So, we need to make sure we’re protected in our agreements. And secondly, the other prism, I suppose, side to the question, and the answer is that we need to start planning early if we know we want to exit eventually. We need to make sure that we’re planning early and making sure that we have all the right provisions in place, both in the firm and then in the ultimate agreement, effectively.

Yeah. So is that. Are you suggesting that, hey, look, let’s not trust anyone because, you know, at the time, spirits are high, we’re all, we’re all friends and we loosely agree of what we’re going to try and do and start the business at the beginning of the process, or we loosely agree how we’re going to, you know, execute the acquisition of this business.

But the way to work around trust is going, let’s work with everyone and let’s get really clear around what we’re trying to achieve, what is the objective. So if we’re starting out in business, let’s get really clear of what success would look like to us. Why are we starting this business? What is it? You know, we’re saying we’re aligned, but what exactly is it?

We’re aligned to get really clear, to make sure we’ve got the same page, so that we know that we’re going to be working at the same effort, the same intensity, in the same direction. So, there’s one way, and then the other way to work through trust is, again, when we’re exiting the business, if we’re completing a deal, get really clear and aligned to what the deal looks like. The devil’s in the detail. Make sure that we know that, how the process is going to work, what’s good, what’s bad, what constitutes a breach or a change. When do we have to invoke this or invoke that?

Just get really clear around the details. And when it’s written down, there’s, you know, that that negates any. Well, I remember it this way. Here’s what I remember it. Yeah. Because we’ve got it agreed in writing, and I guess that’s how the legal profession was created in the first place. And by writing it down, we got a contract and going. Here’s what we agree to. The clearer it is, the more crystal it is.

Yes.

The less dispute or the less wiggle room there is.

Yeah, yeah. I completely agree. Great summary. I mean, I call it the three P’s. Now, personality, process and paper. So, one look at the personalities. What are they like? Can you trust them? Make sure that you put protection in the agreement process.

What process must you follow in order to reach your end goal? And then you’ve got it down on paper to ensure that it reflects what you want.

There we go. So, Jay, personality, process and paper, they’re the three big learnings that anyone should take out of this conversation around. Yeah. How do I, how do I get clear if I’m going to start a business? And the big tip, when I’m exiting my business, let’s get really clear around what it is. What are the details of the deal look like? And I think we can even add in there, you’re getting a good commercial lawyer who’s done it a stack of times to make sure, hey, here’s some traps for new players. Let’s make sure you avoid those.

Exactly, exactly. Yeah. Always have an advisor. Don’t be scared. Or as I was arrogant, thinking that you can do it all yourself. Always have an advisor by your side. Really important.

Brilliant. So, there’s our learnings. Jay, what are you doing now? You’ve exited the business? It was two years ago. I’m sure the litigation isn’t taken up all of your time. What is it you’re working on now?

Well, I love doing what I’m doing now, and it’s given me freedom and quality of life and time with the kids.

And I love, I love my work. I’m helping other law firms now effectively. Darryl. So, I am a mentor, non-executive director, and a trainer to law firms, all different shapes and sizes. And I run workshops on things like time, recording costs, pricing fees, commerciality billing, client care, conversion, etcetera.

Learning all my learnings that I’ve picked up in big firms, small firms, making mistakes, doing things the right way, wrong way. I now imbue into my learning with law firms, and I train them and all this sort of stuff. And I love it. Absolutely love it.

So if you want to learn from Jay’s mistakes and not repeat them yourself and save a whole lot of time in running and building a law practice and scaling it up pretty quickly, by the sounds of it, you’re helping others do that now.

So, we’ll share, or if anyone wants to get in touch with you and get some help with that. We’ll put all your contact details in the show notes. But, Jay, look, I really appreciate you being so open and honest and sharing all of your exit insights and what you’ve learned from the school of hard knocks.

Thank you, Darryl. Not at all. It’s a real pleasure. Lovely to see you and thank you for your time. Really appreciate it.

Cheers.

Thanks, Darryl.

About Jay Sahota