Legal Firms take many forms and the financing of each is different according to the strategy of the firm. In the main, financiers separate them into three categories:
- Commercial Firms
- Mixed Services (Commercial / Liquidation/Personal Injury)
- Liquidation / Personal Injury
Each of these businesses have different streams of revenue and as such, they represent different levels of risk to a financier.
For example, a commercial firm may be involved in contract review, shareholders agreements, commercial litigation and other services of a commercial nature. The income from this firm is based on its billing to business and commercial clients and is expected to be paid. On the other hand a personal injury lawyer may rely on insurance claims and winning court cases for it’s income. The risk for this firm is the length of time it can take for cases to be finalised and the possibility that cases may be lost and income is not received.
As a result the debt available for commercial firms is higher than for both mixed services firms and those that rely on liquidation and personal injury claims for business.
Some of the same rules as other professional services firms apply, being loans of up to 50% of revenue available for one partner firms, whilst larger firms are tested on their business mix in addition to a test of interest coverage of 2.5 times the business EBITAPR.
For each of the firms, the landscape is as follows:
- Commercial Firms – a maximum debt of 2.25 times EBITAPR
- Mixed Firms – a maximum debt of 1.5 times EBITAPR
- Liquidation and Personal Injury – a maximum debt of 1.00 times EBITAPR
Of course, there will be variables based on the experience of the principal partner and the reason for the loan. The most favourable loan purpose is expansion. Using an existing business to help fund the purchase of a second firm increases its revenue and ideally its mix of clients. It also provides depth to the business structure and presents as a stable risk to a bank.