Year after year, professional advisory firms and law firms in Spain are sold or merged into larger firms that are concentrating market share and which, moreover, have teams entirely dedicated to carrying out mergers and acquisitions of professional practices. As a seller of a professional practice, it is advisable to understand the key elements required to properly structure the sale of the professional business you have spent years building, and to successfully negotiate with professionals specialised in the acquisition of law firms and advisory practices.
The sale of a professional practice, whether a tax, accounting, labour advisory firm or a law firm, is a complex transaction that goes far beyond setting a price and signing a contract. As mentioned above, for the seller, proper planning is essential in order to secure a good price in the negotiation and to avoid possible future contingencies, whether employment, tax or corporate, which may arise even after completion of the transaction.
Below, we review a number of key aspects that every seller should analyse before selling their professional practice in Spain.
Written by Abigail Sked
Legal Advisor
1. THE TRANSFER OF EMPLOYEES WHEN SELLING AN ADVISORY PRACTICE
In most cases (where an organised, ongoing business activity is transferred), the sale of a professional office implies the application of the business succession regime set out in Article 44 of the Spanish Workers’ Statute (Estatuto de los Trabajadores). This means that the buyer is automatically subrogated into the existing employment contracts and the existing employment and Social Security obligations.
In order to avoid delays in the transaction, it is important that, as seller, you have your employment matters in order, with no outstanding salary or Social Security debts:
- Social Security contributions must be up to date,
- the contractual conditions of the workforce must be properly documented in order to inform the buyer, including matters such as employee background, leaves of absence, sick leave and other contract suspensions, reductions in working hours, etc.
Any issue that has not been regularised may result in the buyer adjusting the price or applying retentions on the price to cover future contingencies.
It is also important to manage the organisational change and the communication of such an important change of ownership to employees themselves. This is particularly relevant in long-established consulting firms, or even family-run advisory practices or law firms that are closely connected to their staff.
Employment regulations also impose an obligation on the seller to inform the legal representatives of the employees, where they exist, about the main aspects of the transfer: the expected date, the reasons for the transaction, its legal, economic and social consequences, as well as any measures envisaged in respect of the workforce. Proper compliance also helps to reduce employment disputes during the sale process.
In summary, a well-organised workforce in terms of salaries and contracts is an asset from the buyer’s perspective.
2. THE CLIENT PORTFOLIO AS A CRITICAL ASSET IN THE SALE OF A PROFESSIONAL PRACTICE
The main value of a professional practice lies in its client portfolio, but it is also one of the most sensitive elements in the transaction.
The seller should analyse:
- the level of client concentration,
- the recurrence of fees,
- the existence of written contracts,
- client payment defaults,
- and the degree of personal dependence on the selling partner.
The more personal the practice is, the more likely it is that the buyer will make part of the price conditional upon the retention of clients after the sale, or upon the seller remaining involved for a transition period of at least two years to ensure an orderly handover. This often involves negotiating retentions on the agreed purchase price pending confirmation that expected billing targets are met, as well as the seller’s continued involvement within the structure.
The client portfolio, and how it is maintained, is, in summary, a key element in assessing the risk of the transaction.
3. STRUCTURE OF THE TRANSACTION AND WHAT IS BEING TRANSFERRED IN THE SALE OF A PRACTICE
When selling a law firm or advisory practice, it is not the same to sell shares as it is to transfer the assets and liabilities of the business. The structure chosen has direct consequences for:
- the liability assumed by the buyer,
- the continuity of the practice,
- and the tax treatment of the transaction.
From the seller’s perspective, it is essential to precisely define which elements are being transferred (clients, employees, contracts, brand, software, etc.) and to document this correctly. Certain elements of a consulating business may have significant intangible value and may be taken into account and valued in the transaction (such as the brand, the domain name and SEO positioning, certain software configurations, etc.). It is important that these assets are not left undefined in the contract and that what is being sold and what is not being sold is clearly specified in order to avoid unexpected future claims.
It is also important to consider whether, as the seller, you own any real estate associated with the business that you may or may not wish to include in the transaction. This may even increase the overall price of the deal compared to negotiating it separately, as the buyer may be interested in acquiring a property located in a premium area where the advisory firm or practice operates.
In summary, the valuation of the assets will largely determine the price of the transaction.
4. VAT AND THE CONCEPT OF AN AUTONOMOUS ECONOMIC UNIT IN THE SALE OF ADVISORY PRACTICES
From a tax perspective, it is important to differentiate whether an autonomous economic unit is being transferred, given that Article 7 of the Spanish VAT Act excludes from VAT the transfer of a set of elements (tangible and intangible) which together constitute a unit capable of carrying on a business or professional activity by its own means.
Administrative doctrine is clear: transferring isolated assets or merely a client portfolio is not sufficient. In order to fall outside the scope of VAT, there must be an organised structure of material and human resources allowing the acquirer to continue the activity without interruption.
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In other words, if the advisory practice is transferred as an autonomous economic unit, the transaction is not subject to VAT.
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If, on the contrary, only isolated assets or rights are transferred, the transaction will be subject to VAT, similarly to the supply of goods or services, with the corresponding obligation to charge VAT.
An incorrect classification by the seller may lead to tax reassessments, interest and penalties, so this analysis should be carried out before signing.
It should also be noted that transactions subject to VAT are not subject to Transfer Tax (ITP-AJD) under the transfer tax rules, except in the case of real estate exempt from VAT or included within the transfer of a total business estate.
In practical terms, taxes are unavoidable but the tax scenario will differ depending on how the transaction is ultimately structured.
5. TAXATION OF THE GAIN OBTAINED BY THE SELLER WHEN SELLING THEIR PROFESSIONAL PRACTICE
One issue to take into account in the sale of an advisory firm or professional practice is that the income obtained from the sale must be included:
- in Corporate Income Tax, if the seller is a company, or
- in Personal Income Tax, if the seller is an individual.
In this regard, in the case of a company, it is different to sell the client portfolio than to sell the shares of the company. The determination of the gain, the possible application of adjustment coefficients or the classification as savings income or general income may have a significant economic impact. Prior tax planning can make a substantial difference to the seller’s final result.
6. THE SELLER’S CONTINUED INVOLVEMENT AFTER THE SALE OF THE PRACTICE
In many transactions, the buyer requires the selling partner to remain involved for a transitional period in order to facilitate the handover of clients and business know-how.
From the seller’s perspective, it is essential to define the duration of this continued involvement (normally around two years); its legal structure (whether employment, consultancy or hybrid); its tax treatment; and also any protective clauses the parties may wish to agree.
In this regard, it is important to be clear about the basis on which the seller will remain involved: will you continue as a director? Will the contract be protected? Will you have a senior management contract? A general manager contract? A special senior management relationship? Will you contribute under the general Social Security regime or remain under the alternative mutual fund for lawyers? Or as a self-employed worker depending on the position and shareholding you retain?
Continuity does not always work out well. An inadequate structure may create future employment, Social Security and tax problems which are best prevented through proper negotiation in advance.
Ultimately, it is very important to negotiate the conditions governing the seller’s continued involvement or exit as the driving force behind the sale of the advisory firm or law practice.
7. NON-COMPETE CLAUSES FOLLOWING THE SALE OF A LAW FIRM OR CONSULTING PRACTICE
In our sector it is important to understand that what the client is buying is trust. Clients return because they trust that a particular professional will handle their matters well.
Non-compete and non-solicitation agreements are common in these types of transactions and the seller must pay attention to their duration, their territorial scope and their material scope (in other words, which clients, matters or activities are covered by the restriction).
In the negotiation it will be important to agree what compensation is appropriate to offset this restriction on the professional activity in which the seller specialises. For example, it is not the same to agree that one cannot work in the sector at all as it is to agree that one cannot work for any of the clients who were previously clients of the business.
8. DOCUMENTATION AND CONTRACTUAL GUARANTEES IN THE SALE OF A LAW FIRM OR ADVISORY PRACTICE
Proper documentation of the transaction is important in order to facilitate the sale process, because the buyer will have greater confidence if they can quickly understand the position of the business through accounting, employment and corporate documentation presented transparently.
The documentation should accurately reflect, among other matters: the employment and tax situation of the practice; the guarantees provided by the seller; service continuity and transition arrangements; price adjustment mechanisms (very common to prevent the buyer from acquiring something that does not subsequently produce the promised profitability); data protection and professional confidentiality; and the allocation of liability for contingencies arising prior to the sale (as the buyer will carry out their own employment, tax, accounting and corporate due diligence, and will introduce warranty clauses into the sale agreement, potentially adjusting deferred payments to reflect any claims relating to pre-sale issues).
From our perspective as intermediaries, using clear, direct and understandable language, it is important from the outset to understand whether there are any “issues” within the company, whether from a tax, accounting, employment or potential professional liability perspective, because lack of transparency may lead to difficult negotiations or future disputes if the contract is poorly drafted or situations are concealed which the buyer would reject if discovered.
In summary, complete and well-organised documentation will improve both the speed of the process and confidence in the transaction.
9. THE PRICE IN THE SALE OF A LAW FIRM OR CONSULTING PRACTICE
The price is usually the decisive factor in the sale of professional practices. Unless there is urgency due to the seller’s personal circumstances, or professional pride in preserving the firm’s name, price is normally the key element determining the seller’s decision.
We are available to help you assess decisive factors such as sweet equity; investments and costs that the buyer will no longer incur which may increase EBITDA; professional reputation in the sector; internal working procedures that may add value; staff experience as an asset; the structure of the client portfolio; market concentration; and acquisition appetite within the sector.
To assist you, contact us to assess the value of your client portfolio or professional business. We take all these factors and more into account in order to help you achieve the best possible negotiation and sale.
CONCLUSIONS ON THE SALE OF AN ADVISORY PRACTICE OR PROFESSIONAL FIRM
The sale of a professional practice requires detailed analysis of multiple legal, tax and economic factors, as well as effective negotiation with professionals who are usually experienced both in the sector and in negotiating and drafting contracts. Anticipating risks, structuring the transaction correctly and documenting it properly is key to protecting the seller’s interests and ensuring the success of the transaction.
If you are considering selling your professional practice and require assistance with identifying potential buyers or with the legal and tax aspects of the transaction, please do not hesitate to contact us.
Frequently Asked Questions
Author of the article:
Josep Conesa is a lawyer and manager of Conesa Legal, a third generation law firm that has actively participated in purchases, sales, dissolutions and acquisitions of several professional firms and consultancies throughout 30 years of professional practice. He also combines his professional experience with the activity of manager of the firm (from the point of view of marketing and sales; financial and HR), together with the management of operations and coordination of teams in the areas of payroll, tax, accounting and commercial, and teams of labor, civil and criminal lawyers.
