Closing a law firm is a complex and lengthy process requiring careful planning, adherence to regulatory requirements, and mitigation of legal risks. This article is designed to assist lawyers in Saskatchewan who are considering winding up their practices. However, similar rules apply in Alberta, Manitoba, British Columbia, and Ontario.
1. Initial Considerations
Before deciding to close your law firm, consider the following:
- Retirement Goals: Determine whether you want to fully wind down your practice and close your office or transition clients to another law firm or lawyer.
- Internal Succession Planning: Identify whether another lawyer in your firm will take over certain client matters.
- Client Transition: Especially for lawyers that have been practicing law for many decades and have worked together with certain clients for long periods of time, consider your communication strategy and what will be most beneficial for your clients.
- Regulatory Compliance: Ensure you can comply with the Law Society of Saskatchewan's rules for closing your firm or practice, which are explained in more detail below.
- Financial Planning: Assess and consider how you will address your outstanding debts, taxes, and other financial obligations of your firm.
2. Structuring the Transaction
A law firm can be sold like any other business – through either a share sale or an asset sale, each with distinct legal and tax implications.
2.1 Share Sale
- In a share sale, the law firm buyer purchases the shares of your law firm entity (typically a professional corporation), assuming control of its assets, liabilities, and ongoing obligations.
- This structure can be advantageous for sellers like you as it may provide tax benefits, including capital gains treatment.
- The law firm buyer, however, assumes responsibility for most past and future liabilities of the firm, making extensive due diligence essential, time-consuming, and ultimately very expensive.
2.2 Asset Sale
- In an asset sale, the law firm buyer selects specific assets of the firm to purchase, such as only client files or specific office equipment, leasehold interests for offices or actual offices themselves, and other goodwill.
- The seller retains liability for past obligations, including tax and professional liabilities.
- This structure provides buyers with more flexibility while allowing sellers to wind down remaining liabilities separately. The time required and costs for the law firm buyer are significantly lower and so this is a more common arrangement to purchase and sell a law firm.
3. Valuation
Determining the value of a law firm is a critical step in the winding-up or sale process. Several factors influence valuation, including:
3.1 Revenue and Profitability:
- Historical financial performance, including revenue trends and net income;
- Stability and predictability of cash flow;
- Billing and realization rates.
3.2 Client Base and Goodwill:
- Strength and loyalty of client relationships;
- Recurring clients and long-term retainers;
- Reputation and market position of the firm.
3.3 Assets and Liabilities:
- Physical assets, such as office equipment, leasehold improvements, ownership of office building and land, and technology;
- Intellectual property, including proprietary legal resources or templates, website, and electronic content;
- Outstanding debts, liabilities, or pending litigation against the firm.
3.4 Practice Area and Market Demand:
- The demand for the firm's legal services in the market;
- Specialization in high-value practice areas such as corporate law or litigation;
- The geographic location and competitive landscape.
3.5 Transition and Retention Risks:
- Likelihood that clients will stay with the firm after a sale;
- Retention of key personnel and associates;
- The firm's reliance on the founder or key partners for business development.
3.6 Valuation Methods
Common methods for valuing a law firm include:
- Multiple of Earnings: Applying a multiplier to the firm's average net income;
- Discounted Cash Flow (DCF): Estimating future earnings and discounting them to present value;
- Market Comparisons: Evaluating recent sales of similar law firms (if any, and if such information is available);
- Asset-Based Valuation: Summing up tangible and intangible asset values.
Due to the uncertainty of many of the above factors noted in 3.1 to 3.5 above and the significant amount of time, money, and resources that the purchaser must spend, law firms are often only valued at a small or nominal amount. Professional valuation experts or accountants understand that the practice of law is very personal. There is no easy way to ensure that clients will transfer to another lawyer or law firm and therefore the value of the law firm by necessity must be low or nominal.
4. Notifying the Law Society of Saskatchewan ("LSS")
The LSS has specific rules governing law firm closures. Key steps include:
- Written Notification: Notify LSS of your intent to close at least 90 days in advance.
- Trust Account Reconciliation: Conduct a final audit of trust accounts and submit reports to LSS. This can be onerous and require the assistance of an accountant firm with law firm experience.
- File Storage and Destruction Plan: Ensure proper handling of client files in accordance with LSS policies. This can also be a very onerous undertaking which can take months or even years and cost significant amounts of money.
- Professional Liability Insurance: Ensure continued coverage for past legal work to mitigate future risks and that there are no gaps in coverage if you intend on practicing with the purchasing law firm.
5. Client File Management
Proper handling of client files is essential:
- Active Files: Transfer ongoing matters to the purchaser and their assigned lawyer(s) and provide sufficient notice for clients if they wish to transfer their file elsewhere.
- Closed Files: Retain according to LSS retention guidelines.
- Confidentiality: Ensure proper storage or destruction of sensitive information in accordance with LSS rules.
- Client Notification: Provide required notice to clients regarding file transfer or retrieval options.
6. Financial, Tax & Accounting Requirements
Winding up a law firm requires careful attention to financial, tax, and accounting responsibilities:
6.1 Trust Account Obligations
- Final Trust Reconciliation: Perform a final reconciliation of all trust accounts to ensure no outstanding client funds remain. This can be time consuming and require significant amounts of communication.
- Return of Client Trust Funds: Any remaining trust balances must be returned to clients or, if unclaimed, handled according to LSS rules.
- Closure of Trust Accounts: Submit final trust account reports to LSS and formally close accounts.
6.2 Financial & Tax Considerations
- Outstanding Balances: Settle all outstanding debts, invoices, and liabilities with creditors, vendors, landlords, and service providers.
- Canada Revenue Agency (CRA) Compliance: Ensure all required
filings are completed, including:
- Final corporate tax return if the firm is incorporated
- GST/HST final return and de-registration if applicable
- Payroll source deductions and final T4 slips for employees
- T5018 reporting for subcontractors, if applicable
- PST, if applicable
- Tax Clearance Certificate: The purchaser may request a tax clearance certificate from the CRA to confirm that no tax liabilities remain.
- Personal Tax Considerations: If you are a sole proprietor or part of a partnership, you will need to ensure any outstanding income tax obligations are addressed.
An accountant or accounting firm with direct experience advising law firms in sale or winding down processes can assist with the above. Procido LLP uses our own internal and external accountants to assist and work together with the accountants of the departing lawyer or law firm.
6.3 Accounting & Financial Record Retention
- Retention Period: The purchaser in a share transaction will need to maintain financial and tax records for the time periods required by CRA and LSS regulations.
- Final Financial Statements: As the selling lawyer or law firm, you will need to prepare your final financial statements to document the firm's financial position at closing.
- Professional Accountant Consultation: As noted above, engage a professional accountant to ensure compliance with all tax and accounting obligations and find a purchaser that does the same.
7. Staff and Employment Considerations
- Notice to Employees: You must provide notice in compliance with employment laws for those employees which the purchaser is not employing.
- Severance Pay: If applicable, you may need to provide severance payments to staff which the purchaser is not employing.
- Pension and Benefits: You will need to address any outstanding obligations regarding employee benefits for those employees not moving to the new firm.
- Employment Records: You will need to maintain or properly dispose of employee records per applicable laws.
Working together collaboratively with a purchasing law firm that has been through this process themselves, such as Procido LLP, can be invaluable in minimizing your stress and anxiety during this fundamental life transition.
8. Office Closure and Asset Management
- Lease Termination: Review lease agreements and negotiate termination terms if necessary. If you own your building and land you will need to speak with the purchasing law firm.
- Sale or Disposal of Assets: Properly dispose of or transfer office equipment and resources, depending on what has been agreed with the purchaser.
- Technology & Cybersecurity: Secure digital records, deactivate online accounts and services, and properly dispose of confidential information (in compliance with LSS rules), depending on what has been agreed with the purchaser.
- Debt and Liabilities: Settle all outstanding obligations with banks, vendors, and service providers.
9. Risk Mitigation & Legal Considerations
- Insurance: Maintain tail coverage for any future claims.
- Regulatory Audits: Be prepared for an LSS review after closure. This is another reason to involve the LSS early in the process so you can identify and discuss any potential issues with them.
- Client Complaints: Address any outstanding grievances before transfer or closing.
- Record Retention: Ensure you or the purchaser maintain necessary records for the required duration per LSS guidelines.
10. Final Administrative Steps
- Updating or Dissolving the Business Entity: If incorporated, you and the purchaser will, if applicable, need to follow proper corporate procedures to update the corporation.
- Informing Stakeholders: You will need to notify relevant organizations, including the CRA, banks, and professional associations.
- Archiving Important Documents: Store necessary paper records or copies thereof safely for future reference if you have important documents you need to retain.
Winding up a law firm in Saskatchewan is a daunting process that requires compliance with legal, financial, and ethical obligations. Working together with a firm that has experienced a purchase and sale, like Procido LLP, and proper planning and adherence to the Law Society of Saskatchewan's requirements, will ensure a smooth and compliant transition.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
