What is actually being sold when you sell a law firm

When a law firm is sold, what changes hands is not just the practice's physical assets (furniture, computers, case-management licences) but its goodwill: the value of the client relationships, the reputation, the brand and the income stream those things generate. In many small and mid-market law firms, goodwill is by far the largest single asset on the balance sheet, and understanding how it is valued is the starting point for any exit plan.

This guide covers the main valuation approaches used in the UK legal market, how the resulting gain is taxed and how to plan in advance to maximise take-home.

How goodwill is valued

Recurring fee multiple

The most common method in small and mid-market UK law firms. The purchaser applies a multiple to the firm's recurring (annualised, sustainable) revenue. The multiple depends on the practice area, the quality of the client book, fee dependence on individuals, geographic concentration and, critically, the ability to retain clients and staff after the sale.

A conveyancing-heavy firm with volume-based, transaction-dependent revenue might achieve 0.5 to 0.8x recurring fees. A private-client firm with long-standing advisory relationships, strong Will and probate work and cross-generational client retention might achieve 1.0 to 1.5x. Commercial and litigation practices vary widely depending on the concentration of revenues in key partners.

EBITDA multiple

Larger firms, particularly those attracting private equity acquirers, are more likely to be valued on a multiple of EBITDA (earnings before interest, tax, depreciation and amortisation). Multiples in the current market range from 3x to 7x EBITDA depending on scale, practice mix and the acquirer's strategic rationale. This method is less common in sub-£1m revenue firms because the EBITDA is often not clearly separable from owner remuneration.

Net asset value

For firms with very low profitability, persistent client attrition or a practice that is substantially dependent on the outgoing principal, a buyer may pay close to or at net asset value (the firm's tangible assets minus liabilities). This is the floor, not the target.

What buyers actually pay for

Every sophisticated buyer discounts for the same risks: client dependency on the selling partner (if 40% of the fee book leaves when you do, that is priced in), key-man concentration in staff, geographic single-office exposure, practice area cyclicality and regulatory compliance record. The best exits happen when the firm has invested in client-relationship breadth, a strong second-tier team and clean, documented systems well before the sale.

How the sale proceeds are taxed

What is subject to CGT

The proceeds attributable to the sale of goodwill are a chargeable gain. The gain is calculated as the disposal proceeds minus your base cost (the amount you paid for the goodwill, or zero for goodwill you built from scratch). If you built the firm yourself, the entire goodwill proceeds will typically be a gain with a zero base cost.

Annual exempt amount

Each individual has an annual CGT exempt amount of £3,000 (from April 2023 onwards). This is deducted from the gain before tax. On a large firm sale it is rarely material, but it should always be included in the calculation.

Business Asset Disposal Relief (BADR)

BADR is the most important CGT relief available on a law firm sale. It reduces the CGT rate to 18% (from April 2026; the rate was 10% before the Finance Act 2026 changes) on qualifying gains up to the lifetime limit of £1,000,000. To qualify:

  • The firm must have been your personal trading company or business for at least two years before disposal.
  • You must have owned at least 5% of the equity and voting rights (for companies).
  • The disposal must be of a genuine trading business, not an investment holding.

The lifetime limit is cumulative. If you have previously claimed BADR on another disposal (for example, a previous firm or shares in a company), the remaining lifetime allowance may be less than £1,000,000.

BADR on gains above £1,000,000 does not apply. The higher-rate CGT rate (24% from April 2026) applies to gains above the BADR threshold and above the basic-rate band remaining after the individual's other income.

2026/27 CGT rate summary

  • On qualifying BADR gains (up to £1m lifetime): 18%
  • On gains within the remaining basic-rate band: 18%
  • On gains in the higher-rate band: 24%

Earnouts and deferred consideration

Many law firm sales include an earnout: deferred consideration paid over two to four years contingent on the firm hitting revenue or client-retention targets. The CGT position on earnouts is complex. You may elect to defer the gain on the contingent element until it is received, or you can be assessed on a present-value estimate at the point of sale. The right approach depends on the likelihood of receiving the earnout and your other income profile in the relevant tax years. This is an area where taking specialist advice early in the sale process is important, not after the heads of terms are signed.

Planning the exit: maximising take-home

The two-year clock for BADR

BADR requires a two-year ownership and trading period. If you have recently restructured (for example, moved from partnership to LLP or incorporated), make sure the clock is running from the correct date for your structure. Do not assume that ownership of the underlying goodwill in a previous vehicle counts uninterrupted through a restructure without taking advice.

Pension contributions

Pension contributions made in the year of a significant disposal reduce your adjusted net income, which can affect the personal allowance taper (relevant above £100,000 of income) and your total income for income-tax purposes. If the sale proceeds are treated partly as income (for example, a consultancy payment under a post-sale agreement), pension planning around the year of sale can be material.

Structure before sale

Whether the business is sold as a going concern (assets) or as shares (in a corporate structure) has significant CGT and SDLT implications for both buyer and seller. Asset sales are more common in law firm exits, particularly from partnerships and LLPs, but a corporate structure can enable the seller to benefit from the shares CGT regime rather than the income-from-trade rules. This is a decision to make, with advice, before heads of terms are agreed.

Using the sale model

The accompanying workbook contains two sheets:

  • Valuation: enter your fee type and the firm's recurring revenue. The model applies the relevant market multiple range (low and high) and a region and demand adjustment to produce a low, central and high estimated value. This is a market estimate for planning purposes, not a professional valuation.
  • CGT net proceeds: enter the anticipated sale price, your base cost, your other income, whether BADR applies and how much lifetime relief remains. The model calculates taxable gain, the BADR and non-BADR split, the CGT liability and your net proceeds after tax.

The Rates sheet is locked and matches the online calculator, using the correct 2026/27 CGT rates and the current £3,000 annual exempt amount.

Getting advice before you start

A firm sale is a once-in-a-career transaction for most solicitors. The planning window matters: the difference between preparing a year before a sale and going to market unprepared can run to tens of thousands of pounds in tax and in achievable price. If you are thinking about exit, whether in two years or five, a conversation with a specialist who works only with law firms is a useful first step. The first call is free.