Due diligence and confidentiality when selling your law firm

I was interviewed recently by Law Firm Ambition about my views on the most common questions I see around selling a law firm. The focus of this article is the process of due diligence and confidentiality. To see my answers to previous questions, follow these links:

Questions 1 - 5 - The basics 

Questions 5 - 10 - Determining value  

Questions 11-15 - Minimising tax and getting your law firm ready for sale   

Questions 16 - 20 - The sales process 

21. What due diligence should I undertake as vendor?

Some believe the answer to this question is none! But remember that you are entrusting your clients and staff to them. Moreover, if the consideration is deferred then you will be a creditor of their business.

As a minimum, you want to check that the other side is financially sound and likely to be able to pay staff (and any deferred consideration) in the future.

22. What due diligence might an acquirer undertake?

Each one is different. This can range from a few hours ‘kicking the tyres’ to multiple days inspecting files, financials and quality of staff.

In either case, the basic premise is that they want access to certain matter files and to your financial data (such as accounts, ledgers and budgets/forecasts).

23. How can we minimise disruption to employees and clients during the sale process?

If done properly, there should be minimal disruption to begin with. That said, it is important to keep these stakeholders updated and communication flowing. Employees will likely fear the change and upheaval that comes with being part of a new organisation, so bringing them into the conversation as early as possible and with as much involvement as you can is key. I have seen “team on team” meetings early on to break the ice and pre-sale negotiations get down to very finite detail (literally in one case deciding whose coffee brand to use in the staff kitchen), all in an attempt to minimise change where possible.

For clients, they should primarily be reassured by knowing that their matter will continue where it left off, almost certainly with the same staff dealing with it. The usual approach is to write to them (or contact directly if a very important client) and explain what has happened. They are of course free to choose any legal representative they wish and it is not unheard of for some clients to pick this moment to change legal supplier; however, my experience is that this is caused by historic service issues/breakdown in relationship and the change in ownership is a useful excuse for a client who was already on their way out of the door.

24. How do I keep the sale process discrete?

Your accountant and solicitor should be capable of keeping the process confidential. Ultimately it will become public knowledge, but you should be able to control information to some extent using non-disclosure agreements etc.

25. Are there any regulatory concerns when we sell the firm?

From the SRA perspective, the most important issue is who is taking ownership of the client matters and ledgers and therefore who is deemed as the successor practice. This may not be straightforward, especially if some clients are remaining with the original firm.

Other issues that will need to be addressed in detail include the requirements of Companies House, Legal Aid Agency, HM Revenue & Customs and others.

26. What are the implications if I need a quick sale?

As any retailer will tell you, if ‘everything must go’ then the only way to do that is to slash prices. However, that need not be unreasonable. Even in quick and/or distressed circumstances, it is still possible to achieve some level of value, even if it is less than a more normal sale.

27. If I cannot find a buyer what are my alternatives?

Perhaps this would be the time to rethink internal succession options, perhaps recruiting an individual to fill that gap?

Ultimately you can always enter run-off cover with your PII broker, but that (together with any redundancies, lease obligations and so on) can be a costly exercise.

If you are planning to sell your law firm and have any further questions for Tom, please get in touch

Contact Tom

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