How to Conduct Proper Due Diligence When Buying a Law Firm
Law is a competitive industry and seems to becoming more competitive day by day. According to the American Bar Association (ABA), there are approximately 450,000 law firms nationwide. If you are looking at ways to stay ahead of your competition then buying a law firm—either as a stand-alone business or to acquire/merge with your existing law practice—can be a great way to put yourself in the best position to succeed. At the same time, purchasing a law firm is not something most lawyers or law firms have gone through and it can be a complex transaction with lots of questions to be answered along the way.
It is imperative that you know what questions to ask and that you conduct comprehensive due diligence on a law firm that you are considering purchasing. You need to be confident that buying the law firm is the right option and that you know a fair price. This article will give you an overview of the best practices for conducting proper due diligence when buying a law firm.
All Buyers Should Be Prepared to Perform Comprehensive Due Diligence
Due diligence is a crucial part of purchasing any business. It is the process of examining the finances, operations, employees and other aspects of a target to ensure it is the right opportunity. It is key to making sure you as a buyer want to go forward and is especially important with complex professional practices, including law firms. Defined broadly by Investopedia, due diligence is “an investigation, audit, or review performed to confirm facts or details of a matter under consideration.” When you are making a significant investment—such as buying a law firm—careful due diligence is of the utmost importance. Here are three core benefits:
- Due diligence helps to ensure that a buyer better understands the law firm—including making a final decision on whether or not it makes sense to move forward with the purchase.
- Due diligence allows for the early identification of potential conflicts, hidden liabilities, and other areas of concern.
- Due diligence provides a buyer with the full, comprehensive facts that they need to be in a better bargaining position when negotiating a final purchase agreement.
A Checklist for Conducting Due Diligence When Purchasing a Law Firm
Knowing that due diligence is critically important when buying a legal practice, you may have questions about how to go about actually doing it. The answer depends, in part, on case-specific factors. That being said, the central goal of due diligence for buying a law firm is to ensure that you are able to perform a comprehensive review and analysis of the target business. You do not want to leave any stone unturned. Here is a checklist that you can use for conducting due diligence when buying a law firm:
- Perform Legal Due Diligence. A law firm is a complex, highly regulated business. Legal, due diligence is a must. Among other things, this includes assessing potential conflicts of interest, ensuring that there is adequate insurance coverage, ethical requirements and preparing for the handling of sensitive client information.
- Review and Verify All Financial Information. The law firm’s finances are going to go a long way toward determining whether it is a suitable acquisition target and the appropriate sale price. You must carefully review and scrutinize all financial documents and records, including income, cash flow, balance sheets, tax returns, debts, and other liabilities.
- Human Resources and Physical Assets. With the purchase of a law firm often comes its employees and physical assets. Due diligence should be conducted on both human capital and physical assets to determine the value of what is being acquired as part of the transaction.
- Review and Analyze Law Firm Structure and Operations. The specific structure of a law firm matters. Even if you are open (or interested) in making some changes, it is still crucial that you take the time to understand and assess the current structure and operations of the business. This will provide useful information on the viability and value of the firm.
- Review Any Outstanding Contracts/Agreements. A law firm that is being sold will often have outstanding contracts/agreements. Indeed, these agreements can sometimes be highly beneficial―they could be assets. At the same time, it is essential that you understand all contracts and whether or not they will still be enforceable if the firm is sold.
- Assess Client Records and Firm Goodwill. A lot of a law firm’s value will be in its accumulated goodwill (an intangible asset) and its list of clients. It is imperative that you carefully analyze client information as well as the goodwill of the law firm.
- Develop The Transition Plan. What’s the plan for attorneys to transition, the announcement to clients and team and the plan after closing to ensure a smooth transition and transfer of the assets.
The Law Practice Exchange is the Leader in the Buying and Selling of Law Firms
At The Law Practice Exchange, LLC, we are proud to be the experts in law firm brokerage services. You can become a Preferred Buyer with our team. If you have any questions about conducting due diligence when buying a law firm, we can help. Contact us today to set up a strictly confidential consultation. We are a nationwide leader in the brokerage of the buying and selling of law firms.