In the second of our two articles focusing on M&A activity in the legal sector, our Solicitors’ PII experts discuss the importance of a comprehensive due diligence process and the key risk considerations firms need to be aware of before signing on the dotted line.
In the last few years, we have witnessed a consistent increase in merger and acquisition activity amongst law firms. Driven by a variety of reasons, one such lever has been the increased costs of professional indemnity insurance (PII), especially for small to medium sized firms where margins were perhaps already thin.
Whether your firm is contemplating a full-scale merger, or taking over all or part of another firm, a lack of proper planning and full due diligence, particularly in relation to risk, can lead to significant problems that can far outweigh any benefits. Below are some of our top tips and key areas to be aware of.
Engage with your broker early
Be open and transparent about your plans and the reason behind the potential deal. Request a copy of the target firm’s most recently completed proposal form, full claims history and financials and send this to your broker for an initial assessment. This basic information will enable us to formulate a view of how the deal may alter your risk profile, prepare you for further questions from insurers and seek alternative solutions if required.
Areas of practice
It’s vital to understand the areas of work undertaken by the firm you’re intending to merge with or acquire, and whether this is the right fit for your practice. Consideration will need to be given to what the firm work split will look like going forwards, and the accompanying impact on insurance cover.
Even if you know the firm and partners well, due diligence is a critical step and should be comprehensive. Not always, but sometimes, there is a hidden agenda behind a proposed deal and we have seen many firms caught out in an eagerness to get the deal done on or before a PII renewal date.
Claims or circumstances, including complaints history
Upon succession, the claims history of the other firm will become part of your claims record. It is therefore absolutely critical that you understand the nature of any claims and identify possible trends. If there are sizable payments or reserves, you will need comprehensive information regarding the background to the claim, including a detailed explanation of what happened and any measures that were put in place to prevent reoccurrence.
A deep understanding of the firm’s risk management is important and should include systems and processes, client selection procedures, file audits, supervision arrangements, conflicts of interest, training and continued professional development. Without understanding their risk and compliance culture it is virtually impossible to consider how to achieve successful integration between the two.
Financial health is a key underwriting consideration and can be quite volatile. You need to demonstrate a healthy balance sheet, both as separate firms and combined.
Consideration needs to be given as to how the combined firm will work in practice from both an operational and financial perspective. Will all partners join forces? Planned retirements? Consultancy roles? Etc. This is where a strong cultural fit is crucial. A deep understanding of what each party wants to get out of the merger is vital to its success.
After initial meetings have taken place and both firms have agreed to move forward, it’s time to get your insurer involved. There will no doubt be questions on both sides, such as will the risk profile of the newly structured firm still fall within insurer’s appetite, how will the premium be affected and what will their position be on renewal? A face-to-face conversation, facilitated by your broker, can form a solid foundation to future developments.
We’re here to help
If you are going to be the successor practice or assume additional liabilities as part of a merger or acquisition, we can help you throughout the process.
Our team of experts have a wealth of experience assisting law firms of all shapes and sizes successfully navigate the process and can help you avoid some of the common pitfalls. We can tell a lot from a proposal form, often being able to read between the lines, and have developed pre and post checklists to assist with the due diligence process. We also understand what insurers are looking for and can offer advice on how to present the proposed merger or acquisition to underwriters in the best light.