There continues to be growing activity in the legal sector in law firm sales, mergers and acquisitions. There are some healthy mid-sized well capitalised firms with good culture, looking to grow, and firms that are forced to sell due to an event, or those who wish to sell because of age, dwindling energy, patience and the wall of compliance.
The sum of money which needs to be paid for run off cover if a firm closes varies significantly, and provides a bargaining chip to buyers and sellers alike. At the minimum end, an Insurer requires 225% of the final years premium to provide six years run off. At the opposite end, several Insurers require 350% of that sum.
If you are a firm that have been caught by an unfortunate event and your PII premium has increased significantly, a 350% charge on top of that might well be unfeasible so you may look to an acquiring a firm to take you on and hand your firm over without consideration in order to avoid past liabilities. Alternatively, an acquirer may see an opportunity to negotiate a good deal on a purchase if it knows that the vendor has this sum lurking in the background.
Understanding these situations at this time of year (and in Autumn) can provide an edge.
It is important to go through a “drains up” process to flush out all past potential complaints and claims if you are looking to buy or sell, so that you can leave your acquired or sold firm behind without taking with you a long tail of past matters which could drag the enlarged entity down. There is a process for this and the other aspects which go with purchase, sale or merger.
Accounting and financial year end is also an increasingly important trigger. We are seeing an uplift in firms delaying their year end accounts to the SRA and failing to make deadlines as they seek to shore up their financials. Some are good legal practices which have been hit by a single one-off event.
There is a general belief that the current round of CQS reapplications may also trigger further stress among some law firms, where the renewal process may involve a visit by the regulator and much more invasive questioning. The date of the re application therefore can sometimes be a trigger for the search for a merger or acquisition.
Quality PI give their clients free advice around the risk, Insurance and strategic aspects of M and A processes (and for example, how Directors and Officers liability policy will help protect the firms senior people during change).