Due Diligence considerations in M&A for legal practices
Kate Arnott · Posted on: August 4th 2025 · read
In our previous article we looked at alternative funding options for law firms looking to generate capital for future acquisitions. In this article we turn our attention to the process of merging or acquiring a firm and highlight the key issues to consider.
Due diligence is an important part of any acquisition or merger, particularly as we are seeing more consolidation in the legal sector and an increase in private equity interest in this space.
During any merger or acquisition, you will likely need to appoint external advisers to assist with the various due diligence streams, which are covered below. Deciding on which due diligence stream to undertake and the level of scope varies and is often driven by a risk assessment.
Different types of due diligence
Below is typical due diligence work that would be carried out on a professional practice.
Financial
Fundamentally, financial due diligence needs to cover value points on the acquisition / merger target pertinent to informing the deal mechanism (e.g. quality of earnings / enterprise value and price mechanism adjustments).
And, depending on the legal services offered by the target, understanding key financial metrics and value drivers are often an integral part of financial due diligence.
Financial due diligence also aids the buyer in determining the extent that the target’s general accounting environment and financial metrics represent a “good fit” for the buyer going forward.
Key financial metrics and value drivers to consider
- Revenue trends across all service lines (including growth/decline, geographical footprint and seasonality)
- Profitability (Gross and EBITDA margin) by division
- Annual recurring revenue (ARR)
- Fee earner KPI’s (capacity, utilisation, billings, profit per partner, profit per service line)
- Client base and client concentration
- Routes to market for new clients and client churn (client retention)
- Net working capital, with a particular focus on the levels of work in progress and debtors (“lock up”)
- Cash flows and Cash Conversion (billing cycles and cash collection).
Financial Due Diligence provides data driven validation of the commercial discussions that have taken place between the Parties.
Tax
Tax due diligence is important to inform the buyer as to whether there are any significant potential tax risks that may raise red flags or impact on the value of the target entity (e.g. taxes on profits, appropriate treatment of VAT, employment taxes).
Group structures have become much more complex and firms often have a combination of Limited Liability Partnerships, and Limited Companies. This is often done for tax planning or to diversify the risk of a practice. Tax due diligence will ensure you, as the buyer, are aware of all possible tax liabilities that may be due by the target entity.
A typical example of this may be where a firm transfers all of its employees to another company. This company charges a management fee to the main firm (or the LLP). Any profit in this standalone company will be subject to taxation.
Tax Due Diligence will ensure you, as the buyer, are aware of all possible tax liabilities that may be due by the target entity and to consider how to address these in the context of an acquisition negotiation.
IT
An IT due diligence process will review the current IT environment of the target entity. Identifying and reviewing simple processes like the software used for timesheets, processing of accounts, billings and reconciling client money accounts etc. Depending on the extent, this could highlight any IT risks within the company and assist you in making decisions on any synergies to ensure you can set out your integration plans and identify any immediate cost savings (synergies) or red flags.
Commercial
Commercial due diligence has grown in popularity in recent years due to the growing complexity of the different services and relationships a professional practice may have.
The key focus of any commercial due diligence is to:
- review the industry and market the target entity may operate in,
- identify the target entity’s clients base,
- identify the target entity’s main competitors, and
- analyse the target entity’s growth potential by reviewing its pricing, optimisation, customer retention etc.
Human Resources (HR)
On average, more than half of all expenses within a professional practice relate to staff costs. Which is why it is no surprise that the HR element is a crucial part of the due diligence work. The work around this will note:
- the adequacy and comparability of HR policies,
- the basic information around the target entity (e.g. employee numbers),
- remuneration and benefits packages,
- contracts and terms of employment,
- leave pay/holiday accruals.
Legal
Legal lastly, and possibly the most important due diligence stream, is focused on documenting and reviewing the legal elements of the target. This will likely be a combined effort of your appointed legal experts, the external accountant, target entity’s staff, and the relevant indemnity insurance providers.
A legal due diligence will:
- identify potential risks and liabilities within the target entity
- consider the likelihood of any claims brought against them and the completeness of any provisions
- review the adequacy of the current insurance policies of the target entity
- inform the legal drafting of the relevant Share Purchase Agreement.
The above DD streams will assist you in identifying possible synergies between the two businesses, potential cost rationalisation and assessing the cultural fit of the firms. A successful integration plan, led by timely and targeted due diligence in the acquisition phase, is paramount to the success of any merger or acquisition.
Whether you are merging, acquiring, or even if you are the target entity yourself, it’s a very big step in any firm’s life and the elements above are important to note.
If you need any assistance in the matter, be sure to reach out to our Corporate Finance team. Their wealth of experience will be crucial to negotiating and concluding a successful transaction.
