Lawyer Monthly - November 2021 Edition

32 WWW.LAWYER-MONTHLY.COM | NOV 2021 THE IMPORTANCE OF DUE DILIGENCE WHEN BUYING A LAW FIRM Some of this work will be paid without questions, but some will be disputed. As the vendor, it is therefore important to close as many of the WIP cases as possible before completion, or to schedule new work around the sale completion date if possible. As the buyer, your due diligence needs to be examining this WIP and assessing if the accuracy of the costs is being accrued. However, solicitors will sometimes take payments on account in advance of starting work to cover this WIP and this should be accounted for and identified separately. Connected to this is the debtor ledger. Traditionally, solicitors have not been the quickest to chase overdue invoices, leaving a large debtor figure in the financial accounts. As the vendor, you should be chasing outstanding invoices well ahead of a sale completion to minimise this debtor figure. As the buyer, you need to be confident that any outstanding debtors are not going to turn bad. Legal firms are no different to other businesses in this respect. If you can demonstrate well-managed financial records with systems in place that call in payments when due, it will make the proposition of a purchase much more appealing to buyers. Checklist Below is a checklist of what a buyer needs to cover as part of their due diligence process: • Corporate information - company structure and any subsidiaries, shareholders, option holders and directors. • Business and assets – business plan, key assets and equipment, material contracts with customers and suppliers. • Human resources – employees, employment contracts, directors’ contracts, salaries and wages, handbooks, disputes and pensions. • Property – properties owned, leased or occupied by the business. • Information technology and intellectual property – software and equipment used, maintenance and support contracts, intellectual property (IP) used or owned by the company, including all license agreements for domain names, website design, trademarks and copyrights. • Data protection – how data is stored, safeguarded and used, privacy policies and GDPR compliance. • Litigation and regulatory – any disputes the company is involved in or likely to begin, and any licenses or regulatory consents. • Health and safety – any relevant policies, log of incidents. • Insurance – claims history, insurance policies, premiums. • Financial – accounts, assessment of tax liabilities, loans, charges and borrowing, VAT. Includes clients’ accounts as they will need to be properly audited with suitable controls in place to prevent fraud. Take some time to reflect on what your due diligence has revealed before making your final decision and it will also show you are serious about investing in the firm. Do not, however, get stuck in ‘analysis paralysis’ where you may find yourself in a perpetual cycle of due diligence, afraid to make a decision. Some prospective buyers fail to do careful due diligence and end up regretting it later, often having to face unexpected financial shortfalls. Due diligence is paramount as it can uncover risks, anomalies or unforeseen liabilities that could undermine negotiations and ensure you do not get stuck with a business that has no future. If you can demonstrate well- managed financial records with systems in place that call in payments when due, it will make the proposition of a purchase much more appealing to buyers.