Making the right deal for your business

Mergers and acquisitions (M&A) within the legal profession have been on the increase recently and show no signs of slowing. Drivers can often be complex and unique to each particular organisation. However, it is clear that a combination of a changing regulatory landscape, the maturing of alternative business structures (bringing with them increased competition), the general economic climate, and the need to secure ever savvier consumers of legal services plays no small part.

Both parties in an M&A transaction are likely to have different strategic goals. Pressures on either side often compete in what is usually a stressful, time-sensitive window of opportunity. Whether you are looking to merge or sell your business, it is vital that it is properly presented to attract and secure the right buyer. Similarly, if you are looking to acquire, you need to understand the target business and be confident that the risks you absorb have been thoroughly considered and assessed. In either case, adequate due diligence must be an integral part of the overall process, providing assurance (or otherwise) that the deal is right for you and for your employees.

As a legal concept, due diligence refers to the reasonable care you should take before entering into a business agreement. At a minimum, this ought to include a review of all records and documents that are directly pertinent to the transaction, usually those relating to regulatory history and compliance, legal structure, financial data (including forecasts), and operational activity. Practicality will demand that due diligence covers only a sample in any given area. This will be dependent upon your risk appetite and based on some level of trust and openness between the parties, but you will always want more than just a ‘snapshot in time’.

Below, I will look generally at some of the issues to consider.

Regulatory

It is important to examine the firm’s relationship with the regulator, checking points such as disciplinary history, practising conditions and compliance systems. Consider the following:

• compliance officer for legal practice and compliance officer for finance and administration records;
• systems and controls (conflicts, supervision, anti-money laundering, anti-bribery, etc);
• matter files and standard documents;
• complaints and claims; n business plans (including business continuity and disaster recovery);
• policies and procedures; n compliance with associated legislation (eg LASPO, Consumer Contracts Regulations 2013, Legal Services Act 2007); and,
• compliance with the Solicitors Accounts Rules.

Financial

You will need to assess and establish the historical performance and current financial status of the business, including:

• entity structure (shares, equity etc);
• work in progress valuation and lock-up;
• debtors and creditors;
• assets and liabilities;
• contingent cases;
• filed accounts;
• SRA accountant’s reports, budgets and forecasts;
• bank statements, banking facilities and loans; and, 
• outstanding liens or other legal issues that have financial implications.

Legal

You will need to review:

• the company’s constitutional documents (articles of association, shareholders’ agreement, or other governing documents);
• tax returns;
• leases;
• employment contracts and compensation plans (including salaries and bonuses);
• third-party contracts;
• professional indemnity insurance (including claims history);
• compliance with applicable regulations (eg health and safety, environmental); and,
• any pending litigation and possible claims or insurance notifications.

The merits of adequate due diligence should be obvious, and failure to carry it out can devastate both your financial position and reputation. Given the importance of this obligation and the broad scope of expertise required, it is often crucial to instruct external advisers to ensure that an independent and risk-focused review is conducted. Consider:

• Select providers with appropriate expertise and ensure there is a common understanding of the issues and scope;
• Allocate sufficient resources and time to successfully complete due diligence;
• Consider your risk appetite and what concerns you most. Ensure activities are conducted discreetly and in complete confidentiality, with signed non-disclosure agreements if appropriate; and
• Agree on the scope and type of report to be generated, ensuring all necessary information is included. This report will be an important tool to assist in business integration following a merger or acquisition. SJ

Michael Black is a lead compliance consultant at Weightmans' Compli service

@Weightmans