A law firm merger can create opportunities for growth, greater efficiency and access to new markets. However, it can also expose areas of a practice that are no longer commercially viable or strategically aligned with the future direction of the combined business.

Before completing a merger, partners may therefore decide that certain areas should be reduced, transferred or exited altogether. Making this decision before the merger can make the transition considerably smoother and help ensure the newly combined law firm begins its next stage from a stronger financial and operational position.

Why exit a practice area before a merger?

Not every practice area will necessarily fit the strategy of the merged firm. A service may have become less profitable, require specialist resources that the new firm does not intend to maintain, or simply sit outside its future plans.

The legal market is continually changing, and firms need to consider whether particular areas of work are capable of supporting sustainable growth. Rising staffing costs, professional indemnity insurance, regulatory requirements and other overheads can make some departments increasingly difficult to operate profitably.

A merger provides an opportunity to review the entire business and determine which areas should form part of its long term strategy. Exiting a practice area before the merger can also simplify due diligence. The acquiring or merging firm can assess a clearer portfolio of ongoing matters, financial commitments and liabilities rather than inheriting an area of work that neither intends to develop.

Start with a financial and strategic review

The first step is to establish why the practice area is being considered for exit. Partners should examine profitability, staffing requirements, outstanding fees and the amount of work in progress associated with the department.

The review should therefore consider:

• Current and projected profitability
• Outstanding work in progress
• Unbilled time and recoverability
• Staffing and operational costs
• Regulatory and professional obligations
• Existing client commitments
• Potential liabilities
• Strategic relevance to the merged firm

This information can then be used to reach an informed decision regarding the department.

Protect client relationships

One of the biggest risks when exiting a practice area is losing valuable client relationships. Clients should not simply discover that their solicitor is no longer handling their matter after the merger. Communication needs to be carefully managed, particularly where matters are ongoing or involve important deadlines.

Depending on the circumstances, clients may be transferred to another department within the merged firm or referred to another specialist practice. The process should prioritise continuity and transparency for the client. Handled correctly, an exit can preserve goodwill even where the firm is no longer offering the relevant service.

Deal with work in progress before completion

Work in progress can become one of the most complicated aspects of exiting a practice area. Before a merger takes place, the firm should identify all live matters and establish the position on unbilled time, disbursements, outstanding invoices and potential recoveries. Some cases may be close to completion, while others could continue for months or years.

Recovering value from WIP can also have a direct impact on cash flow. If a firm is preparing for a merger while also dealing with financial pressures, turning existing WIP into realised income can provide important liquidity during the transition.

At Recovery First, we regularly work alongside professional advisers, including merger and acquisition specialists, to support firms through this process. Our model involves discreetly placing cases with multiple approved purchasing firms from our panel. This spreads risk, maximises the value of WIP realised for the seller, and ensures full compliance with SRA requirements.

Consider staff and succession

Exiting a practice area is not simply a financial exercise. Employees, partners and fee earners may have spent years developing expertise and client relationships within the department. The firm should therefore consider whether staff can move into other practice areas, transfer with the work or leave as part of the planned exit.

Where a senior partner is responsible for the department, the process should also be considered alongside the firm’s succession plan. A merger may provide an opportunity to transfer clients and expertise to another team rather than allowing valuable knowledge to disappear when a partner retires or exits the business.

Early planning can reduce disruption and give employees greater certainty about their future.

How can Recovery First assist?

The Recovery First model can form part of a law firm’s exit strategy, supporting the orderly run-off of files and helping achieve an SRA-compliant closure or sale without the need for a distressed exit.

We work with law firms, insolvency practitioners, accountants and restructuring specialists, including in distressed situations where SRA intervention is a risk.

Our flexible model provides:

• SRA-compliant protection
• Managed transfer of live matters to approved panel firms
• Financial management and distribution of costs recoveries
• Dedicated management throughout the process

Clients receive 100% of their recoverable WIP, plus their allocated entitlement to deductions from damages. Our streamlined approach also means lengthy due diligence is not required, allowing us to act quickly.

Contact Recovery First today to discuss how we can support your firm’s exit, merger or restructuring.