Law firm merger advice issued by SRA

The UK legal market has experienced a significant rise in law firm mergers over the past few years. In 2022, there were 122 reported mergers, up from 99 in 2021, representing a nearly 23% increase. This trend reflects a growing preference for expansion through acquisition rather than organic growth​

Several factors drive this trend; larger firms are pursuing mergers to enhance their competitive edge, add practice area and legal services expertise, and improve economies of scale. Additionally, the tight labour market has made it challenging to recruit new talent, making mergers a more attractive strategy to bolster resources and capabilities quickly​.

For smaller and mid-sized firms, economic pressures such as rising operational costs, higher interest rates, and increased professional indemnity insurance costs are significant motivators. These firms often see mergers as a way to generate more resources, reduce costs, and overcome financial difficulties more effectively​.

High-profile mergers, such as the combination of Allen & Overy and Shearman & Sterling, highlight a broader trend of UK firms looking to expand their global presence, particularly in the US market​​.

Despite the appeal of mergers, however, the complexities involved in aligning firm cultures, integrating operations, and maintaining service standards pose challenges, which can lead to disastrous outcomes. 

SRA advice on law firm mergers

The Solicitors Regulation Authority (SRA) has issued a new advisory to law firms involved in mergers and acquisitions, emphasising the need for law firms to prioritise client interests. This advisory reminds the managers of both the acquiring and the acquired firms that they must adhere to regulatory standards when law firms merge.

This warning comes in the wake of several notable failures post-mergers. For instance, Metamorph, which rapidly acquired several High Street firms, was eventually closed by the SRA.

Additionally, the SRA is under scrutiny for its actions after Axiom DWFM acquired the larger firms Ince & Co and Plexus Legal, leading to regulatory intervention due to concerns over a missing £60 million.

Clients of merged firms have sometimes reported financial losses, and such regulatory actions have also strained the compensation fund, which is funded by contributions from solicitors and firms.

The new advice stresses that firms must communicate clearly with clients about the changes, allowing them to make informed choices regarding their legal representation.

It also highlights the importance of retaining relevant client documents, prioritising urgent client matters, conducting client account reconciliations, and ensuring thorough due diligence by both parties involved in the merger.

Paul Philip, SRA’s chief executive noted that while there are often valid reasons for these mergers and the SRA supports a competitive legal market, there are concerns when firms make multiple acquisitions quickly.

Such rapid growth can lead to issues with business integration, organisational culture, and maintaining service standards for an increased client base.

He stressed that firm managers must ensure that growth through acquisitions does not result in poor governance, systems, or controls, which could harm clients or damage trust in the legal profession.

How Recovery First can assist in a law firm merger

As part of the new combined entities’ long-term plan, there may be a desire to discontinue servicing a specific area of law after the merger takes place. In this situation, the decision may be to exit that area completely before the merger takes place.

Selling work in progress (WIP) files to exit a specific market can be a positive solution for merging law firms. It can help them focus on more profitable areas of law once the merger is complete.

Recovery First have worked alongside professional advisers, such as merger and acquisition specialists, on many law firm projects. We discreetly sell a firm’s cases to multiple purchasers on our panel of solicitors.

This mitigates the risks to the buying firms and results in a higher value for the work in progress (WIP) being realised by the seller, whilst ensuring SRA compliance.

We are an accountancy service provider that has built specialised software and processes to liquidate the full value a law firm has locked into WIP over time.

We monitor case progression and conclusion in real time and account back to our clients for the value realised , thereby de-risking a deferred deal from the seller’s perspective.

Our process is highly flexible, and many firms have greatly benefitted from exiting a market when merging, to dispose of a caseload within a legal area in which the merged entity does not wish to continue operating.

Alternatives to mergers 

Although mergers are a great option for firms wishing to change their business model, they are not the only options. One of the main alternatives to law firm mergers involves restructuring the firm and exiting specific markets to focus on more profitable areas of law.

Recovery First have many years of experience in assisting on these types of projects.  In many instances, we can facilitate the immediate release of ash to deal with exit liabilities when restructuring. As our process is flexible, the exit from the market can be completed in a way that best meets the needs of the firm, with many firms opting to exit using a phased approach.

How Recovery First helps to protect the clients’ interests

Recovery First plays a crucial role in safeguarding client interests during law firm mergers, specifically when one firm decides to exit a legal market. We ensure client cases are handled with the utmost care and continuity. Clients are provided with the opportunity to transfer their cases to firms specialising in the area of law required. Moreover, the process ensures clients are well informed of their options and ability to choose the firm they move to.

This strategic approach allows the new combined firm to focus on more profitable areas without compromising client service. 

Why choose Recovery First?

 Whether you opt for a law firm merger, or an alternative, such as restructuring, Recovery First can help. The unique scheme offered by Recovery First is suitable for law firms and professional advisors, including accountants, merger and acquisition consultants, restructuring and insolvency practitioners, corporate recovery specialists and private equity firms. Our services are suitable for all types of legal work, using a simple, ongoing process with no up-front costs.

We guarantee 100% confidentiality for all clients. If you would like to find out more about Recovery First’s process, feel free to get in touch today using the contact details below.