How to protect your finances during a business merger
Mergers can offer law firms the opportunity to grow internationally or increase their services or long-term continuity.
Before any merger occurs, you must understand the financial position of both firms and the risks involved in ensuring the merger delivers lasting value.
What is a law firm merger?
Most law firm mergers take the form of a business transfer agreement, where the assets and liabilities of one firm are usually transferred as a going concern into the other.
During early discussions or due diligence, certain liabilities such as property obligations, pension schemes or previous claims may be excluded from the transfer.
For any liabilities that are left behind, corresponding assets are often retained to fund them and this must be carefully reflected in the merger agreement.
What are the financial considerations?
The first question when considering a merger agreement is whether it delivers tangible financial benefits.
These may include cost savings through shared premises or support functions, improved purchasing power, increased revenue through cross-selling and a greater clientele.
However, these benefits should be tested rigorously and a detailed financial evaluation is crucial. This usually involves both internal finances teams and external advisers.
This evaluation should review:
- Balance sheets – Assets, liabilities, partner capital and any outstanding debts should be assessed as any hidden liabilities or unresolved disputes can affect value.
- Cashflow – Law firms are particularly affected by cashflow timing. Reviewing previous and future cashflow can help spot any fundings gaps or capital pressures post-merger.
- Profit and loss history – Examining three to five years of financial performance provides insight into sustainability and cost control.
- Client and supplier contracts – Some agreements may contain change-of-control clauses or require consent, which could affect the continuity of income.
- Contingent liabilities – Any ongoing claims, tax enquiries or regulatory matters must be identified early.
Tax can affect the success of a merger and Corporation Tax, where you operate as a limited company, VAT and payroll obligations should be reviewed carefully so all filings are up to date.
Capital allowances and loss relief claims may also affect the post-merger position.
Poor tax management uncovered late in the process can delay or derail a transaction and early reviews are essential.
With the right financial support, we can help provide an objective view of the financial position of both firms and any risks that may not be immediately visible.
How can you prepare a successful merger?
When considering a merger, you must ensure your firm’s financial records accurate and partner capital arrangements are clearly understood.
A merger can offer growth but only if both parties are clear on what they are gaining and the risks they are assuming.
We can help support your financial due diligence, assess profitability and cash flow, advise you on tax structuring and help model your merged firm’s future performance.
For tailored advice on a merging firms, please speak to a member of our team.