Law firm acquisition finance: funding the purchase of a solicitors’ practice

A law firm has almost no hard assets. The furniture is worth little, the client account money belongs to clients and never forms part of the price, and the building is often leased. What a buyer pays for is a combination of four things, and each one is financed differently.

• Goodwill: the expectation that clients, referrers and repeat instructions will stay with the practice after the seller steps back. This is the part lenders scrutinise hardest because it has no resale value if the clients leave.
• Work in progress: unbilled time on live matters. In conveyancing it converts to cash quickly on completion; in contentious, personal injury or clinical negligence work it can sit for a year or more.
• Debtors: bills issued but not paid. Sellers often keep these and collect them themselves, which reduces the price but leaves the buyer with a cash gap in the first months.
• Stored files and archived wills and deeds: these carry storage costs and regulatory duties rather than value, and a buyer who takes them on needs to budget for that.

Separating these items in the heads of terms makes the funding request clearer: goodwill suits a term loan, WIP and debtors suit working capital, and the deferred element suits the seller.

Lenders will not release funds into a deal that could leave the firm unable to practise, so regulatory steps sit on the critical path. New owners and managers of an authorised firm generally need SRA approval, and a firm must keep its compliance officers in place; the SRA sets out the process in its guidance on approval of role holders. Where one firm takes over another’s practice, the SRA also expects notice of the succession, described on its notice of succession page.

Indemnity cover is the other critical point. Depending on how the deal is structured, the acquiring firm may be treated as a successor practice, so its insurer picks up claims arising from the seller’s past work, or the selling firm closes and buys run-off cover. The answer affects the price, the acquiring firm’s next premium and the conditions a lender will attach to its offer. For funding the premium itself, see PII funding for law firms.

Illustration only, with hypothetical round numbers. A two-partner firm agrees to buy a retiring sole practitioner’s private client and conveyancing practice for £300,000 of goodwill. The heads of terms provide for £180,000 on completion and £120,000 over two years, reduced proportionately if retained fees fall below an agreed level. The buyers put in £40,000 of their own cash and seek a £140,000 term loan. They also buy the WIP at a discount but leave the debtors with the seller, so they ask for a modest revolving facility to cover the first quarter’s salaries. The lender models the combined firm’s profits with a haircut on the acquired fees, adds the deferred payments to the debt service, and checks that the partners’ drawings still leave headroom.

The largest risk is client attrition. Private clients often follow a trusted individual rather than a firm name, and referrers may reconsider their panel after a change of ownership. Retention-linked deferred consideration shares that risk with the seller; paying everything upfront does not.

Personal guarantees are standard, so each acquiring partner is exposed beyond their capital in the firm; read our note on personal guarantees before signing. Integration costs, such as case management migration, file review and TUPE obligations, are easy to underestimate. Buying a firm with a poor claims record can also raise your own PII premium at the next renewal. Sometimes the better answer is not to buy the whole firm: recruiting a team or buying a defined block of fees, as described in our block of fees finance guide, carries less inherited risk.

Buying a law firm with borrowed money involves two sets of legal work. The purchase itself, from heads of terms to the sale agreement, warranties and SRA approvals, is handled by your own solicitors. The finance adds its own documents, and the lender usually instructs separate solicitors to act for it, with the borrower normally paying the lender's reasonable legal costs.

• Facility agreement: the loan terms, covenants and the conditions that must be met before drawdown.
• Security: usually a debenture over the buying company and, after completion, over the target, plus any personal guarantees.
• Priority with the seller: a deed of priority or subordination so that deferred consideration owed to the seller ranks behind the lender.
• Conditions precedent: the checklist the lender's solicitors work through before release, which often includes evidence of SRA approval and professional indemnity cover in place.

Choose solicitors with acquisition experience for the purchase and let them see the lender's offer early, because the finance conditions and the sale agreement have to line up on completion day. We arrange the funding and liaise with both sets of solicitors; we do not give legal advice.

Each of these guides covers one part of funding a purchase in more depth.

• Acquisition finance in the UK: the complete guide
• How to buy a business, step by step
• How much deposit you need to buy a business
• Vendor finance and deferred consideration
• How to compare business acquisition lenders
• Working capital after an acquisition
• Management buyout (MBO) finance
• Management buy-in (MBI) finance
• Finance to buy a professional practice
• Partner buy-in loans

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