Article 6/6: External Purchasers and Mergers: What Buyers Want to See Before They Commit
External sales and mergers can be powerful succession solutions for law firms, especially where there is no obvious internal successor. They can provide scale, continuity for clients, broader career options for staff, and capital realisation for owners. But external purchasers are cautious. They are not simply buying fees. They are assessing whether the firm’s clients, people, systems, profit, and risks can be integrated into their own business.
The first thing buyers want is credible information. A vendor who can produce three years of financial statements, year-to-date management accounts, client lists by fees, current matter reports, aged debtors, aged work in progress, trust and office bank reconciliations, disbursement ledgers, lease documents, staff information, insurance details, and claims history will create confidence. A vendor who cannot produce this information may unintentionally signal poor management or hidden risk.
Financial performance is only the starting point. Buyers will examine the quality of earnings. They will want to know whether fees are recurring or one-off, whether clients are concentrated, whether particular referral sources dominate, whether profit depends on unusually low partner salaries, and whether work in progress is recoverable. They will also look closely at lockup. A profitable firm with slow billing and old debtors may require more working capital and may carry greater collection risk.
Client transferability is crucial. External purchasers want to know whether clients are attached to the firm or only to the vendor. A strong commercial client base with long-standing relationships can be attractive, but only if the vendor is willing to support transition. In many successful deals, the outgoing owner continues working after settlement in a reduced capacity, helps introduce the purchaser, and accepts staged payment terms linked to client retention or fee performance.
Deal structure often determines whether a transaction is possible. A vendor may prefer a full payment on completion, but a purchaser may seek deferred payments, clawbacks, or earn-out elements where future revenue is uncertain. For example, part of the price may be paid after 12 months, with a reduction if fees fall below a set percentage of prior-year levels and an additional amount if fees exceed expectations. These mechanisms can bridge the gap between vendor confidence and purchaser risk.
Mergers require an even broader review. Strategic fit matters. The firms need to assess practice areas, client overlap, planned capital expenditure, future acquisitions, and the business plan for the merged entity. Partner arrangements must also be scrutinised, including age profile, equity shares, admission criteria, voting rights, drawings, and performance management. A merger can quickly become difficult if one firm has disciplined partner management and the other does not.
Financial modelling is essential. The parties should test the profitability of the merged entity, including expected economies of scale, staffing changes, premises decisions, technology integration, and practice group performance. Sometimes a merger works because one firm is well managed and seeking scale, while the other has revenue, clients, or practice areas that can become more profitable once legacy staffing, management, or lease issues are addressed. But those benefits need to be modelled honestly rather than assumed.
People and systems can make or break the deal. Buyers and merger partners will review key staff, salaries, tenure, training, incentive plans, practice group structures, IT platforms, management reports, and professional indemnity claims. Integration risk increases when systems are incompatible or when staff roles are unclear.
A successful external sale or merger depends on preparation. The vendor must know the firm’s value, have the information ready, accept commercially sensible terms, and be prepared to support transition. The purchaser must see a clear strategic reason to proceed, have funding available, and understand the risks. When both sides approach the process with evidence rather than hope, external succession becomes far more achievable.
Sam Coupland
Director, FMRC
E enquiries@fmrc.com.au