Start with the client account. Everything else in a law firm acquisition can be priced, warranted or walked away from, but an inherited shortfall on client money is a live regulatory problem from the day you complete — and it is the one thing a standard financial due diligence exercise will not look for.
Guide · Updated August 2026
Ask for these five things before you discuss price seriously. If any of them cannot be produced, that is itself the answer.
On residual balances, understand what you would be taking on. Rule 5.1(c) permits a balance of £500 or less on any one client matter to be paid to a charity without SRA authorisation where the conditions are met; anything over £500 requires the SRA's prior written authority. The conditions include reasonable steps to trace the owner, records of those steps kept for at least six years, a central register recording the owner, the amount, the charity and its number and the payment date, and a bar on deducting tracing costs from the balance. A large, untouched residual register is months of administrative work you are buying.
WIP is the hardest asset in a law firm to value, for three reasons that compound. It is not cash. It has not been billed, so no client has yet accepted the figure. And its value depends on whether the person who did the work is still there when the bill goes out — which, in an acquisition, is precisely the thing in question.
Worked example — illustrative. A target firm has fee income of £900,000, WIP of £250,000 and a sales ledger of £160,000 including VAT. Daily turnover is £900,000 divided by 365 = £2,466. WIP days are 250,000 divided by 2,466 = 101. Debtors excluding VAT are £133,333, giving 54 debtor days. Lockup is 155 days, or £383,333 of cash.
Now put that next to a headline price of £450,000. If you are buying the WIP and the debtors, you are funding £383,333 of working capital on the same day you pay the price — a real cash requirement of over £830,000, not £450,000. If you are not buying them, you are running the acquired practice from a standing start with no collections for the first two months while the seller collects their own ledger. Either way the lockup number changes the deal, and it is rarely in the information memorandum. Our lockup guide sets out how to calculate it properly, and the lockup calculator will do it from the target's four numbers.
Then discount the WIP itself for the things that make it not-cash: its age, how much of it sits with fee earners who have not committed to staying, whether the matters can complete, and the firm's own historic write-off rate on billed work. A seller's WIP figure is an opening position.
Clause 5.4 of the Minimum Terms and Conditions requires six years' run-off cover when a firm ceases. It is a genuine cost, it falls on the seller, and it therefore sets a floor under what the seller can accept for the practice. It also behaves differently depending on the deal structure: buy the shares or the LLP interest and the firm continues, so cessation is not triggered; buy the assets and the seller's practice ceases, so run-off is due. Establish which of you is assuming it, and at what price, before heads of terms rather than after.
Rule 9.1 of the Authorisation of Firms Rules requires the SRA to approve any manager or owner of an authorised body. Every new manager and every new interest holder needs approval, and the timetable for that belongs in the deal programme, not in the completion checklist.
Check separately whether the transaction changes your authorisation category. Under Rule 1.1 a recognised body requires all managers and interest holders to be legally qualified. Bringing in an outside investor, or admitting a non-lawyer manager as part of the deal, moves the firm into the licensed body route. That is a different authorisation, and it is not a two-week job.
Ask for the practice-wide risk assessment, the policies and controls, a sample of client due diligence files, and evidence of the annual AML and sanctions data submission. Two things to have in mind. First, changes to the Money Laundering Regulations in force from 18 November 2025 mean the Register of Overseas Entities cannot be relied on alone to verify beneficial ownership, and bring that register into the discrepancy reporting framework — so files closed before that date may have been built on an approach that is no longer sufficient. Second, the Government has decided that the FCA will take over AML supervision of the legal sector under the Single Professional Services Supervisor model. The SRA confirmed the transfer is in progress in its July 2026 update, but it depends on enabling legislation, funding and a transition plan, and no transfer date has been set.
On 19 June 2026 the SRA launched a consultation, closing 17 August 2026, proposing new rules that would require firms to notify the SRA when they merge with or acquire another firm, and when they start holding or receiving client money. It follows the PM Law and Axiom Ince cases. This is a consultation, not a rule: nothing in it applies to a transaction completing today. But if you are planning an acquisition programme over the next couple of years, build the assumption that acquisitions will become notifiable into how you resource them.
The structure changes what you acquire, what you inherit and how the tax works. At the level of principle, and without straying into advice on your particular deal:
| Point | Asset purchase | Share or interest purchase |
|---|---|---|
| What you get | Specified assets — files, WIP, goodwill, staff by TUPE — and you can leave things behind | The whole entity, including its history |
| Historic liabilities | Generally stay with the seller's entity | Come with the entity; risk is managed by warranties and indemnities |
| Run-off | Seller's practice ceases, so run-off is triggered | The firm continues, so cessation is not triggered |
| Accountant's report | A ceasing firm generally needs a final report; rule 12.4 lets the SRA require one on reasonable notice | The firm's reporting obligation simply continues |
| Usually preferred by | The buyer | The seller |
That last row is why structure is often the hardest term to agree, and why it should be modelled before heads of terms rather than argued about afterwards. If the acquiring entity is a company, its own corporation tax position matters to the return: 19% up to £50,000 of profit, 25% above £250,000, with a 26.5% effective marginal rate between the limits — and those limits are shared between the company and its associated companies, so a company with three associates divides them by four and is working to £12,500 and £62,500. An acquisition programme quietly increases that count. The structure guide covers that arithmetic, and law firm accounts and tax explains how we model an acquisition alongside the existing firm's numbers.
We do the financial and client-account due diligence and model the deal; we are not a law firm and this is information rather than legal advice, so the transaction documents are for your own solicitors. If the firm you are buying holds client money, get the reporting position clear early — our Accountant's Report page explains how the report is prepared and who signs it, and client account bookkeeping covers how we take on a ledger that has not been reconciled properly.
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The client account. Ask for the last three reconciliations, the residual balance register, the breaches record, the last Accountant's Report and confirmation of whether it was delivered to the SRA. Rule 8.3 of the SRA Accounts Rules requires reconciliations at least every five weeks, genuinely three-way between the bank statement balance, the cash book balance and the client ledger total, signed off by the COFA or a manager. Look for date gaps, for reconciliations that are not three-way, and above all for difference lines carried forward unresolved from one period to the next. A standard financial due diligence exercise will not check any of this.
It depends on the structure. On a share or interest purchase the entity continues, so the client account, its history and its reporting obligation all come with it, and the risk is managed through warranties and indemnities. On an asset purchase the seller's practice ceases: run-off cover is triggered under clause 5.4 of the Minimum Terms and Conditions, a ceasing firm generally needs a final Accountant's Report, and rule 12.4 allows the SRA to require one on reasonable notice. Either way, examine the reconciliations and the residual balance register before agreeing a price, because an inherited shortfall becomes a live regulatory problem on completion.
The SRA must approve every manager and owner of an authorised body under rule 9.1 of the Authorisation of Firms Rules, so new managers and new interest holders arriving through a deal need approval, and that timetable belongs in the deal programme. Check separately whether the transaction changes your authorisation category: rule 1.1 allows a recognised body only where all managers and interest holders are legally qualified, so an outside investor or a non-lawyer manager moves the firm to the licensed body route. Separately, a consultation launched on 19 June 2026 and closing 17 August 2026 proposes requiring firms to notify the SRA of mergers and acquisitions.
Clause 5.4 of the Minimum Terms and Conditions requires six years of run-off cover when a firm ceases, and the obligation falls on the ceasing firm — so on an asset purchase, where the seller's practice ceases, it is the seller's cost. On a share or interest purchase the firm continues and cessation is not triggered at all. Because run-off is a real and often substantial figure, it sets a floor under the price a seller can accept, and it is one of the reasons sellers push for share sales while buyers push for asset purchases. Agree in writing who is carrying it, at what price, before heads of terms.
Start by measuring it rather than accepting the seller's figure. On an illustrative target with £900,000 of fee income, £250,000 of WIP is 101 days of turnover, and a £160,000 sales ledger is another 54 days once VAT is stripped out — 155 days of lockup, or £383,333 of cash you must fund on completion alongside the price. Then discount the WIP for the things that make it not cash: its age, how much sits with fee earners who have not committed to staying, whether the matters can complete, and the firm's own historic write-off rate on billed work. WIP is the hardest asset in a law firm to value precisely because none of that is settled.
It has proposed to. On 19 June 2026 the SRA launched a consultation, closing on 17 August 2026, proposing new rules that would require firms to notify the SRA when they merge with or acquire another firm, and when they start holding or receiving client money. It follows the PM Law and Axiom Ince cases. That is a consultation and not a rule, so nothing in it applies to a transaction completing today. If you are planning an acquisition programme over the next few years, though, it is sensible to assume acquisitions will become notifiable and to resource the regulatory workstream accordingly.
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