BEHIND THE LEGAL M&A SURGE: HOW AUDIT AND FINANCE INSIGHTS DRIVE SMARTER ACQUISITIONS

With M&A activity accelerating across the legal sector, acquiring a practice is becoming a strategic move, whether that’s to expand your client reach, diversify services, or build scale.

But here’s the thing: the real value of a legal practice isn’t always obvious from the headline numbers. Beneath the surface sit critical factors like work in progress (WIP), residual balances, systems, and operational structure, all of which can make or break a deal.

At Cooper Parry, our audit and deals teams bring complementary perspectives to help firms assess acquisitions with both technical rigour and strategic foresight. Let’s break down what really matters.

UNDERSTANDING WORK IN PROGRESS (WIP): THE HIDDEN VALUE DRIVER

Audit Perspective

WIP represents work completed but not yet billed. It often looks like a strong asset on the balance sheet, but only if it’s accurately recorded and recoverable.

Key audit considerations include:

• Ageing profile – older WIP may be harder to collect.
• Billing discipline – consistent, timely invoicing is crucial.
• Recovery rates – what’s the ratio of billed vs. collected revenue?
• Matter mix – contingent matters carry more risk than transactional work.

Corporate Finance Perspective

WIP is a key driver of both cash flow and valuation. If it’s concentrated around a few partners or clients, retention risk rises.

To manage that:

• Build valuation models that factor in deferred payments or earn-outs based on actual collections.
• Use these structures to align incentives and mitigate risk for both buyer and seller.

RESIDUAL CLIENT BALANCES: SMALL NUMBERS, BIG RISKS

Audit Lens

Residual client balances, leftover funds after matters close, may seem minor – but they carry compliance and reputational risk.

Watch out for:

• Compliance with SRA client money rules.
• Reconciliation quality and audit trail clarity.
• Volume and ageing, a buildup may signal weak internal controls.

Corporate Finance Lens

From a corporate finance view, residual balances impact:

• Working capital and cash flow.
• Contingent liabilities needing remediation.
• Reputation – mishandled balances can affect client trust post-acquisition.

SYSTEMS, PROCESSES & OPERATIONAL FIT: THE REAL INTEGRATION TEST

Beyond financials, operational alignment is often the biggest challenge post-acquisition.

Firms should assess:

• Practice management systems – for matter tracking, deadlines, document storage, and communication.
• Leverage model – partner-to-associate ratios and support levels.
• Time recording & billing – automation, integration, and accuracy.
• Utilisation rates – how efficiently time is billed.
• Accounting systems – ledger structure, reconciliations, reporting.
• Client money management – controls and compliance.
• Cybersecurity – access, backups, and data protection.
• HR systems – payroll, benefits, and performance tracking.
• Client intake and conflicts checks – to ensure smooth onboarding.

Cultural and structural fit is equally crucial:

• Compliance culture and governance standards.
• Internal controls and approvals.
• Staff retention and morale – will teams integrate well?
• Talent pipeline – how strong is recruitment and training?
• Technology compatibility – migration costs and interoperability.
• Client retention risk – reliance on key individuals or revenue streams.

FINANCIAL AND STRATEGIC CONSIDERATIONS: LOOKING BEYOND THE DEAL

FINANCIAL DUE DILIGENCE (FDD)

A deep dive into the financials helps reveal the true picture.
Key focus areas:

• Profit quality and recurrence.
• Client concentration and dependency risk.
• Billing structure – hourly, fixed, or contingency-based.
• Realisation and collection rates.
• Hidden liabilities – contingent claims, leases, etc.
• Cash flow predictability and revenue sustainability.
• Interest treatment on client money.

CORPORATE FINANCE PERSPECTIVE

From a deal-making view, consider:

• Strategic fit – does it enhance capabilities, client base, or geography?
• Deal structure – upfront payments, earn-outs, WIP adjustments, or indemnities.
• Scenario modelling – stress-test assumptions for retention and revenue.

KEY TAKEAWAYS FOR LEGAL SECTOR M&A

1. Look beyond the numbers – WIP, residual balances, and operations tell the real story.
2. Combine audit and corporate finance insight – together, they give the full picture.
3. Structure deals to reflect risk – deferred payments and indemnities protect value.
4. Assess systems and culture – integration depends on people and processes.

“When it comes to law firm acquisitions, it’s rarely just about the balance sheet. The real value lies in the firm’s culture, systems, and the people who make it work. At the same time, taking a joined-up view between audit and corporate finance is key. It gives you the full picture and helps structure a deal that protects value for everyone involved.”

Paul Tallon, Transactions Services Partner

THE NUMBERS ARE JUST THE BEGINNING

Acquiring a legal practice isn’t just a financial transaction; it’s a strategic move that hinges on understanding value, risk, and sustainability.

By blending audit precision with corporate finance strategy, firms can make smarter decisions, reduce surprises, and set the stage for long-term success.

READY TO TALK LEGAL SECTOR M&A?

If you’d like to discuss this further or explore how our audit and corporate finance teams can support your next move, get in touch with me or one of our team today.