Personal injury M&A engenders specialist WIP due diligence

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13 May 2013


Historically, the assessment of personal injury WIP valuation has been firmly set within the remit of accountants. With the onset of the flourishing personal injury retail sector, the growth of specialist caseload due diligence to assess WIP is ever present.

“Increasingly, acquiring firms look to carry out independent caseload due diligence by specialist auditors with technical experience. Further, a growing number of banks are also seeing the value of independent caseload assessment that may sit alongside an accountant’s Independent business review,” says Zoe Holland, managing director of Zebra Legal Consulting.

Caseloads for sale

The market has seen an unprecedented number of deals involving the purchase of caseloads in isolation. Often it is the desire to increase turnover and cash flow, without the headache of a firm-wide acquisition that drives the purchase of personal injury WIP. Further, in firms where personal injury is only a part of the business and they have made a strategic decision to concentrate investment in other areas, caseloads are often sectioned off for sale.

Another motivation for purchasers is the ability to buy cases that have been undervalued in proposed settlement value and costs at a low value. These will then be worked into a substantially more valuable commodity, making the return on the investment more attractive.

The aim of specialist caseload due diligence is to get to the heart of key indicators of personal injury WIP value and caseload risk profiling. Highlighting and then assessing trends throughout the caseload is a fundamental part of the process. It requires a combination of technical, financial and commercial skill. The role of an experienced costs expert is also critical to assess retainer and funding risk.

Increasingly, vendors are also looking to independent auditors to assess ‘how healthy’ their WIP looks, and consider whether action can be taken to prepare the caseload for sale.

Confidence for banks and investors

Some banks are looking toward an independent and specialist approach to WIP valuation and caseload risk profiling that involves a closer look at the cases behind the WIP. Over recent months, lively debate has been focused around the need for closer ‘comfort and confidence’ around the assessment of WIP, particularly in new/additional lends or acquisition funding.

Zebra Legal Consulting has been instructed on several projects where there has been bank funding for acquisition and/or expansion. These instructions have been on a joint instruction basis between the law firm and bank. One project involved carrying out the caseload due diligence on law firm Atteys, prior to administration.

Clinical negligence: why is it so different?

Purchase of clinical negligence WIP usually carries a higher risk than that of personal injury cases. It is much more difficult to identify significant proportions of admitted WIP (a true admission in clinical negligence being that of both breach and causation). This means that uncovering the ability of the selling firm to identify good prospects is key to risk profiling and valuation of the caseload. Often evidence of optimism bias on cases with significant WIP can substantially undermine caseload valuation.

Knowledge-based due diligence with a commercial approach

The approach to specialist caseload due diligence must be to achieve the most time-effective and commercial outcome for all parties. In the majority of projects, assessing the entire caseload is not commercial. A carefully selected sample is the process of choice.

The market is now beginning to acknowledge in earnest that a knowledge-based caseload due diligence audit has tangible value in the personal injury WIP valuation process. In firm-wide acquisition and mergers, it adds meaningful dimension to an accountancy-based report. Projects on this basis have already been welcomed by some national accountancy practices.

With M&A set to take significant pace over the coming months, getting to the heart of personal injury caseload value and risk will no doubt see a greater appetite to assess WIP with a more forensic approach.



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