Closing your law firm? How to handle work in progress

Recovery FirstBy Legal Futures Associate Recovery First

Making the decision to close all or part of your law firm is rarely an easy one. Some may opt to sell their firm to a successor practice; whilst others may choose to close the firm completely.

If you are thinking about closing your law firm or exiting a market within the legal sector, there are many components that should be considered. Law firm closures can be complex, and a well-structured plan is required to ensure a smooth transition.

Partners and directors have certain duties to creditors when closing their firms, especially when the firm is insolvent or nearing insolvency. Owners must take reasonable steps to maximise returns for creditors. This includes selling assets at a fair market value and not transferring assets at undervalue or giving preferential treatment to certain creditors.

One of the main factors to be considered when closing your firm is, what will happen to your client files?  Will you use a pre-pack sale, sell your files to a single purchaser, or sell to multiple purchasers?

Pre-pack sales

Pre-pack law firm sales, often referred to as “pre-pack administrations,” involve the sale of a law firm’s business and assets before the firm formally enters into administration. This process allows the firm to continue operating smoothly and may help preserve value for creditors if the price achieved is right.

It is important to note; however, that pre-pack administrations are not the only route for law firms facing insolvency. Insolvency practitioners have a duty to get the best value for their clients’ assets. There can be concerns about whether the assets are sold at their true market value, especially if the process appears rushed or lacks sufficient market exposure.

Insolvency practitioners are required to explore all their options when it comes to getting the best value for a solicitor’s work in progress which should include investigating the sale to multiple purchasers using the Recovery First model.

Selling files to a single buyer

Law firm owners may wish to close their business for reasons other than financial hardship, such as retirement, or a change in career. Some may wish to close part of their business to focus on more lucrative areas of law.

Whether you plan on selling your law firm as a whole or selling files as an exit strategy from a single legal market, you should weigh up your options in terms of selling to a single buyer vs multiple purchasers and the true ultimate value which can be achieved by both.

Selling to a single buyer has some advantages. It can be a more simple and straightforward process. However, negotiations and due diligence can be lengthy to protect their future risk before the legal process can be started.

Selling to a single purchaser poses many challenges, especially concerning client care, case specialisms, and other operational issues.

Potential disruption to client relationships:

A key concern is the potential disruption to established client relationships. Law firms often build their reputation and client base on personal relationships, service and trust cultivated over years. A single new owner may not necessarily hold the same rapport with clients or understand their unique needs as well as the original firm did.

This could lead to dissatisfaction, a decline in service quality, or even the loss of clients who feel their expectations are no longer being met under the new management.

Focus on short-term financial gains over long-term client care

A single purchaser may prioritise short-term financial gains over the long-term relationship and care of clients. This focus can lead to cost-cutting measures that may adversely affect the level of personalised service and attention to detail that clients have come to expect. Over time, this can erode the firm’s reputation and its ability to attract and retain clients.

Less value for work in progress

A single purchaser may negotiate a discount for buying the entire firm as a package, including WIP, rather than valuing each component individually. This could result in a lower overall price.

A single buyer may perceive greater risk in acquiring all WIP, potentially leading them to offer less to mitigate uncertainties, such as the likelihood of clients continuing with the new owner or the successful completion of ongoing cases.

Accepting a lower value for WIP as part of a single sale might breach the owner’s duty to maximise returns for creditors if it can be shown that selling to multiple buyers would have achieved a higher overall return, which leaves a shortfall to creditors.

Selling to multiple purchasers on the Recovery First panel

As an alternative to selling your law firm to a single purchaser, Recovery First provides a method of running off your Work in Progress files by selling them to a panel of multiple Solicitors.

The firms on our panel of Solicitors assist by taking on part-run cases and running them to conclusion.

On the successful conclusion of each case, the Solicitors then pass the files onto an independent cost drafting firm to assess each case so that they can allocate a fair split of costs. The benefit of running off files in this manner is that we can ensure that you retain the value of your WIP in a fully outsourced, managed, and compliant manner.

Using the method of selling your Work in Progress (WIP) files to multiple purchasers on the Recovery First panel offers several advantages, particularly for law firms looking to offload part-run cases efficiently and effectively. This approach contrasts with the traditional method of selling the entire firm or its assets to a single purchaser. Outlined below are the key benefits:

Diversification of risk:

Through the distribution of your WIP files across multiple solicitors, you are not putting all your ‘eggs in one basket’. This diversification helps mitigate risks associated with the performance or financial stability of a single purchaser. If one solicitor faces issues, it only affects a portion of your files, not the entire batch.

Specialisation and efficiency:

The firms on our panel have a wide range of areas of expertise and specialisation. This means your cases will be matched with solicitors who are best suited to handle them, leading to better outcomes, higher success rates, and more efficient case management.

Maximised value retention:

As we have an independent cost drafting firm assess each case upon conclusion, we ensure a fair and accurate allocation of costs. This process helps in retaining the maximum value of your WIP. This can help law firm owners and administrators to fulfil their duties to creditors.

Compliance and management oversight:

Using our model means that the management and oversight of the WIP files are handled in a fully outsourced yet compliant manner. This setup ensures that all legal and regulatory standards are met throughout the process, reducing the burden on your firm to manage these aspects directly.

Financial flexibility and liquidity:

Selling off WIP files gradually to multiple buyers can provide your firm with a more consistent cash flow compared to a one-time sale. This financial flexibility is crucial during transitions, allowing for smoother operations and strategic planning.

Ease of transition:

For law practices looking to exit certain areas of practice or wind down operations entirely, this method offers an orderly way to manage the transition without the abruptness of a full sale. It allows the firm to scale down gradually while ensuring that ongoing cases are handled appropriately.

Client continuity:

Matching capacity at each of our panel firms with the allocation of files ensures that there is sufficient resource available to contact your clients quickly to reassure them that their file is safe, will be reviewed quicky and a plan to move it forward devised and communicated, and that strict confidentiality is being maintained.

As we carefully select solicitors who can competently take over cases, we help to ensure continuity of service for your clients. 

Why Choose Recovery First when closing your law firm?

Recovery First is the optimal choice for those looking for a structured exit from any legal market and wanting to recover 100% of their recoverable WIP value, paid disbursements and an entitlement to a proportion of any success fee.

Whatever the reason for closing your firm, Recovery First will ensure the most positive and profitable outcome is achieved. The unique scheme offered by Recovery First is suitable for both law firms and professional advisors, such as accountancy firms and insolvency practitioners.

We guarantee 100% confidentiality for all clients. If you would like to find out more, get in touch today using the information below.


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