News & Views

Five key regulatory considerations when selling a law firm

For law firm owners contemplating a sale or exit, whether this is prompted by succession planning, market consolidation, or strategic realignment, it is essential to approach the process with a clear understanding of the regulatory obligations involved. Unlike more straight forward corporate transactions, the sale of a legal practice carries with it unique regulatory requirements, and it is crucial that these matters are properly addressed to ensure compliance.

Below, we outline five key regulatory considerations that should be factored into any exit or sale planning process:

1.    Professional indemnity insurance (PII) and run-off cover

When transferring ownership of a practice, it is a common misconception that a firm’s existing professional indemnity insurance (PII) policy will automatically continue following the sale or closure of a practice. In truth, this will depend entirely on the transaction structure.

Where a sale results in the cessation of the seller’s standalone legal practice, the buyer may be deemed a successor practice under the SRA Indemnity Insurance Rules (Rules). In such cases, unless steps are taken to engage run-off cover, the buyer's PII policy could automatically extend to cover the seller’s historic liabilities, effectively making the buyer responsible for past claims, even if they pre-date the acquisition.

Under Annex 1, paragraph 5.5 of the Rules, the seller (as the prior practice) has the option, before cessation, to either:

• Elect to engage run-off cover under its existing PII policy; or
• Be treated as a prior practice under the buyer’s PII (if agreed).

If no such election is made and the seller fails to pay the run-off premium, the buyer (as the successor practice) will be left assuming those liabilities by default.

To minimise uncertainty and de-risk the transaction, it is preferable for the seller to procure and fund run-off cover in advance of completion. This would provide for a clean break and can be factored into the transaction terms, either as a negotiated cost within the consideration or via indemnities and price adjustments. Crucially, insurers should be consulted early to confirm how the transfer will be treated.

2.    Outstanding complaints and client redress

As part of any sale process, the buyer will undertake detailed due diligence to assess the target firm's regulatory exposure, including a review of complaints history and claims risk. This review typically covers both internal (tier one) complaints and any matters that have been escalated to the Legal Ombudsman (LeO), or to insurers, as potential negligence claims.

Unresolved complaints (depending on their nature and severity) can significantly affect deal dynamics. They may result in delays to completion, impact valuation, or in some cases, deter a buyer altogether. Another concern is that, under LeO rules, a buyer may be deemed a successor practice for complaints-handling purposes. This means that the buyer could be held responsible for historic client complaints, even where the underlying conduct occurred prior to the acquisition and was entirely outside the buyer’s control.

To mitigate this risk, it is advisable for sellers to:

• Audit complaint and claim records at an early stage of sale preparation.
• Resolve or close outstanding complaints wherever possible before completion.
• Ensure that complaints-handling policies and documentation are up to date and compliant with regulatory requirements.
• Disclose relevant information against the warranties in the purchase agreement or, where appropriate, include additional warranties so the necessary information can be disclosed.

Taking proactive steps to manage legacy complaints not only enhances the attractiveness of the firm to potential buyers but also reduces the risk of future post-completion exposure for both parties.

3.    Regulatory status and non-lawyer ownership

Where a law firm is acquired through a share purchase, regulatory approval from the SRA will be required prior to completion. This applies even if both firms involved are already authorised, as the SRA must assess and approve any new persons becoming owners, managers, or compliance officers (COLP/COFA), of an authorised body. Depending on the nature of the transaction, the approval process may involve updating ownership records, appointing new COLP/COFA, and ensuring the acquiring entity satisfies the SRA’s criteria for control and governance.

Particular care is needed where the prospective purchaser is a non-authorised person, is a licensed body (ABS), or if non-authorised persons will be appointed as directors, or designated members (if an LLP). In such cases, the firm being acquired, or the buyer, must either already be, or become, a licensed body (ABS), which permits non-lawyer ownership or control of a legal practice. The process of applying for ABS status is detailed and can take several months, involving extensive disclosure around ownership, decision-making structures, and compliance arrangements.

Conversely, if the selling firm is already an ABS and the buyer is not, the buyer does not necessarily need to become an ABS. The key requirement is that the ABS status of the target must be maintained, which includes having at least one non-authorised person (e.g. a non-lawyer) as a manager or owner. This condition can typically be met by appointing a non-lawyer to the board or ownership structure post-completion. However, if that structure cannot be preserved, the buyer may need to apply for ABS authorisation in its own right. Early engagement with the SRA is advisable to confirm the appropriate approach and avoid regulatory delays.

4.    Client engagement and notification

If a buyer were to acquire a law firm by way of a share sale, the legal entity holding the client relationship remains unchanged. In such cases, client notification is not strictly required from a regulatory perspective, as there is no change to the contracting party or the legal service provider. However, some firms may choose to notify clients as a matter of good practice, particularly where the change in ownership is likely to impact ongoing relationships or service delivery.

By contrast, in the context of a business or asset sale, the solicitor-client relationship is personal and contractual, and any attempt to transfer that relationship must be approached with care. In such transactions, clients’ matters will transfer from the selling firm to the acquiring entity, which will require informed consent from the client. In accordance with the SRA Code of Conduct, the selling firm must:

• Notify clients of the intended sale and explain how their legal matters will be affected.
• Seek express consent to transfer ongoing matters to the acquiring firm.
• Provide clients with the opportunity to instruct alternative legal advisers, should they prefer to do so.

5.    Client confidentiality and data protection compliance

The transfer of a legal practice invariably involves access to and, in some cases, the transfer of confidential client information and personal data. Failure to manage data responsibly may give rise to regulatory breaches and reputational harm, as well as potential civil liability. For further information on the steps required to protect such data, please see our article: Protecting data during the sale of a law firm

Further information

The sale of a law firm should always aim to strike a balance between the commercial requirements and regulatory considerations. Presenting a well-managed and compliant legal practice will not only increase buyer confidence but may also enhance valuation and reduce the risk of post-completion issues arising.

The views above provide an overview of the current legal landscape and do not constitute legal advice. For further information, please email Natasha Lackner or Michael McKenna, or call 0151 906 1000.