The following article has been supplied by Travelers Europe. 
The UK’s legal sector could be poised for a boom in dealmaking during 2025. Recent developments in technology, the fragmented state of the sector, and growing private equity interest are creating the right conditions for a spike in mergers and acquisitions.[1] PwC’s recently published survey of the UK’s 100 largest law firms found that M&A continues to be a key focus for firms across the board. A majority of the firms surveyed said they are actively pursuing or considering a tactical acquisition in order to build scale in a geography (60%) or particular practice area/service line (58%).[2] The pressure to invest in artificial intelligence (AI) or other legal technology to compete is likely to drive demand even further – particularly if forward-thinking competitors have gotten a head start in this area.[3]
While it’s an exciting time for firms to consider new investments that can help them gain new ground in the marketplace, these changes also generate challenges. Preparing for a M&A requires firms to practise robust financial management so transactions can proceed smoothly. They demand that firms manage the risks of new technology without the insights of a long track record guiding such decisions. M&A can also test law firm culture at a time when clarity of culture is critical to attracting and retaining talent. That is especially true as firms expand to new territories internationally.
“Firms that can anticipate how to respond to these risks can strengthen their position for growth,” said Sharon Glynn (pictured top, right), managing director at Travelers Europe. “At the same time, their efforts can help them secure the insurance cover they need to protect them through these changes.”
As firms considering an M&A look ahead to their insurance renewals in 2025, they should expect to have to answer more questions about how they operate. Insurers need to make sure their prospective insureds can demonstrate good financial hygiene as they prepare to make these investments – whether they are the acquiring business, or are the one being acquired.
Through the process, insurers will want to assess the firms' financials, understand the cultural alignment of the merging firms, review claims history, and ensure proper compliance with know-your-customer and anti-money laundering processes. Further, the insurer will want to seek assurance that the firm has a record of giving accurate advice, has followed know-your-customer and anti-money laundering processes carefully, and has demonstrated good hygiene and complete recordkeeping when it comes to the scope of retainers.
“As insurers, we need to know there aren’t any skeletons in the closet that could generate claims and damage the acquiring firm’s claims record if a firm decides to take on the past liability and not purchase run off,” said James Graham (pictured top), managing director at Travelers Europe.
Brokers can help their prospective insureds prepare.
“They can help firms gather the information needed to demonstrate how they will integrate new business smoothly whilst maintaining their organisational culture and standards of client service,” said Graham. “This preparation will only grow in importance as the Solicitors Regulation Authority increases their focus on law firm M&A.[4]”
As law firms consider growth strategies in the current environment, many are looking to acquire organisations with strength in AI. The PwC survey found that the largest UK law firms are especially optimistic about generative AI, with the majority expecting future productivity gains as their organisations use the technology in new ways.
Other firms are more cautious about generative AI. Many firms believe it may cause clients to expect a reduction in prices. They may also feel they need to invest in the technology at all costs to remain competitive, or search for opportunities to merge to create economies of scale. The urgency around using generative AI and other legal technology to drive efficiency makes it particularly important for firms to verify the technology they are looking to acquire, assess the people around the business, and understand potential regulatory risks.[5]
As law firms consider M&A, brokers can streamline their insurance renewal process by reinforcing the need to evidence due diligence to insurers, as well as reviewing the organisational structure of the business,” said Glynn. “We want to understand how the firm plans to integrate and onboard new employees and ensure there are no silos in the merged organisation. The financials of the merging organisations are important too, as well as their claims experience. As insurers, we consider the firm’s past to be a valuable indicator of their future performance.
This article is provided for general informational purposes only. It does not, and it is not intended to, provide legal, technical, or other professional advice, nor does it amend, or otherwise affect, the provisions or coverages of any insurance policy issued by Travelers. Travelers does not warrant that adherence to, or compliance with, any recommendations, best practices, checklists, or guidelines will result in a particular outcome. Furthermore, laws, regulations, standards, guidance and codes may change from time to time, and you should always refer to the most current requirements and take specific advice when dealing with specific situations. In no event will Travelers be liable in tort, contract or otherwise to anyone who has access to or uses this information.
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[1] https://www.business-sale.com/insights/for-buyers/slumbering-legal-sector-wakes-up-with-a-surge-in-dealmaking-224445
