Law Firm Due Diligence Checklist for Buyers
By the time a buyer signs a letter of intent on a law practice, they have usually seen summary financials, met the seller and formed a view of the clients and the work. Law firm due diligence is the stage where those impressions are tested against records. It is where a buyer learns whether revenue is as durable as it appears, whether receivables will actually be collected, whether client trust practices are sound and whether the clients are likely to stay once the seller steps back.
This checklist is organized by area so buyers, their advisors and their lenders can work through it systematically. It is a practical guide, not legal or ethics advice. Many items involve professional conduct rules that vary by jurisdiction, and those should be reviewed with qualified counsel. For the overall deal process, see our guide on how to buy a law practice.
1. Financial Records
- Several years of business tax returns and financial statements
- Interim statements for the current year
- Bank statements that reconcile to reported revenue
- Owner compensation, draws, distributions and personal expenses run through the practice
- Recurring operating expenses, including rent, staff, technology and insurance
- Any existing debt, leases or obligations that will remain with the practice
The goal is to confirm reported earnings and understand what the practice earns after paying for the legal work the seller currently performs.
2. Revenue Quality
- Revenue by client for each year reviewed
- Revenue by practice area and by fee type: hourly, flat fee, retainer and contingency
- The share of revenue from repeat or institutional clients versus one-time matters
- Origination: which attorney brought in each significant client
- Trends in new matters, referral sources and marketing channels
Revenue concentrated in a few clients, a single practice area or one attorney deserves extra scrutiny. Our article on law firm client concentration and rainmaker dependence explains why.
3. Accounts Receivable and Work in Progress
- Accounts receivable aging by client
- Unbilled work in progress and how it is recorded
- Historical write-offs, write-downs and fee reductions
- Any fee disputes or clients who regularly pay late
- Whether receivables are included in the purchase or retained by the seller
Receivables can represent significant value, but only if they are collectible. See our guide to law firm accounts receivable and WIP for more on evaluating collection cycles.
4. Contingency Matters, if Applicable
- A schedule of open contingency matters, their stage and the responsible attorney
- Case expenses advanced and how they are tracked
- Historical patterns of case resolution and fee recovery
- How fees on pending matters will be handled after the transition, consistent with applicable rules and client agreements
Contingency practices have distinct cash-flow patterns, discussed in our article on contingency fee law firm cash flow.
5. Engagement Letters and Fee Arrangements
- Standard engagement letter forms and a sample of signed agreements
- Any non-standard fee arrangements with significant clients
- Whether fee arrangements are documented consistently
- Any referral or fee-sharing arrangements with other lawyers, reviewed against applicable rules
6. Client Trust Accounts
- How client trust accounts are maintained and reconciled
- Recent reconciliations and any discrepancies
- How client funds will be transferred or handled at closing, in the manner required in the jurisdiction
Trust account issues can create serious professional and financial problems. Buyers should have qualified professionals review trust practices and confirm requirements for handling client funds during a transition.
7. Professional Liability and Disciplinary History
- Professional liability insurance policies and claims history
- Any open claims, threatened claims or known issues
- How coverage for the seller’s prior work will be addressed, such as extended reporting or tail coverage
- Good standing of the attorneys involved and any disciplinary history, confirmed through the appropriate authorities
8. Conflicts and Client Files
- The process for identifying potential conflicts between the buyer’s and seller’s clients
- How client files are stored and how they will be transferred
- Requirements for client notice or consent before files and matters move, which vary by jurisdiction
- Record retention obligations for closed files
9. People
- Associates, paralegals and staff: roles, compensation, tenure and client contact
- Which staff members are critical to client relationships or operations
- Employment agreements, bonus arrangements and any restrictive covenants
- Whether key people intend to stay after the transition
10. The Seller’s Transition
- How long the seller will remain involved and in what role
- Which clients the seller will personally introduce
- Any restrictions on the seller’s future practice, to the extent permitted in the jurisdiction
- How the seller’s compensation or payments are tied to the transition
11. Office, Technology and Operations
- Office lease terms, remaining term, assignment provisions and landlord consent
- Practice-management, billing and document-management systems and whether data can be transferred
- Data security practices and any known incidents
- Vendor contracts that will transfer or need to be replaced
How Diligence Findings Affect Price and Financing
Diligence findings often lead to adjustments. Weak receivables may be excluded or priced separately. Heavy owner dependence may lead to a longer seller transition, a larger seller note or a lower price. Trust account or liability concerns may need to be resolved before closing. Lenders will review many of the same items, so organized diligence also helps the financing process. Our guide to law firm valuation explains how these findings feed into price.
Build Your Professional Team
A law practice acquisition benefits from an accountant familiar with professional practices, counsel experienced in practice sales and professional responsibility in the relevant jurisdiction, an insurance advisor for professional liability coverage and a lender who understands legal practices.
US Professional Funding works with attorneys buying established practices and with firms pursuing ownership transitions. Learn more about our law firm acquisition and partner buyout financing.
