How in-house lawyers can use litigation funding to become the Financial Director’s hero!

Funding ensures costs taken off the balance sheet, while money is not “left on the table” because of short-term budget considerations.

Perhaps surprisingly, whether you win or lose your legal case, using external finance to pay the costs of litigation helps your company’s balance sheet. In fact, it delivers the sort of benefits that will make the finance director a big fan. Here’s why:

When your company has a big-value claim often it will not sit as an asset on the balance sheet or, if it does, it will be impaired due to its uncertain outcome. By contrast, the ongoing legal costs of pursuing the case, however, hit the profit & loss account immediately. So, for the balance sheet, litigation is all cost but little benefit until the judgment or settlement happens. Further litigation often catches the attention of the risk committee who are more concerned with mitigating the risk rather than realizing the maximum value of the litigation asset.

In large companies with a lot of litigation, such as banks and insurance companies, legal costs may well be viewed as a standard cost of business. But most companies don’t have the luxury of a budget for major litigation, which is often not anticipated, so any substantial legal costs for a big claim will most likely be unbudgeted and have to come from other budgets in an organization affecting business operations. 

Legal costs, as a case progresses, can quickly become large enough to have a material impact on most firms’ financial reporting since they are a direct overhead that reduces overall profits and ultimately dividends. In some jurisdictions, England and Wales being one, it may be necessary to reserve for adverse costs risk.

It can even mean that meritorious claims are not pursued, even where a win is highly likely, because of the short-term impact of costs.

This is why litigation funding is attractive for corporate in-house legal teams, and their colleagues in finance, as it helps keep legal costs off the balance sheet and also ensures money is not “left on the table”.  Indeed, the prospect of a business having plenty of financial firepower to pursue its dispute may well make the opposing party think even more carefully about settling.

For companies looking to be acquired, there is an additional benefit. Having unresolved legal claims is unattractive to acquirers. Sure, they will like the potential pay-out if it arrives, but generally they will worry more about costs escalating after they have acquired the business and becoming an unexpected financial burden. Further they may not have the knowledge of the underlying issues giving rise to the claim.

By contrast, external finance brings accounting benefits as not only will legal costs be taken immediately off the balance sheet, but future budgets and forecasts will not need to build-in the potential costs of a drawn-out and hard fought case. 

In fact, some commentators note that the benefit brought to the P&L by external litigation finance actually improves the valuation of a business.  This is because the value of a business is often based on a multiple of its profits, which will be lower if it is paying for the costs of a lengthy litigation from internal resources, while the prospect of an eventual award for the litigation will not significantly increase its value because it is, as already noted, impaired.

Our conversations with in-house counsel indicate that many see external finance as an expensive way to fund their litigation despite the balance sheet benefits. 

This need not be the case. Putting aside the benefits to the financial health and profitability of your business, testing the market to get the best terms is also important to ensure you get the most affordable offer.

This can be time-consuming at the best of times and particularly when using litigation finance for the first time. To simplify the process, we have created FINLEGAL.IO to help inhouse counsel approach a range of funders simultaneously using one straight-forward form. We even provide plenty of online explainers to help those new to the process.

To sign up and receive further information about the new forum for securing external litigation funding from a range of providers, simply click here.