The perfect fit

Law firm mergers and acquisitions (M&A) have long been a mainstay of reporting in the legal press. The well-publicised failings of Metamorph Group and Axiom Ince have helped renew interest, and indeed criticism, of this approach to growth.

According to UK legal sector: review of mergers and acquisitions activity (published by Saffery earlier this year), the acquisitions market remains active, with 69 transactions between 1 July 2022 and 30 June 2023, compared to 43 in the previous 12-month period. However, LexisNexis’ Bellwether 2023 report, which looks at small firms and sole practitioners, found that only 13% of its respondents were planning to grow via M&A compared with 2022, when 16% were planning that route, and 15% in 2021. Instead, 59% of respondents who were expecting their firm to grow were planning to achieve this via client acquisition, and 47% were planning to sell more work to new clients.

The current market

One of the authors of the Saffery review, and partner of the firm, Jamie Lane, commented: “One of the attractive features of the M&A model of law firm growth is the potential for increased partner profitability via economies of scale, especially as the burden of increased regulation may be beginning to squeeze profits.

“While there are risks, having a clear strategic rationale along with careful planning and post-deal integration are key to getting value from any merger.”

Andy Poole, legal sector partner at accountancy practice Armstrong Watson, and legal M&A expert, added: “The number of higher profile acquirers may have reduced in the past year or so, but that has not reduced the appetite for acquisitions, mergers or disposals across a wide range of firms.

“Smaller firms need to plan for succession and are often frustrated by management and compliance requirements. Larger firms that have historically been the acquirers are also now looking to sell / merge, as they see the need to invest in technology, become more efficient, and continue to compete. The acquirers, both new-entrant consolidators and traditional firms, are also looking for further economies of scale and access to new markets.

“All of this is continuing to drive legal sector M&A. Not all the transactions are multiple-based goodwill valuations, as many are still structured as mergers, even if, in reality, it is a takeover; however, there are still significant acquisition payments being made for the right types of firms.”

Making a difference

Lawfront is a regular acquirer in the legal space, with Fisher Jones Greenwood – an Essex-based practice with nine offices – Farleys – a Lancashire and Manchester firm with six offices across the region – and Nelsons – a firm with three offices across the East Midlands – as member firms. The acquirer’s focus is upon full-service practices with a strong people culture.

Neil Lloyd, Lawfront’s chief executive officer, said: “Our model looks to maintain and invest in local leadership and brands, rather than subsume them within the larger firm. We deliver the benefits of consolidation via central management by light-touch practices, such as investing in people, the provision of price and cost benchmarking, and making capital available for investment in staff, IT and processes. Local merge-ins led by local management are also encouraged where they support the broader strategy.” In April 2022, Fisher Jones Greenwood acquired Steed & Steed, Farleys acquired Mulderrigs in February 2023 and Nelsons acquired Pattersons Commercial Law and Cleggs Solicitors in November 2023.

Models such as Lawfront can be attractive, as they provide a succession plan for firms that may not have obvious future equity partners, and therefore also provide a higher value for current equity partners with an eye on retirement. The ability to retain the brand of an existing firm, alongside a degree of flexibility around management and strategy, may also be attractive to both the existing partners and the next generation of senior lawyer. While these individuals may not currently want to invest, they are likely to want reassurance and clarity as to what will change, as and when a merger or acquisition completes.

The MAPD Group has completed six acquisitions since its inception in March 2020, four of which have taken place in the last 14 months. Acquired firms include Avidity IP Group, Thomson Hayton Winkley and the Rural Law Practice, and Bromleys. The business currently employs more than 500 people in 14 offices, with a turnover of around £36m.

MAPD’s chief operating officer, Joanna Kingston-Davies, commented: “We are driven by our purpose (that is, what MAPD stands for: making a positive difference) and we very strongly believe that alignment to that sense of purpose – how firms make a positive difference to their people, their clients and the communities within which they operate – is absolutely fundamental to a successful acquisition.

“We believe in having a diversified portfolio of work across all of our brands (corporate commercial, transactional, litigation, private client and access-to-justice work) because it creates a more sustainable business for everyone and protects us from external variables such as the economic and political landscape.

“MAPD brands operate under their own name from a client-facing perspective; businesses are simply ‘powered by MAPD’, through our shared values and the back-office operational services that we provide to them.

“We collaborate across the businesses within the group on all material supplier contracts to leverage the scale and benefits of being part of a group, but we also facilitate strong collaboration between teams at every level to share knowledge, processes, thought leadership and to avoid duplication, which benefits everyone.”

There are also new entrants into the market. EMW Law’s recently appointed managing partner, James Geary, has set the firm upon the M&A path and is actively seeking to acquire firms to enable the practice to grow and broaden its geographical reach. He said: “We are looking for profitable firms where there are clear synergies to be maximised by bringing the practices together. We have ambitious plans to double turnover by the end of the decade and, while we believe that a good proportion of this can be achieved organically and through diversifying into other services outside of law, we are forecasting that the majority of that growth will be via merger and acquisition.”

Why follow the acquisition trail?

M&A is still seen as one of the quickest and most effective routes to law firm growth, and increased interest by outside funders – for example, Inflexion’s take private of law firm DWF – indicates that acquirers are not alone in seeing untapped potential in the sector. The resilience of the legal market to external threats (highlighted by the profession’s successes against the norm during the COVID-19 pandemic) is also no doubt attractive.

Andy Poole commented: “Organic growth, while less risky, is also less transformative. Acquirers realise that, to compete more effectively, they need to have more scale to cover the increasing costs of running their businesses and to invest in the best people, the best technology and the best working environments, and, in many cases, to be able to offer the full service that key clients demand.”

Successes and potential pitfalls

Philip Lewis, a former banker who now specialises in M&A matchmaking, said: “One of the key aspects of a successful merger is a similar culture across both practices. Where firms have very different working practices – for example, the dominant firm has a strong office-based workforce, whereas the joining practice has traditionally allowed a degree of flexibility and homeworking – there is the significant possibility of a real clash.

“In the worst cases, trying to overlay a new culture onto an existing practice can result in employees and clients voting with their feet. While some shedding of staff overhead is to be expected, and may be beneficial longer-term, nobody wins if the superstars leave.”

With merger activity comes change, which is notoriously difficult to manage effectively in the workplace. Unfortunately, law firms are not always on the front foot when it comes to proactively managing internal communications, and problems arise from the offset when team members don’t feel involved or supported during the merger process.

Internal communications and inclusion specialist, and founder of Comms Rebel, Advita Patel said: “Effective, transparent and inclusive communication during a merger or acquisition is critical if you want to retain talent and expertise in your firm. Good internal communication can help cultivate powerful connections through two-way engagement, meaning people feel valued and part of the conversation. The biggest communication pitfalls are failing to provide information, giving limited or no opportunities for feedback, making assumptions, and not giving people enough time to digest what’s happening.”

Lawfront’s Neil Lloyd added: “Culture is the most important factor and, for us, that means people culture – that is to say, how a firm’s management engages, communicates with, empowers, develops and incentivises their colleagues.”

In addition to culture and employee engagement, there are other pitfalls to be aware of, including pricing and profitability, professional indemnity insurance (PII), systems, property and people.

On future pricing across the combined practices, Lewis continued: “It’s very important to ensure that you understand how matters and work are priced and recognise that it will take time to bring any pricing changes into effect. Ensure that you effectively communicate on how matters are to be costed but also recognise that significant price hikes can result in lost clients. Remember that a client will often expect improved service with increased fees, so ensure you are clear around client service expectations, and provide training and mentoring if necessary.

“In addition, and clearly linked, is remembering that profitability is key. You need to know what your firm is actually buying. Careful due diligence will help.”

Brian Boehmer, partner at insurance broker Lockton Solicitors, commented upon PII considerations: “First of all, all acquirers need to get really comfortable with the ‘Successor Practice Rules’ and give detailed consideration as to whether the joining firm will acquire run-off insurance and join the firm with no previous claims history or be merged into the acquiring firm’s PII cover. It is also possible to run two policies concurrently for a period of time.

“If the acquiring firm is going to absorb the firm into its existing policy, then very detailed due diligence will be needed by carefully reviewing a range of the open and previous files along with a selection of matters managed by any former employees. It is particularly important to take a detailed look where the team to be acquired has had high staff turnover, or if there is a long-standing team operating in an area that’s unfamiliar to the acquiring firm. It is vital to review not just compliance within each matter but also the quality of the legal work carried out.”

For EMW’s James Geary, one of the acquiring firm’s attractive features is that it can work with practices that may have PII-related issues. He commented: “Our PII arrangements mean that we can more easily accommodate firms that are facing challenging renewal premiums.”

Another important consideration relates to the actual nuts and bolts of bringing two firms together, and systems can create a significant challenge. Philip Lewis commented: “The integration of systems and processes should not be overlooked. You should consider the method and timetable for having one common practice management system, as running two systems can be a costly burden. It also makes it much harder to have meaningful management information and can lead to enormous frustration.”

Boehmer added: “Even where both firms use the same case-management system, it’s important to ensure there’s an integration plan for client data and ways of working.”

Property is another key consideration for players in the market, and it is important for the parties to know exactly what the assets and liabilities are for each practice and plan for their future management. Andy Poole commented: “Property is always an interesting aspect of any deal – whether it be vested interests of personal ownership, ongoing lease costs, best location or how to treat dilapidations or required improvements. It is always best to raise such matters at an early stage in discussions and document the agreed position, including whether the property is even needed at all.”

As already outlined by Philip Lewis, people should be a key consideration for a merger – both in respect of how to manage change and communicate properly, and in respect of culture and how each firm goes about its business. As well as the employed staff, the players at the top need to consider how they will work together. James Geary said: “If a firm doesn’t pass our glass of wine test, we don’t move forward – would you want to have a drink with the key principals at your local?” Brian Boehmer added: “The process is akin to a courtship. What does the relationship look like when you are having those tough conversations? Merger discussions often break down when the parties realise that it just won’t work. They can’t envisage working together.”

A final thought relates to perception outside of the immediate discussions. A significant risk inherent in a merger or acquisition is that of the reputations of the practices involved. It’s a truism that a good reputation takes years to create but moments to destroy. Effective due diligence pre-deal should help to mitigate reputational risks created by metaphorical skeletons in the closet, but the strategic use of effective public relations and communications – both internally and externally – can also make a big difference. As Advita Patel commented: “if you were to calculate the loss caused by poor communication, I can guarantee it would be much higher than the investment needed to do it well.”