The acquisition activities of law firms make headlines in the legal press every week, but what are the trends to expect in 2021?
Law firm strategy experts, Andrew Hedley, Andrew Roberts and Paul Bennett, look at the lessons, opportunities and issues with acquisitions for firms of all sizes with distinct markets.
The acquisition opportunities for small firms are that they can acquire or be acquired far more easily than many larger practices. Paul Bennett of Bennett Briegal LLP, a law firm which specialises in advising other law firms, comments on the options: “If the intention is to exit smoothly into retirement or to grow the firm, then options to be acquired will exist, as will the option to acquire other small firms. The exit opportunities will be limited though, for firms with a modest turnover and more generic client base. It is a buyer’s market and always has been.
“Specialist firms, by contrast, tend to do very well at this level because they have something to distinguish them, opening up the possibility of expansion into linked areas of practice. The price they can generate is kept modest by their smaller scale. Large firms looking for specialisms can add two or three teams of niche firms which are smaller in scale and more easily accommodate them.”
Just because you can do a deal does not mean you should
Paul Bennett, Bennett Briegal LLP
The picture for small firms is therefore a contrasting one. A high-street offering may appeal to another local law firm or a consolidator firm looking to acquire geographical coverage across England and Wales, but not to anyone other than competitors and consolidators.
High street firms may imagine that they would not be attractive to potential buyers, but as long as they are established, have a strong local reputation and a good claims record, this is not the case. Andrew Roberts comments: “Fees for brokers, accountants and lawyers can appear to be a barrier to sale, but the costs of the alternative – such as run-off, redundancies and storage – are often far higher. If the firm is a good business there will always be others happy to acquire it, it is only the dynamics of the deal you need to get right.”
Mid-tier firms face pressure from above – as larger firms look to acquire their more valuable and growing clients – and from below, with smaller firms looking to compete using a more personal service or price.
Andrew Roberts of Ampersand Legal, a merger broker to law firms, observes: “We are very encouraged by the number of active buyers in this market. Most firms we know took the opportunity to cut excess costs (usually office space, support staff and non-efficient fee-earners) and have taken advantage of the furlough scheme and Coronavirus Business Interruption Loans scheme. The effect is that, whilst fee income might have dropped by 10%, their costs dropped by 15% so they have come out of the short, sharp shock leaner and hungry for growth. There are more firms looking to grow by acquisition than we have seen in 20 years.”
The growth ambition is key. The mid-market is focused on growth because it needs economies of scale to be fit for the 2020s. For those looking to sell in this space, the specialist law firm brokers, accountants and legal teams are all within budget. The support network for a deal can be built easily and quickly.
We expect this to be the most active market for the foreseeable future.
Large-firm acquisition is the least active market at present. Andrew Hedley of Hedley Consulting understands why this is happening, given his work in the space, and says: “These firms now have the scale that they require to service their UK clients. There are, quite simply, not many ‘doable deals’ or an appetite to scale up further with significant combinations within the UK market. Instead, their [mergers and acquisitions] focus has shifted to building capacity outside domestic markets.”
So, super-mergers within the top-50 market are less likely than in previous years. However, these firms are still looking to grow, and many have a keen interest in team moves mirroring the small firm appetite for specialist acquisitions outlined above. Hedley believes the reasons for this are obvious: “Specialist teams or boutique firms in niche practice areas will often have revenues that would place them in the top 200, were they standalone firms. The advantage over a single lateral hire is clear – if a capability is removed entirely from a competitor then the transfer of clients for that practice area is so much easier to accomplish. The recent acquisition by Deloitte Legal of Kemp Little is a good example of this focused activity.”
Bennett reveals: “In 2020, we were involved in a deal which fell down as the large firm lost its appetite for a boutique-firm acquisition at the last moment. Just because you can do a deal does not mean you should. What is the cultural fit? How will clients react? These are important questions to ask.”
What does this tell us?
If you are looking to sell, then your place in the market – as either a generalist or specialist firm – will be an enormous factor in the opportunities that are open to you.
Small to mid-tier firms are looking at solutions because of the ageing partner demographic. We expect this to accelerate, as those exhausted by the pandemic who do not want to carry on look to exit the market over the next two years.
If you are a buyer, beware – you are seeking the same opportunities as your competitors. You need to have a compelling offer (not just the deal price) that includes earn-out opportunities, reputational security and a solution to the professional-indemnity-insurance market challenges.
The authors are all members of the Association of Law Firm Merger Advisers (ALFMA).