Gordon Dadds hit the news this summer, as the second law firm to float on the London Stock Exchange. Duncan Wood talks to managing partner and CEO, Adrian Biles, about the firm’s strategy and business plan.
In August, London legal and professional services firm Gordon Dadds (GD) became the second law firm to float on the London Stock Exchange. The listing on the Alternative Investment Market (AIM) comes after Work Group plc agreed to purchase the firm in a £18.8m deal.
The £18m proceeds of the placing will be used principally to fund acquisitions and for working capital, explains GD’s managing partner and CEO, Adrian Biles. ‘We had grown the business to the maximum size we could using our own resources,’ Biles says. ‘We operate a third-party capital model, and for us to continue growing, we needed more capital. We decided that the capital markets were the best route to follow.’
GD has outlined an ambitious acquisition strategy to double its £25m revenue over the next three years by becoming a legal market consolidator.
Gateley was the first UK firm to market in 2015, and announced a 44.8 per cent rise in pre-tax profits in the six months up to November 2016, just one year after flotation. Biles insists that he wasn’t studying Gateley’s first steps too closely. ‘They have a slightly different model to us, but more significantly, the experience we take from floating is our own,’ he says. ‘For us, flotation is a very good opportunity to grow the business significantly, because that is what we need to do.’
While Gateley may be thriving one year on, listed Australian firm Slater and Gordon saw its share price plummet and a raft of negative publicity after it bought the legal services arm of insurance outsourcer Quindell (now known as Watchstone) in a disastrous £637m deal in 2015. Biles says this did not provoke second thoughts about GD’s own move. ‘Slater and Gordon is a perfectly sensible listed vehicle for personal injury-type work. They made one bad decision, which was to pay as much as they did, and in cash, for Quindell. You cannot pan their whole business model on the basis of that one mistake.’
With Gateley’s bullish trading performance – not to mention the potential share windfall for partners and employees – why have no other firms rushed to follow suit? ‘It’s very difficult for law firms to change their strategy and structure,’ Biles says. ‘A typical law firm is owned by its partners, and generally most of those partners have to agree on a strategic decision, which is hard to achieve.’ He’s not sure he buys the theory that lawyers are wary of ceding control to external investors: ‘If you are one of 100 partners, you effectively have one per cent control of the business. What control do you really have?’
In fact, securing buy-in from the business proved to be very straightforward. The possibility of going public had been discussed with staff for two years, and consensus was built by strong and clear communication, Biles explains. ‘If you believe in our model, then flotation was the obvious next step,’ he says. ‘We have always been clear that we do not believe in a model in which partner loans provide the capital to the business. We chose to raise the capital from a listing on AIM; equally, it could have been via private equity investment. Most of the staff are shareholders anyway and subscribed for shares before the listing. Some partners also put significant money into the placing. Our people are very supportive of our model.’
Biles foresees a smooth transition to a plc. ‘There are clearly going to be more requirements in terms of investor relations and formal reporting, but we have always operated the business on a corporate basis. Our management information has always been high quality, and we have never been shy to be scrutinised. We are happy to share our experience with investors, the market and the public.’ If anything, the listing has greatly enhanced the reputation of the business with clients, he believes. ‘Having a strong balance sheet gives them confidence in our ability to survive; and I imagine we have the only balance sheet like it in the City.’
GD’s listing has also seen new blood flow into the business. Anthony Edwards, a qualified solicitor, former managing partner of Thomas Eggar LLP, and former non-executive chairman of investment management service provider Thesis Asset Management plc, is the group’s new non-executive chairman. Simon Howard, chairman of Work Group plc since inception, and senior executive in the UK recruitment industry for over 20 years, is a non-executive director. ‘We are fortunate to have their experience and expertise on board,’ says Biles. ‘Tony Edwards brings considerable experience of running a substantial law firm and a great network of contacts. We gain Simon Howard’s experience of the recruitment world, which is obviously helpful in a people-orientated business such as ours.’
The share model
Most of the current partners in GD owned shares in the business pre-listing. Each GD client is allocated a client care partner (CCP) who receives, as allocated profit share, a percentage of annual revenues billed to those clients for whom they act as CCP. The CCP is responsible for managing the client’s relationship with the firm from every perspective: they are responsible for all work that gets done for the client, for ensuring that work is priced correctly for the client and paid for, and for making the client aware of the different services GD offers. ‘It is a proper job, as it were, for which the CCP is remunerated,’ says Biles. All partners perform some element of the CCP role.
Each partner receives, as allocated profit share, a percentage of their personal billings, whether or not they are the CCP. ‘Partners can share in the improvement of the value of those shares, by virtue of their own efforts, which is clearly a self-fulfilling and effective circle of activity,’ says Biles. So far as people coming into the business are concerned, there is a share ownership scheme they can join. A proportion of the share capital will be reserved for share options to incentivise staff, and of course anyone who joins the business can buy shares on the open market. Staff are also entitled to a full workplace benefits package, including private medical insurance.
The strategy in action
The GD business model works by both integrating mid-market law firms under the Gordon Dadds brand, and acquiring smaller firms, which retain their brand identity, providing a platform for legal practices to gain the necessary scale to compete successfully. Biles believes there is great scope for consolidation in the market, and the capital raised from the listing will fund its next round of acquisitions of larger, high-end professional services firms. GD has its focus on the top-1,000 UK firms, with annual revenues of around £2m-£40m. ‘We will look at businesses which serve similar practice areas, are geographically close to where we have existing offices, and where the people are enthusiastic about pursuing an alternative way of providing services to clients,’ he says.
GD has already integrated 12 firms into the business over the past four years, including commercial firm Jeffrey Green Russell and UK immigration specialist Platt & Associates. Gordon Dadds Group plc now has more than 140 solicitors based in three offices. When GD merges with a firm, the acquired business gets branded Gordon Dadds and adopts its culture. GD offers a robust ongoing training programme to ease the merging and consolidation of teams. ‘In any of our offices on any given day, there is a training session going on, from networking to general business strategy. We are good at disseminating and embedding our message through a strong and experienced management team, and we will be rigorous in reinforcing that message as we continue our acquisitions strategy.’
In addition, Gordon Dadds Group contains complementary businesses including Prolegal, a vehicle for integrating and managing smaller law firms, which was acquired by GD in 2016. For these smaller mergers and acquisitions, the firm retains its office and brand, but Prolegal provides the management, technology and regulatory platform, into which GD has invested over £3m. Prolegal has recently made its first acquisition, of a £1.6m revenue firm, Alan Buckley, based in south-west London. ‘Investing in our back-office system gives us and firms that wish to join the group the ability to operate more efficiently and increase profitability,’ Biles says.
Why the model works
Biles believes that the GD model is attractive to firms because it offers them the opportunity to, as he puts it, ‘de-risk their professional future’. He says: ‘We have a strong balance sheet and a robust management team, with a track record of demonstrating growth and profit. We provide an opportunity to improve business performance by reducing overheads.’
Why does Biles think so many firms are struggling in the current market? ‘The legal profession has typically been a cash-extractive profession – when given the choice of spending £250k on a practice management system or taking £250k out of the business, partners will typically choose the latter.’ With increased competition and regulation, firms need to invest in technology, but many are not.
Smaller firms, too, typically face succession issues, and many find it difficult to create an exit plan. ‘It is actually quite difficult to close a law firm,’ Biles remarks. ‘You have to pay a significant insurance premium when you do close, and you are also giving up the opportunity to realise any capital value from it. GD offers an environment where those risks can be solved by joining us.’
If a firm in difficulty is considering its options and future strategies, is there anything it can do to make itself more attractive for a potential merger? It depends whether, from a cultural perspective, they believe a merger can solve their problems. ‘The fact is, depending on the age and stage of the firm, it’s quite difficult to change its cultural behaviour without a significant corporate event,’ claims Biles. ‘If you are capable of changing your financial performance yourself, then you should. If you think consolidation is the way forward, it’s probably because you think that you will have to change your financial profile and recognise there is a very significant investment requirement, whether that be in recruitment, technology, premises etc. In order for the partners to develop the businesses to their fullest potential, they have to be prepared to invest. Either they can raise the capital themselves, or they can merge with a business that has the ability and the appetite to invest effectively to help them.’
The GD business model is rigorous, but also non-threatening, Biles argues. ‘In our view, it’s very constructive and one that other firms should feel very comfortable about exploring. Even if they don’t end up doing anything about it, it’s interesting.’