Mergers & Aquisitions · According to Deloitte’s Developing Legal Talent report10, ‘pressure on...

In the Legal Sector

Mergers& Aquisitions

A Whitepaper by Ortus Group

Throughout the paper, we’ll explore the existing state of legal mergers and acquisitions across Britain, examine internal and external influences affecting M&A activity, and gain a more thorough understanding of the steps involved in buying and selling a business. Additionally, we’ll consider the average success rate of legal mergers and acquisitions, placing particular focus on why some businesses struggle to thrive following purchase.

Ortus Group delivers this paper at a time when M&A activity across UK law firms is expected to rise substantially. Recent research suggests that 40% of Top 10 law firms are considering a merger in 2020, along with almost half of all Top 26-50 firms, and nearly one third of Top 11-25 legal organisations.

Of these organisations, Top 10 firms appear to be placing their sights on geographical expansion, primarily reaching out to businesses in the United States.

In contrast, Britain’s smaller firms seem to be more interested in domestic expansion, with a particular focus on acquiring or merging with other smaller organisations. The research suggests that strong M&A activity will continue from 2020 for approximately two years before subsiding1.

This paper is an important read for anyone thinking about moving on from a firm they own, especially for those who have worked to build a regional or smaller business similar to the smaller firms we look at here. For these organisations, who tend to have an annual turnover between £500,000 to £10 million, the process is especially complex, and the market ever-changing. This means that plans must be put into motion at the earliest possible point, and experts should be consulted. Without both speed and expertise, a merger is far from guaranteed to be successful.

This paper, from leading business advisory and brokering service Ortus Group, aims to delve deeper into the current and future state of mergers and acquisitions within the legal sector, especially in terms of M&A activity and behaviours amongst some of the UK’s smaller law firms.

Overview

Table of

Contents

W W W . O R T U S G R O U P . C O M M E R G E R S & A C Q U I S I T I O N S I N T H E L E G A L S E C T O R

01

02

03

04

05

06

07

08

09

10

Overview 03

Executive Summary 04

Overview of M&A Activity in the UK Legal Space 05

Most Commonly Cited Reasons for M&A Activity 06

What is a Law Firm Worth? 12

How to Find a Buyer/Seller 13

Key Steps In The Mergers & Acquisitions Process 14

Closing Down a Law Firm 16

Legal Mergers & Acquisitions Success Rates 17

Conclusion 19

01

1 https://www.pwc.co.uk/industries/law-firms/pwc-law-firms-survey-report-2018-final.pdf

0302

There’s no ‘do-over’. Mergers, acquisitions and firm closures must not only be well planned and well prepared, but the risks and potential for failure must also be explored prior to signing on the dotted line.

Right now, it’s reported that almost half of our country’s top legal firms are considering a merger, with around 9% and 18% of organisations saying that a merger is very likely and somewhat likely respectively2. M&A activity is strong, which means there’s never been a more important time for practice owners considering a buyout to ensure they have the necessary plans in place to approach the idea of a merger from the best angle, maximising the chance of successful outcomes, not only for themselves but also for their legal team, their support staff, and for their existing and prospective clients.

Legal mergers can and do succeed under the right circumstances and with the necessary planning, organisation, and professional support. Perhaps one of the most prolific mergers over the past few years has been Dentons, who transformed themselves from a 600-lawyer firm into a truly global organisation of more than 6500 legal staff, with an international presence across more than 65 different countries worldwide.

From a more personal standpoint, Ortus Group has witnessed M&A successes first hand, having advised both sellers and buyers in deals creating new entities in nearly 30 towns and cities around the UK.

Mergers and acquisitions can, however, go wrong. This can place a massive strain on business operations, and could be costly to both reputation and client base, two areas a lot of time and effort are sunk into for a successful law firm. At a time in which many legal firms are considering buying a business or selling their practice, time, spending, hassle, and risk can all be minimised significantly by working with M&A advisors like Ortus Group, seeking alternative professional guidance, or through the generation of a fully comprehensive M&A plan.

Ultimately, the aim is to ensure that the best decisions are made for both personal and professional futures. Access to an outsider perspective is often one of the best ways to ensure that all possibilities have been covered and that common and not-so-common risks have not been overlooked.

Recently, M&A activity does not appear to have been quite as lively as it has been in the recent past. It should be noted though, that many of the smallest mergers go under the radar rather than being reported. Of the larger law practice mergers reported, there were 21 in 2011, and 26 and 28 in 2012 and 2013 respectively3 which were publicly recorded. That figure seems to have tailed off somewhat in more recent years, with 12 publicly reported mergers involving UK law firms in 2018, and 8 noted by Q3 2019. This dip can be explained using the Smith and Williamson 2018 Law Firm Survey4, which showed that some businesses feel that mergers and acquisitions are not a ‘viable approach’ for growth and development at this time, with a reasonable number instead looking to expand their own business into new areas of interest. Of course, one could argue that there are fewer firms available to merge as a result of all those deals completed during the previous years! Despite this, M&A activity is still notably strong.

In fact, in spite of some firms believing mergers and acquisitions not to be viable at this time, reports show that the majority of legal organisations still view M&A activity as a necessary step towards future survival, growth and development. According to professional estimation, half of the UK’s top 10 law firms will merge with — or acquire — another business within the next three years5, while just eight years ago in 2011 most firms were widely expected to shun the idea of mergers and acquisitions in the short and the medium term.

Of those firms expected to merge, it is likely that many will merge internationally to expand global presence and reputation.

This is all new to the UK, but not without precedent. It appears that the longstanding US trend for acquiring smaller firms is slowly but surely making its way across the pond. Over in the United States, 27 reported law firms mergers occurred in just the first quarter of 2019 with the vast majority being businesses with 20 lawyers or less6. Here in the UK, Ortus Group has assisted with a number of mergers in 2018 and 2019 involving larger firms acquiring sub £5m turnover practices and the overall trend appears to be erring on the side of smaller mergers like these. Just a small number of the recent 2019 publicly reported mergers in the UK involved larger firms with more than 20 legal staff, showing the emergence of this trend in Britain. The growth of this trend is highlighted by a 2018 law firm survey showing that of those looking at mergers and acquisitions, around one quarter would prefer to partner with a smaller organisation7.

This could be promising for owners or partners looking to step away from the day-to-day of their business or retire entirely, as it means that given enough time and effort it may be possible to find a larger firm to acquire their small to medium operation. Again, though, this would involve forward planning and professional assistance.

Buying or selling a business should never be a case of trial and error. If things go wrong, something that we’ve seen happen many times within the professional services sector, there isn’t a second chance to get it right.

Executive Summary Overview of M&A Activity in the UK Legal Space


02 03

3 http://jomati.com/uk-mergers4 https://smithandwilliamson.com/media/4513/law-firm-survey-2018.pdf 5 http://www.gullandpadfield.com/articles/CMO_in_the_spotlight6 http://www.altmanweil.com/MergerLine/ 7 https://smithandwilliamson.com/media/4513/law-firm-survey-2018.pdf

2 https://www.pwc.co.uk/industries/law-firms/pwc-law-firms-survey-report- 2018-final.pdf

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With 89% of all UK law firms reporting notable increases in income8 many are finding that, from a financial perspective, there are greater opportunities for both new and continued business growth and development into the future.

One of the potential opportunities is mergers and acquisitions, with law firms able to utilise the resources, skills, technology, and reputation of a competing or counterpart firm to fast track them on a pathway towards achieving their unique business goals and aims. It is therefore not surprising that growth is cited as one of the top reasons for considering merging with another law firm.

Most Commonly Cited Reasons for M&A Activity


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Source: https://1stdirectory.co.uk/_assets/files_comp/ccdba7a8-dbf8-427e-813b-f0073ca65a51.pdf Pg.5

8 https://www.pwc.co.uk/industries/business-services/law-firms/survey.html 9 https://smithandwilliamson.com/media/4513/law-firm-survey-2018.pdf

Source: PwC Law Firms Survey Report 2018, Pg. 12

Despite the opportunities that have arisen with improved profits and income, however, there are still a number of significant threats that stand in the way of law firms achieving their growth ambitions. What is interesting is

that these challenges themselves could be overcome through mergers and acquisitions, which again forms another significant reason for the strong M&A activity that can be seen across the UK.

As the above graph demonstrates, technology and talent are two of the biggest challenges affecting law firms today. Perhaps even worse is the notion that firms who find themselves unable to overcome these challenges potentially face being left lagging behind at a time when

competition in the legal sector is rife. Just last year, three quarters of all law firms believed that the level of competition they were facing would rise over the coming year9, sparking a pre-emptive need to bring themselves to the frontier.

Current Challenges Facing Legal Firms

Top Reasons for Considering Mergers

Regulatory Constraints

Evolving Client Needs

Delivering Value for Money

New Entrants

Talent Shortage

Technology

0% 50%

10%

10%

20%

20%

50%

100%

100% 150%

8.2, 58%3.2, 23%

1.4, 10%

1.2, 9%

Growth

Competitive Advantage

Extend Practice Area

Cost Saving

0706


Change In Legal Firm Competitive Landscape

Little/No Change

Significant Change

Slight Increase

0% 10% 20% 30% 40% 50% 60%

26%

23%

51%

Source: Smith and Williamson Law Firm Survey 2018, Pg. 08

Source: SRA 2017-2018 Annual Review, Pg. 57

10 https://www2.deloitte.com/content/dam/Deloitte/uk/Documents/audit/deloitte-uk-developing-legal-talent- 11 https://www.lawsociety.org.uk/support-services/research-trends/annual-statistics-report-2017/

According to Deloitte’s Developing Legal Talent report10, ‘pressure on mid-sized firms will intensify as merger and acquisition activity continues and the market sees more new entrants’. New entrants, cited above as another of the most common challenges facing legal firms today, is certainly a growing area of the legal market.

In 2017, the number of practicing solicitors in the UK rose by an impressive 2.5 percent on the previous year11; an increase that has been attributed to the increasing number of women entering the legal sector, and a much larger representation of black, Asian, and minority ethnic certificate holders.

This idea of competition and an ever increasing competitive landscape as a reason for continued M&A activity suggests that the acquisition of a new team could be one of the primary reasons that law firms choose to purchase other practices. According to the Law Firm Benchmarking 2019 report, availability of people with the right skills is now the top critical risk for 29% of regional law firms in the UK12. To minimise this risk, there are really only two suitable options for law firms. The first is to acquire those skills from competing organisations through M&A activity. The second is to create a recruitment process that efficiently identifies and attracts the most relevant talents in the industry. Both options appear to be being utilized across UK businesses. It is reported that the executive search

industry — strategic candidate sourcing for high level and executive positions — grew by 2.6% between 2014 and 2019. It is now worth more than £1.4 billion13.

The Law Benchmarking 2019 report confirms that regional law firms in particular are prioritising valuable internal resources. It is understood that, amongst those firms operating from regional locations, head counts increased by 3.7% in 2018, and by only slightly less in 2019 with a 2.1% total rise. Following the importance of human resource utilisation is the development of new, specialist areas of law, which is cited by 35% of respondents in the Smith and Williamson 2018 survey as being a major influencer of purchasing behaviour. Both cross selling opportunities and the diversification of legal services are also reasons that are worth noting.

Number on the Roll of Solicitors in England and Wales, 2009 -2018

0

50,000

100,000

150,000

200,000

250,000

2009 2011 2013 2015 20172010 2012 2014 2016 2018

Series 1

Source: Smith and Williamson Law Firm Survey 2018, Pg. 22

As the above shows, geographic expansion — either domestically or globally — is an important factor affecting the purchasing behaviours of UK law firms. The trend for global operation and capacity is something that is not only being seen across the legal sector, but also across many other goods and service providers, particularly at this time when digital communications is enabling businesses to expand their reach beyond their local or national borders. While the purchase of international organisations facilitates entry to global markets and audiences, domestic M&A activity enables firms to utilise region-based investment and innovation that may not have been available to them initially.

Of those law firms that are considering or actively planning some form of expansion of the business, almost half (40%) confirm that they would be interested in expanding geographically within the next 12 months14. However, this is not a future state. Geographical expansion is already being seen, particularly within Europe. Western Europe is leading the way in terms of international revenue growth, which has increased by around £23.2 million within the region’s Top 10 firms alone.

This is much higher than international revenue growth in China, Central and Eastern Europe, Australia, and the Far East combined, and forms a very significant portion of total global international revenue earned by law firms.

Finally, it is worth considering how economic uncertainties have created opportunities for small law firms in the UK. The uncertainties that have been apparent in the run up to major Brexit decisions, for example, resulted in what is being cited as one of the biggest shifts to have occurred within the legal landscape to date. With heavily trusted sources such as the Law Society estimating that Britain’s exit from the European Union could potentially create a £3.5 billion hole across the sector, UK firms have naturally been keen to capitalise on the situation to future proof their organisations and protect themselves from the unknown. One of the most prominent future proofing trends that has been seen in the sector is consolidation. The Law Firm Benchmarking 2019 report claims that there has been a notable rise in merger conversations, which is being directly attributed to a strong desire for consolidation as Britain weathers uncertainties.

Most Common Reasons For Purchasing A Legal Practice

12 https://www.crowe.com/uk/croweuk/insights/law-firm-benchmarking-201913 https://www.ibisworld.co.uk/industry-trends/market-research-reports/administrative-support-service-activities/employment/executive-search-recruiters.html 14 https://smithandwilliamson.com/media/4513/law-firm-survey-2018.pdf

40%

17%

14%

9% Developing a Specialist Practice Area

Cross-Selling Opportunities

Diversification

Geographic Expansion (Non-UK)

Geographic Expansion (UK)20%

0908


Many of these reasons are intrinsically linked, and one issue may be causing or exacerbating others. However, there is usually one primary reason leading the owners to seek a business sale. The above graph comes from examining internal data from enquiries and referrals received by Ortus Group and the percentages are allocated to the primary driver for action although there are almost always secondary considerations leading to the desire to sell; almost always from the same list of considerations above.

A 2017 SRA survey covering nearly 180,000 UK solicitors found that 21% of lawyers in small firms are aged between 55-64. There is presently a glut of ageing baby boomers with small practices that have failed to produce internal succession of the kind most expected when current owners made their first investment into equity.

The main reasons internal succession is now so hard to achieve within a small (sub £5m turnover law firm) practice relate to the evolution of the legal industry as a whole, as well as society in general. Societal changes during the last twenty years mean people are more likely than ever to prioritise quality of life over the time and financial commitments required of a business owner. This means that fewer and fewer younger lawyers are working towards firm ownership. Allied to this, the legal industry has become increasingly dominated by large organisations, driving further specialisation. In turns, this creates academics more than entrepreneurs. This latter point is also a key factor in smaller practices struggling to attract the right quality of staff and retain their better performers, who are frequently tempted to the shiny city firms. The big firms hold the draw not only of better pay, but also more structured training.

Most Common Reasons For Selling A Law Firm

46%

7%

18%

8% Retirement

Regulation

Financial Difficulties

Staff Departures/Recruitment Difficulty

Client Losses21%

Another key aspect of the evolution of law practice in recent years is the increased regulation and compliance burden on firms of all shapes and sizes, particularly since January 2013 when all firms had to nominate a COLP and COFA. However, it is the smallest firms that feel this burden most keenly because it is difficult for most firms with a turnover of less than £3m to afford staff to shoulder the heaviest weight. Many owners are becoming increasingly frustrated at the amount of time convening to regulations takes, and the opportunity cost of being unable to otherwise devote this time to clients and the actual practice of law.

The competing demands on owners of small firms can make it difficult to maintain the sorts of financial controls and liquidity required to avoid financial pressures.

Once difficulty occurs with cash flow, it can be increasingly tricky to rectify, and firm owners can find themselves reliant on overdrafts. This puts firms at the mercy of banks’ oscillating views on risk. Equally, the loss of key clients can be the difference between profit and loss for small firms. This can happen following the departure of staff, the growth of a client to the point your firm is no longer adequately capable of dealing with its need for more specialist advice or just a successful pitch by a competitor. While each point above can be tolerated for a period of time, one of these factors will usually develop into a strong enough motivation to take action, especially as others rear their heads.

1110

In alternative sectors away from the legal space, valuing a business is typically undertaken through a thorough inventory and consideration of physical assets. A valuation in this instance would largely be based upon:

Cash, including any financial assets tied up in prepaid expenses or refundable deposits

Cash due to the business through accounts receivable and any unbilled fees, work in progress or client costs

Cash owed by the business through accounts payable, accrued expenses, and loans

Property leases and premises, to take into consideration any necessary improvements/dilapidations

Office furnishings, equipment and physical resources

Internal infrastructure to include both owned and leased technologies, utilities, and services

Any future obligations not included in the above

In law firm valuation, however, the industry’s low overheads must be considered. A law firm’s value is rarely held in its cash base or tangible assets. In fact, in the United States it was considered unethical to sell a law practice before the ABA Model Rules of Professional Conduct act was introduced in 199015. This was due to the fact that it is highly challenging in law to determine what is being valued and what is being transferred when selling a legal firm. Both tangible and intangible assets are important factors, especially as buyers will be looking for an income stream motivated by an existing client base or individual lawyers.

When valuing a law firm, there is much more than physical assets that can impact the valuation. The value of a law practice will depend greatly on intangible aspects which will often include:

The location of the business and its proximity to a demanding market

The value of the existing client base and relationships with these clients

Lawyer skill and experience

Firm reputation and recognition of individual lawyers and legal staff

Existing billing and recovery processes

Profitability, curved based on competitor profitability

Size and stability of the firm

Quality (rather than quantity) of the internal infrastructure

While incorporating both tangible and intangible assets into law firm valuation can be challenging, understanding what is being valued and what is being transferred should help minimise the complexity of the task. Law firms may wish to work with professional merger advisors and accountants who truly understand the legal profession to ensure their valuation of the business properly reflects the status of the firm while also ensuring that the seller receives the best possible price for the business that they have worked to build.

With the ‘Baby Boomer’ generation — those born between 1946 and 64 — now aged between 55 and 73, many are starting to think about retiring from law, while still more are actively considering potential exit strategies. The seller market is rising at a rapid rate, a notion supported by the increasing number of firms that are seeking the support of legal marketing teams and legal brokerage services for buying and selling.

However, finding a buyer or seller is not as simple or straightforward as it may be assumed in a market where sellers are looking to sell, and buyers are looking to buy. According to a report by consultancy firm Gulland Padfield, the most recent spate of law firm mergers has ‘significantly under-delivered’ in terms of the benefits and outcomes that were expected by both parties, as well as by their client base. An owner has only one chance to sell a business to a particular buyer. And for the buyer, there is no turning back once an agreement has been entered into. With this in mind, the first step towards finding a buyer or seller must always be to conduct in depth research into the market so you are aware of all the options, not just those that happen to have appeared on the radar of your accountant or colleagues. M&A advisory firms are usually best placed to conduct this research because of the spread and depth of their contacts as well as the lack of conflicts that enable fuller and more open conversations to take place.

At the same time, sellers must be in a position in which they are able to present their business as an attractive investment. Marketing a law firm is different to marketing a business valued primarily by its tangible assets. Law firm owners must not only prove there is a healthy balance sheet, but also demonstrate the value of the business’ intangible assets, such as the experience of the legal team, strength of the client base and relevant market position. Many other factors, including professional indemnity history, any exit plan and financial expectations should certainly be considered in some detail prior to going to market. The terms of departure can significantly affect the value another party will put on your business so make sure you consult with people who understand law practice succession to help you make your own mind up.

Perhaps one of the most important aspects that both buyers and sellers should prioritise — particularly those sellers who are considering mergers where they will remain an integral part of the organisation, or where the existing business will continue to thrive under a new organisational structure — is a firm’s culture. Growth, income, and client base are typically known to be the most vital aspects of a merger, yet culture is often overlooked. In law firm mergers, however, culture should be a consideration equal to those just mentioned. This is because of the high risk of failure in law firm mergers, and the association between merger failure and misaligned cultural fit. An inability to ‘merge’ two companies involved in a merger can result in mismatched goals, missions, and processes, resulting in a failure to combine the firms together as one.

What Is A Law Firm Worth? How To Find A Buyer/Seller


05 06

The truth is, both buyers and sellers are actively looking and this trend is expected to continue for another 20 years at least.

15 https://www.americanbar.org/groups/gpsolo/publications/gp_solo/2012/july_august/evolving_ethics_selling_law_practice/

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M&A behaviour amongst law firms today is very common, and yet there is a significant lack of fool proof business strategy or set of processes that buyers and sellers can follow to increase the chance of a successful merger or acquisition.

‘It is impossible to identify a typical sequence of events in a law firm merger’ according to a book published by Hildebrandt International16. Despite this, most advisors have their own process that is generally followed in most situations. For example, Ortus Group implements the following step-by-step process:

Plan and Assessment Development of a solid merger, acquisition or disposal strategy, to include reasons for the M&A activity, anticipated challenges and desired outcomes.

Packaging and Marketing Preparation of a detailed information memorandum is essential to identify key reasons why another party would be interested in selling to you or buying your business.

Research Identification of target buyer/seller criteria to guide the research for practices that are most likely to experience or provide benefit from combining firms.

Search and critique Using the agreed search criteria, which may include size of business, income range, niche, or geographical location, the best target firms identified during research need to be approached and engaged. Unless your firm is particularly unusual, financially underperforming, or with a very poor professional indemnity record, there will usually be a wide degree of interest in the principle. This stage is arguably as important as the strategy planning and execution because it is easy to get this wrong and lose months if you invest significant time with the first firm showing encouraging signs. Remember there is a strategy with defined outcomes so the majority of your target list should be assessed prior to decisions being made.

Analysis Discuss with your advisors or project team the findings from interested parties so decisions can be made on which of those to progress talks with. Ideally, first stage talks will happen with three firms that each represent something slightly different but all close to the original brief. This will create more confidence in moving forward with the ‘chosen one’.

Key Steps In The Mergers & Acquisitions Process


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First Meetings Following the exchange of signed NDAs, information memoranda and your identity is finally revealed (if using an advisor), it is now time to meet. This first meeting can be relatively informal where both sides are aiming to gain a more thorough understanding of ambitions, personalities and culture. All of these things are difficult to articulate accurately in writing so this initial ‘sniff-test’ can be revealing and guides the shortlisting process. There may well be another meeting to expand understanding prior to the next stage.

Heads of Terms The buyer will normally propose the outline of a deal they are willing to put forward (subject to due diligence) early in the process. These terms will include any consideration for the purchase, equity/salaries/contract types for the sellers as well as a broad indication of how they will treat assets and liabilities. Some negotiation is usually required prior to reaching agreement which then allows the next phase to begin in earnest.

Due Diligence Different buyers will have varying attitudes to risk (and consequently time, cost and depth of this exercise) but it will be detailed. This mainly involves a deep dive into accounts, file reviews, clients, staff and premises but again, different buyers will have different priorities.

Legal Agreements Contracts for purchase and sale are drawn up once due diligence has been completed.

Funding Upon the creation of contracts, the buyer may proceed forward with a financing strategy. Typically, plans for financing will have been considered by the buyer long before this stage but most lenders will want to see signed terms prior to releasing funds.

Completion Once the deal closes, the management teams of both businesses will begin communicating about the details of the merger or acquisition and the M&A plan/process which will have been developing in tandem during the process.

These are all key steps in a typical M&A process, but some of these stages may be comparatively irrelevant in some M&A cases, while other instances may be more complex and challenging and require a much lengthier process. While on paper the key stages appear simple, they can be both time consuming and costly for all involved, and issues that arise at any stage of the process can significantly affect M&A success rates. It is important to note that many of the key steps making up a typical M&A process can also be applied to other forms of activity. In the case of closing down a law firm, for example, the development of a tailored strategy, valuation of the business, and finance considerations will also form vital stages.

If the strategy is wrong, you risk losing months by talking to the first firm showing interest.

16 https://books.google.co.uk/books?id=yQQZd3ZwPRgC&p-g=PA29&lpg=PA29&dq=reasons+for+law+firm+mergers&source=-bl&ots=MjH4ylZlfr&sig=ACfU3U17dd_b2ewQwcEtpYEqEbC5fO-m8ig&hl=en&sa=X&ved=2ahUKEwiaxaOa2NzkAhUSTcAKHWX-CBnM4MhDoATAEegQICRAB#v=onepage&q=reasons%20for%20law%20firm%20mergers&f=false

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Unlike in other industries, closing down a law firm does not equate to the finalisation of previous business, although it does prevent the defunct firm from accepting new business. Everyone is well aware of the costs of run-off insurance (which is likely to be particularly high for a firm that struggles to identify a sale, because 2.5 to 4 times a high premium is a very high premium!) which is required because a closed firm may still be investigated for new and pre-existing professional indemnity claims.

The owners at date of closure may be liable for further professional indemnity costs because run-off cover will not indemnify former partners for claims over the minimum limit, with reports suggesting that around 40% of all claims are made more than three years after the event or the error in question17. For these reasons, it is almost always preferable to achieve a sale than simply move to closure.

In the event the owners cannot find a buyer for their law firm, unlike an unregulated business, it cannot simply close the doors; it is a complex business that is fraught with the risk of astonishing costs if it cannot be achieved prior to an SRA intervention.

Closing Down A Law Firm

One of the underlying reasons for law firm M&A failures is lack of support during vital early stages.

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Perhaps one of the most prominent aspects that is seen across businesses considering a merger or acquisition is the significant gap that stands between the number of organisations who think about engaging third party services to support and guide them through M&A processes, and the number of firms that actually go ahead with this.

A Byfield Consultancy report states that 42% of firms that are considering mergers and acquisitions believe that professional assistance during the period of change would be beneficial and could improve the chance of a successful merger or acquisition. However, when looking at the percentage of law firms that do instruct these consultants to step in, it appears that only 16% actually choose to do so19. This suggests that a lack of professional support during periods of uncertainty could be a major contributor.

Harriet Creamer of Private Banking consultancy Gulland Padfield believes that, within the finance sector, banking institutions are struggling to manage key aspects of

the typical M&A process on their own. Deterred by the time, cost, and complexity of necessary early stage due diligence, Creamer believes that financial organisations are showing a trend for leaving issues relating to client strategy, practice management, culture, and people until the later stages of the process, where they become increasingly difficult to rectify. There is a ‘need to bite the bullet earlier on the softer issues, even though the temptation may be to wait in the hopes that they will resolve themselves over time’ says Creamer. Could this trend for delaying necessary action due to the complexities of managing M&A activity in-house be expanding over into the legal sector? This would support the notion that one of the underlying reasons for law firm M&A failures is a lack of support during the vital early stages of the M&A process.

Throughout early stages of the M&A process, law firms keen to ensure future success should be looking to work with consultants to review potential conflicts of interests that could arise with a merger or acquisition, especially in cases where the specialist areas and niches of the two parties is in some way overlapped or entwined and legal ethical issues may arise. A prime example of this can be seen in the attempted 2013 merger of US law firms

Merger & Acquisition Success Rates

M E R G E R S & A C Q U I S I T I O N S I N T H E L E G A L S E C T O R

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W W W . O R T U S G R O U P . C O M

On average, it is estimated that between 70 and 90 percent of all mergers and acquisitions across all industries may be considered a failure18. While there are very many reasons why outcomes can disappoint, it is important to look into broad trends in merger or acquisition which could help to identify some of the contributors towards this worryingly small success rate.

1716

Orrick, Herrington, & Sutcliffe in California, and Pillsbury Winthrop Shaw Pittman in New York. The M&A process had progressed extensively and the deal was expected to be completed in just a matter of weeks. However, the merger never came to fruition, with the firms issuing a joint statement which read that they had ‘mutually determined that we will not be able to proceed due to prospective client conflicts that we have not been able to resolve’. Examples such as this bring up the question of whether better forward planning would have made a difference.

Along with considering conflict of interests early on in the process, law firms should also be seeking the necessary support that will enable them to properly carry out due diligence during the early stages of the M&A process. This could include delving deeper into customers, suppliers, employees, and intellectual property. Following due diligence, aspects of the sale may be renegotiated, such as sale price, which can delay proceedings significantly when occurring during the later process stages. Early due diligence can also work to minimise risks relating to legal, financial and tax issues that could arise.

Assistance can also enable businesses to develop dedicated strategies for client management. While finances and conflicts of interest are often prioritised, aspects relating to non-conflict clients can often be overlooked during M&A activity. A failure to consider

client needs and expectations can, however, be one of the primary reasons for mergers and acquisitions not delivering the anticipated benefits. Perhaps the reason client relationships are often given a backseat is due to the potential for significant lost billable hours by senior partners, and a notable reduction in professional fees. This is why seeking the assistance of consultants is widely desired by law firms, even though only a small percentage actually instruct these services to act on their behalf in M&A proceedings. According to insights agency McKinsey, the average firms going through a merger will lose between 2 and 5 percent of their combined client base20, which can significantly affect future profits and the ability to continue ‘business as usual’.

To increase the chance of M&A success, it is essential that law firms understand that, until a deal is agreed, mergers and acquisitions are not set in stone. In fact, in a report by London-based law firm Fox Williams, it is stated that 61% of practices that have now merged, and 66% of un-merged practices, have entered into discussions with potential targets which have not progressed into the deal stage21. The time and costs associated with these abortive processes is considerable, even for the shortest ones. Through working with a third party consultant, law firms have the support and guidance they need to understand when to proceed, when to question, and when to exit potential M&A discussions and can make significant costs savings, even after factoring in fees for buying advisory services.

This will involve prioritising advance planning and preparation, improved and wider target sourcing, paying more heed to transitional change and utilising skilled advisors to assist in the whole process.

This paper highlights the significant challenges that can and do stand in the way of M&A success. It is worth noting, though, that when the most effective and suitable approach is taken, mergers and acquisitions can be highly successful, forming a beneficial exit strategy for those wishing to retire as well as successful expansion for buyers. Whether you want to remain involved in the business, or leave the legal field entirely to enjoy a quiet retirement with family, sale of the business is usually the cleanest way of doing so and the best way of eliminating ghosts of future liabilities. In working to anticipate the challenges and problems that may arise, and determining the most effective ways to overcome the obstacles, a successful exit strategy isn’t just a dream…it really can become a reality.

Professionals like us here at Ortus Group work with law firms across the UK to provide the necessary support that practices need to prepare exit strategies that are not only in the best interests of the seller, but which also closely

consider the firm’s skilled legal team. We are aware of what is important, including the client base, the future of the business, and the best interests of all other parties involved in the discussions. Taking a proactive approach, Ortus Group strive to address potential issues in the M&A process before they arise, resulting in smoother proceedings and more successful outcomes. With the right support, law firms could find that they are able to achieve their goals, whether that’s to leave a strong legacy upon retirement, expand the client base, reach out geographically to new audiences, or draw upon the resources of competing firms.

At Ortus Group, we’ve worked with many lawyers and practice owners who are unsure about what steps they should consider for the future of their families, staff and business. If this sounds familiar, our team are ready to offer the guidance and support you need to make the right decision for you and your organisation. For more information on how we can help, or for further details on any of the research outlined here in our report, get in touch with Ortus Group today.

Conclusion

M E R G E R S & A C Q U I S I T I O N S I N T H E L E G A L S E C T O R

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Through taking a closer look at the current state of mergers and acquisitions in the UK law space, the challenges that face practice owners seeking suitable exit strategies prior to retirement, and the failure rate of M&A activity, it becomes clearer that today’s firms need to be approaching the process in a more intelligent and informed manner if they want to achieve the best results.


The time and cost associated with aborted mergers is considerable

17 https://www.lawsociety.org.uk/support-services/advice/articles/run-off-cover/18 https://europe.businesschief.com/finance/390/Why-do-up-to-90-of-Mergers-and-Acquisitions-Fail19 https://1stdirectory.co.uk/_assets/files_comp/ccdba7a8-dbf8-427e-813b-f0073ca65a51.pdf20 https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/where-mergers-go-wrong21 https://1stdirectory.co.uk/_assets/files_comp/ccdba7a8-dbf8-427e-813b-f0073ca65a51.pdf

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Ensuring Value for You, Your Clients & Your Team.

Ortus Group supports professional services firms on the execution of mergers, acquisitions, succession planning, senior recruitment projects and exit strategies. Colin White is the founder and Managing Director of Ortus Group,

having begun working in the legal sector in 1997. He has originated and delivered multiple sales and mergers across the UK from sole practitioners to the creation of two top 100 law firms in addition to delivering countless

lateral partner appointments contributing many tens of millions to turnover in client firms.

Get in touch today to find out how we can support you in achieving your professional goals.

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