Legal M&A Is there capital value in a law firm?

8 March 2016
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Buying & Selling Legal Businesses

Market forces can be dangerous beasts, something the legal sector is now all too well aware of, none more so than those within Slater & Gordon who are of course at the very sharp end being a public company.

Reading some of the comments in the press causes me grave concern about the profession and in my view demonstrates naivety from many quarters. Naturally I would feel sympathy for anyone who may lose their job but the vitriol directed at some of the executives is unnecessary I think and sounds to me like gloating from some quarters.

Rightly or wrongly the Legal Services Act has opened up the legal services market. The extent of external investment has in my view been very small but unfortunately in some instances where it has happened the business has not gone on to be a rip roaring success, most notably the recent breaking up of the Parabis Group.   However, this does not mean that they have become bad businesses overnight, what it may mean is that the deal they did to bring in investment was not necessarily the best deal for one party or another.

Is there capital value in a law firm?

To me this is the $1 question and I am afraid there is no simple answer. My opinion is that it very much depends on how the law firm gets its customers. If they use the business because of the individuals working there then I would argue there is little or no value. However, if those customers use the law firm because of the business itself, for example due to the brand, albeit that is a whole other debate – does a legal brand exist – or because of a long term repeat contract, then it could be a different picture.

The digital age has allowed some legal business to create a presence and attract work using pure marketing methodologies, whereas others relay on networking and the reputation of their lawyers. It is the latter which I think has less value or is more risky quite simply because if those lawyers who are good net-workers or have an excellent reputation in their field don’t like the new regime they will vote with their feet and move on, more than likely taking the work with them.

It is no coincidence in my view that the major acquisitions in the legal market have been of firms which, at least on the face of it, have had good repeat work opportunities based on a contractual position as opposed to people power. For example;

Fairpoint Group PLC buying Simpson Millar & then Colemans CTTS – Trade Union and insurance links underpinned the work flow

Private equity investment into Keoghs & Parabis – work flow underpinned by long standing insurance contracts

If an acquisition doesn’t work out, I would argue that you can not just point the finger at the selling firm or the lawyers who remain. There could be complex financial structures put in place which overwhelm the legal business, put simply, may be they paid too much for it.

Ultimately what we are seeing is market forces at work in their purest form. Within an old fashioned Partnership you can hide a dip in performance or even chose to take a step back, that does not cut it in the Public Company or Private Equity world.

In truth we have not seen a rush to invest in the sector, certainly nothing like what was predicted, possibly because of the past experience with the Accountants. Recent turbulence will not stop investment but I do think it will make those currently outside of legal think long and hard before committing.