Preparing your law firm for a merger or acquisition

Law firms seeking an inorganic route to growth, resilience or future-readiness will need to build up their appeal as a prospect in a vibrant merger-and-acquisition landscape – according to Karen Hain at MHA.

The pace of change in the UK legal market shows no sign of abating – there continues to be plenty of consolidation. Mergers and acquisitions are happening at all levels, from the largest players down to smaller regional legal practices.

Recently we’ve seen examples of large overseas firms buying up regional firms in the UK, some of which had only recently been on the acquisition trail themselves. For those partners or directors who are considering an exit from the profession, there has perhaps never been a more opportune time to do so.

However, it should be borne in mind that in many recent smaller-sized consolidations, very little money is actually changing hands. If you are looking for a buyer who will fund your retirement plans, then this may be a pipedream. That said, any saving in the expense of closing the front door is worth planning for.

Whatever your size and financial position, there are a number of steps you can take to make your firm more attractive to a potential buyer or merger partner.

• Do your housekeeping. It’s an obvious point, but law firms don’t want to take over a business that has problems they’ll have to spend all their time sorting out. Make a list of the issues you think would throw off potential merger partners and take steps to address them. This could include measures aimed at better recruitment, increased profitability, improved morale or better communication with clients.
• Aim for financial stability. Your legal practice is more likely to be on the hitlist of an acquisitive firm – and less likely to be on the hit list of the SRA – if it is on sound financial footing. But even if it isn’t, there are steps you can take to address these issues. It’s all about recognising the warning signs and implementing good financial behaviours.
• Prove you’re not a regulatory risk. Again, this is about understanding potential problems and taking steps to counter them. For example, you have some potential liability with previous cases that are affecting your ability to secure professional indemnity insurance (PII). A specific example might be a conveyancing firm that is exposed to potential claims for mortgage fraud. In such instances, it may be worth identifying and boxing up all the cases where there are potential claims and making a full disclosure – to both the regulator and your insurer. This allows your insurer to see the full picture and understand all the risks. As such, it’s likely to strengthen a weak position in the longer term.
• Consider a stepping-stone merger. You may be thinking “nobody would want to buy us,” and while your firm may not be attractive to a potential buyer in its current guise, it may be of more interest if you joined forces with someone else. For example, you may have two offices within a region. But what if you merged with another firm with offices in two other locations, perhaps with one or two specialisms you don’t have? All of a sudden, that’s a more attractive proposition. It’s about seeing the bigger picture and planning a bit further ahead. Keep asking yourself – what would make someone want to get their hands on your firm.
• Use your network. Nobody will know you’re open to the possibility of a merger or sale if it’s a secret. That doesn’t mean shouting it from the rooftops. Use your trusted intermediary network – your bankers and your accountant – to identify potential merger partners. They will be aware of firms in a similar position who may be open to a conversation, but they can do it in a discreet way.
• Put yourself in the shop window. Law firms that enjoy a favourable public profile will ultimately have better saleability than those that don’t. Invest in PR and marketing to keep your firm in the spotlight for the right reasons. This will also ensure that when a potential future business partner is researching your firm, they don’t draw a blank, and the information they find about you is more likely to be positive.
• Do the tax planning in advance. This is absolutely vital, both in making your firm an attractive suitor to potential acquirers and in protecting your own financial position. You must consider the tax implications of any deal ahead of time. For example, would it be better to incorporate prior to the merger? Get your tax advisers involved early. The last thing you want is to be giving half of any consideration to the tax man when the deal is completed.

Remember, every firm is different, but nearly all will have some merger value somewhere. Realising that value is all about putting the right measures in place to increase financial stability and reduce regulatory risk.