Mergers and Acquisitions: Valuing a Law Firm
6th December, 2016
Paul Bennett, Professional Practices and Employment Law Partner, has contributed to this article – Mergers and Acquisitions: Valuing a Law Firm, by Grania Langdon-Down, freelance journalist. This article was published in The Law Society’s quarterly magazine, Managing for Success.
All the extracts below have been taken directly from the full article which can be found on Pages 6 – 9 in the November edition of Managing for Success.
If you are looking to merge or be acquired, you need to understand your firm’s value, and maximise it by effective planning and due diligence.
Last month, one of the biggest mergers in the legal sector’s history was announced. Nabarro and Olswang are set to merge into CMS, with reports of a US firm also being ‘in the mix’. Due to complete next May, the merger – if successful – will create the sixth largest law firm in the UK.
Like celebrity romances, the headlines are full of exciting new liaisons one minute, swiftly followed by rumblings of discontent the next. Merger activity has settled a little after the frenzy of recent years, but is still lively – though generally only half will make it across the line. According to lawyers and accountants who specialise in advising firms on mergers and acquisitions (M&A), it is a buyer’s market, because the business and regulatory pressures driving consolidation have, in many cases, left sellers in the weaker position.
Some propositions are very attractive. Accountant Andy Poole was involved in the multi-million pound sale of a niche two-partner firm last year, and is working on another small practice which should realise more than £1m. But other practices may sell for just £1, as partners seek to retire without having to pay what may be six-figure sums in run-off cover and other liabilities. But if you are considering merging or selling, how can you understand your value to a potential buyer, and maximise that value?
Paul Bennett describes the idea of mergers as a ‘misconception’. ‘It is always an acquisition,’ he says. ‘One party has to take the lead, otherwise the firms don’t get any benefits from the synergy of being bigger.’
Overcoming hurdles to a merger / acquisition
Paul Bennett identifies five potential hurdles in an M&A negotiation:
- If one party feels it is paying too much, it will resent it, so only go ahead if the deal really represents good value.
- Agree early on what the name and management structure is going to be.
- If you are buying a firm, make sure those selling keep skin in the game for, ideally, a minimum of two years, because then you know they have confidence in what they are selling.
- Law is a people business – dig into the staff of the other firm. Would you want to sit next to them at the Christmas party? Many deals fall down due to personality clashes.
- If the deal relies on the incoming firm’s income growing, be very cautious, because you don’t know the effect the merger / acquisition will have on clients and fee-earners. If the deal works without growth, then you can stand behind it with much more confidence.
Forward planning is essential and can help you to identify steps you can take to maximise the value of your firm when you do decide to pursue a merger or be acquired. ‘If you want to get value out of the transaction in three to four years’ time, pay down any debt, so the last three years of accounts look strong and profitability is shown, even if it means paying more tax,’ says Bennett.
‘Identify which clients will have potential value to other interested law firms. I dealt with a high street practice last year which had identified a core group of commercial clients that came to them on a repeat basis, and the acquiring firm was prepared to pay because of those relationships, rather than the overall firm.’ It is also ‘essential’ that what you are selling is ‘clean, trouble-free, and the client database is up to date’ he adds.
Seeking professional advice early enough in the process can also help you to maximise value. Many firms try to go it alone when arranging a merger, and reach heads of term themselves, but Bennett advises that, if you think you may need professional advice, you should do it before heads of term are agreed. ‘We can sometimes advise on structures that are more tax efficient, making it easier for the transaction to finance itself,’ he explains. He has personal experience of the process. He ran his own employment and professional regulation firm for five years before being acquired by Aaron & Partners LLP. ‘I was approached by a broker and knew of the firm and chose that option because of the security of being part of a larger organisation,’ he says. ‘I did the majority of the negotiating myself, but I also spoke to a trusted accountant and lawyer to get some external perspective.’
To read the full article, Mergers and Acquisitions: Valuing a Law Firm, please click here
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