Mergers and Acquisitions (M&A) activity has historically been a less active and competitive area of the legal sector, especially compared to other industries, such as wealth management or insurance. Although larger corporate transactions would typically be announced due to their high-profile impact, many law firms looking to merge or acquire have always progressed in relative privacy, supported by a carefully managed PR strategy.
However, over the last few years post the pandemic, M&A deals for legal firms has increased, with global mergers, such as Clyde & Co and BLM and smaller deals, like Howard Kennedy and Corbett & CO, hitting the headlines. In fact, research by Hazlewoods, independent accountancy and business advisory company, found that, “the number of law firm mergers in the UK has jumped 23%...from 99 in 2021 to 122 in 2022” (Hazlewoods: Law firms using mergers to shed excess office space). Given the challenges brought on by the financial climate, operating costs and mounting pressures to repay the government’s COVID scheme, it’s not surprising that firms are looking at ways to drastically improve operational activity, advance their growth and stay competitive.
According to research, as we approach the second half of 2023 the uptick in dealmaking is only set to accelerate.
“Many firms are recognising that if they want to grow at pace, organic growth might not be enough alone. Growing by acquisition provides law firms with considerable opportunity to gain market share, invest in innovation and attract new talent with enhanced compensation”, says Matt Green, Founder and Chief Executive Officer of IDEX Consulting.
So, with enthusiasm clearly high, what factors could continue to drive M&A transactions across the profession and what might it lead to?
A saturated market
With the number of law firms across the UK increasing, especially with the entry of smaller businesses and high street practices that service private individuals and local areas, the market is becoming extremely competitive. Smaller businesses often have to spend a great deal of time attracting new clients, sometimes to the detriment of the quality of service they provide to current clients. According to Thomson Reuters, “it’s becoming harder for many law firms to differentiate themselves, with a good deal of legal work being commoditised into standard packages. [There’s also] a new impetus of competition arising from aggressive investments being made in the UK by law firms in the United States that want to grow their share of the market in the UK and Europe” (Thomson Reuters Institute: 2023 State of the UK Legal market).
The desire to merge with a larger firm who can take on more administrative and business development activity and invest in resource and talent, is becoming more attractive to smaller firms. Ian Johnson, Associate Partner at Hazlewood, highlights the opportunity for larger businesses, “Consolidator firms looking to scale up or expand their geographic footprint through acquiring smaller firms will find there are a lot of opportunities to do so at the moment” (Hazlewoods: Legal update: Law firm mergers fall but deals are set to bounce back).
Growing costs
The cost-of-living crisis, rising energy bills, and other socio-economic challenges is having a significant strain on law firms, as they try to balance profitability, increasing operational costs and employee demand for higher salaries. A cost-of-living survey shows that law professionals want financial help from their company but with inflation increasing by around 8%, this isn’t always possible. As law firms look to grow and enhance their profitability, M&A transactions are becoming more of an appealing option.
Succession planning
The legal profession faces an ageing population of owners, with many private practices led by professionals who are approaching retirement age. Naturally, leaders at this age may look for financial stability and an exit path. According to the Solicitors Regulation Authority (SRA) who collected data across the UK from approximately 186,890 law professionals working in 9,677 firms, 13% of all lawyers are aged between 55-64 and 22% are aged between 45-54 (SRA: How diverse is the solicitors’ profession?).
Private equity investment
Private equity (PE) has also been a key influencer for M&A deals with investors looking to build their portfolio and capitalise on new products and businesses. With current levels of saturation and fragmentation impacting law firms, plus growing discussions around succession planning, market conditions present a good opportunity for PE investment. Research shows that investors are looking to buy into smaller boutique firms that specialise in one or two areas, such as commercial, family or employment law.
Is it a seller’s market?
With many potential acquirers ready with money to invest, there is a huge amount of opportunity for firms to take advantage of a full merge or acquisition, or venture capital funding. According to research, global investment is currently at it’s highest level in history, in fact three times above the 2008 figure (Legal futures: An end to the M&A boom?). This provides a huge opportunity for firms looking to grow, despite the current challenging economic climate.
If you’re looking for advice with a potential sale or acquisition, or just an informal, confidential chat, contact Matt Green, CEO of IDEX Consulting on matt.green@idexconsulting.comor 07974 859 860.
Sources
Hazlewoods: Legal update: Law firm mergers fall but deals are set to bounce back
Hazlewoods: Legal update: Law firm mergers jump 23% from 99 to 122 in past year
Hazlewoods: Law firms using mergers to shed excess office space
Hazlewoods: Legal update: Mergers and acquisitions in the legal sector
Lawyer monthly: The legal sector’s revolution will not be televised
Legal futures: An end to the M&A boom?
