Helen Clayton, corporate services partner at PM+M – a leading chartered accountancy, business advisory and wealth management group - on mergers and acquisitions in the legal profession.
Some of the latest challenges facing the UK legal profession in recent years include succession, exit planning, gaining market share and competitive advantage through merger or acquisition and dealing with the financial and other related impacts of regulatory changes. This applies from the largest firms to sole practitoners.
As law firms continue to develop into businesses with much more of a corporate feel, more advance thought is being given to the future, the threats and opportunities available and therefore how a firm’s strategy is developed.
Acquisitions often form part of a firm’s medium or longer term strategy, whether through acquisition of an entire firm, in part or simply through the acquisition of assets such as work-in-progress. Being part of a firm’s strategy is one thing but making them work and be successful in the short and longer term is a real test. Being the only strategy therefore is a sure fire way to standing still, resulting in the financial and personnel challenges that then inevitably brings. It cannot just be about the numbers and aiming for the two plus two equals five.
Culture and People
Research shows that almost a half of all transactions fail to meet expectations for cultural reasons. So, perhaps it is not about the firm but about the people. A law firm is a people business, whether through the ownership and the people employed or whether through the end user of its services. You cannot ignore the people element of a transaction and what they need in order to be able to contribute to making an acquisition successful – on both sides of the deal.
Communication at every stage will be critical. Whispers and rumours will be afoot and heading these off in advance can only help smooth the transition. A key risk will be loss of people, including leadership and management; this can create great uncertainty for employees and they could follow. Whispers in the profession can lead to competitors seeing an opportunity to sweet talk clients.
The combined culture of the firm will be important to understand for all involved. Do the cultures currently align? If not, which firm is the dominant and will it be this culture that wins through? Is that the right answer and who and how will they make this work?
Change can be a barrier for people especially if they feel vulnerable. Getting them on side early enough will be important; however depending on the persons involved, the stage at which they are made aware of the proposed or impending transaction will matter.
There will be a need to address upfront who will form the future leadership and management team. Do shared roles really work? For example, two managing partners. The partners need to like and respect each other, understanding each other, reporting responsibilities and lead by example. Will there be a board and how many from each side will it comprise? When it comes down to it, people have pride in their titles and this can be a sticking point. Further, the name of the combined firm will be high on people’s agendas. Dealing with these politics at an early stage will avoid unnecessary time and cost at a later date, which can inevitably lead to a breakdown in negotiations totally.
If there are multi sites post transaction, how will the reporting work? How will the culture alignment across various offices work?
Therefore, and not just for financial reasons, detailed due diligence is critical to achieving a successful transaction – on both sides. Getting underneath the reasons for the transaction will drive each side’s focus for diligence. These might include competitive advantage through market share or wider service offering, geography, client relationships amongst other reasons. Financial reasons will always be up there, driven by the on-going desire for increased PEP, though these should not be the focus. Understanding the financial impact will still be important however.
Going back to why a firm wants to enter into such a transaction - if the firm is struggling in some way, then it is also likely going to struggle to have a significant voice at the boardroom table moving forwards. If there are internal issues to be resolved, then these should be dealt with before diligence commences as they will be highlighted and used as a mechanism for driving down ‘price’; for example, old debt or work-in-progress that holds no value, internal disputes, poor claims history etc. When I refer to price, often in law firm transactions there is no price unless it is a clear exit mechanism; however, resulting equity points, for example, could be reduced compared to others.
A consideration, which may depend on the size of the transaction, will be to who actually performs the diligence. There should be financial and non-financial diligence performed, with experts carrying out the work. It may be that an element of this can be performed in-house; however I suspect that a great deal of diligence for two law firms to a transaction is performed by professional advisors. In a scenario where both firms have the same advisors, there will need to be a discussion as to how this conflict is resolved.
Throughout, from initial conversations through to diligence, transaction day and beyond, project management should never be underestimated. There are so many stakeholders, which generally results in an increasing amount of internal politics, that a formal project management team with a respected leader is essential.
Initial conversations will need to be confidential and managing that process will always prove difficult. Meetings will need to be held off site but not in a local hotel or coffee shop where other professionals and clients may meet. Risks will need to be considered at every stage of the project.
Agreeing on timelines, deliverables, accessibility and availability will be vital to being able to progress as both sides wish. Ensuring there is commitment to delivering will be key however it should not detract from the day job of leading or managing the existing firms nor delivering to clients.
The project management team will require a variety of skills other than project management! Areas such as IT, infrastructure, property matters, finance for example. These roles need to be assigned early in the process, skill gaps identified and resources sought to fill them. Undertaking such a project in the right way is not inexpensive.
Whilst I believe that financial reasons should not be the driver for a transaction, understanding the financial impact will be very important.
There is the risk, through management being distracted, of not focusing on each individual firm on the lead up to completion, which could result in a loss of clients, income, profit and key talent. Such impacts will undoubtedly change the structure of the deal on the table. This validates the need for a focused project management team who can oversee and deliver the transaction aside or over and above the day job.
Funding will be an issue at some stage and will need to be addressed. Do the combined financial forecasts indicate the requirement for additional funding in the short to medium term and where is this going to come from? If the same bank is involved on both sides, understanding their appetite for the combined firm going forward will be vital, together with potential additional funding.
Referring back to partners working together, understanding each other’s personal financial position will also be important for a transaction to be successful. Whether partners have savings or equity to inject could become an issue.
What if the transaction doesn’t materialise?
Simply, it’s back to the drawing board on strategy. Understanding why this transaction didn’t work will be important to be able to draw experience, make changes and establish guidelines for future potential transactions. Reverting back to the drivers for entering into such a transaction should not be overlooked.
What if it does happen?
Hopefully, this is fantastic news and everyone is on board, including clients, as to what the combined firm is able to deliver, matching the initial reasons for each respective firm to enter into this deal, which no doubt will have taken months, if not years, to get over the line.
The hard work now begins in ensuring it does deliver. The project management team will still be vital to provide focus on this, enabling the leadership and fee earners to focus on quality service delivery and financial results in what may be a new office with new infrastructure. Settling in time can be minimised through an effective project management team.
In conclusion, there are so many aspects to consider in striving to get a deal over the line and for it to be successful, delivering all that was hoped for. Communication is the one word I would use to facilitate all of this; communication at all levels, internally and externally but this needs to be managed and, yet again, validates the undoubted need of a skilled project management team.