The Brief catches up with the CEO of Knights, who explains the implications of the private equity industry’s interest in law firms and why the resulting “corporatisation”  will be a good thing.

The legal profession is on the cusp of being “corporatised” according to David Beech, CEO of the fast-growing firm Knights, which is aiming to become the preeminent legal player in the UK regions. And, he says, it won’t be a moment too soon.

Beech, who acquired Knights in 2012 and floated it on the London Stock Exchange’s AIM market in 2018, had a fairly conventional legal career until 2004, when he left the law, disenchanted, and went to work in private equity.

“I thought the partnership model lacked ownership and management,” he says. “It was lawyers all trying to act committee-style and share profits, but also in competition with each other because the more fees they could earn, the more profit they made individually.

“It was quite political, which I didn’t like.”

Under the partnership model, he continues, “Nobody thinks about capital. It’s all about income.

“If you contrast that with the normal world outside law, people think about investing money and making a capital return.”

The deregulation of law firm ownership in 2012, though, meant it became possible for law firms to be owned, and managed, independently from lawyers – and saw Beech return to the sector and buy the, at the time, two-office firm Knights.

In the normal world outside law, people think about investing money and making a capital return.

The business has since grown, mostly by acquisition, to 32 offices nationwide at the latest count. It now employs 1,350 professionals and is on course to turn over more than £200 million in the current financial year.

The arrival of private equity

Despite the 2012 reforms, just three UK law firms have listed on the stock market to-date. While it is now common for new start-up law firms to be constituted as limited companies, the limited liability partnership remains the standard model for the vast majority of established firms.

However, in the past five years there has been increasing interest in the legal sector from private equity, with almost £1.2 billion in investment. The biggest of these deals was the £450 million acquisition by Inflexion of DWF in 2023, and the rate at which private equity has followed into the legal sector has continued to accelerate, with PE investments last year totalling £534 million.

According to Beech, though, this is just the tip of a rapidly approaching iceberg.

The next generation don’t want to borrow £250,000 to buy out a retiring equity partner.

He points to the accountancy profession, where 26 private equity-backed consolidators have transformed the sector. The prices being paid for accountancy firms now (Grant Thornton was acquired this year at a multiple of 15 times earnings before interest, depreciation and amortisation – EBITDA) mean private equity investors are increasingly looking to opportunities in the less fully valued legal sector.

Sell-side drivers

Based on Knights’ experience of acquiring law firms and integrating them into its business structure, Beech says, “It has been quite challenging to get law firms to understand corporatisation and the separation of ownership and management.

“But now I think they are coming to understand it, partly by looking at the example of the accountancy sector, and I think law is more ready to receive external investment now than it has ever been.”

An important factor that law firms are having to consider, Beech says, is the cost of keeping up in the age of AI. “Everyone is concerned about AI,” he says.

“And when you think about the partnership model that takes all the money out every year, there’s nothing left for investment in technology or AI. Because of this, technology in law firms is pretty weak, and AI is now shining a spotlight on that historic underinvestment and multiplying it.

“So, I think that is a driver toward corporatisation, as firms realise they need external investment to remain competitive.”

Another factor, he continues, is the cost of buying out retiring equity partners. He says, “The capital to buy them out is drying up.

“The next generation don’t want to borrow £250,000 to buy out a retiring equity partner. So where is that money going to come from?

“They are looking to external investment from private equity.”

Competition time

Competition from multiple buyers inevitably drives prices up. So, what will the arrival of private equity investors in the legal space mean for Knights’ strategy of growth by acquisition?

Beech says the business is finding, for the first time, that it is involved in competitive sale processes. “For our last couple of acquisitions we haven’t been the only bidder,” he explains.

“We had the market to ourselves for 12 years, but we haven’t got it to ourselves now. There is definitely going to be much more M&A activity in the sector than there has ever been.”

Beech also says that, because Knights buys high-quality, rather than distressed, legal businesses, and is immediately able to take advantage of cost savings because of the back-office platform it has built up over 13 years, it is used to paying “full value” for the firms it buys.

There is a general rule that the bigger you are, the higher the profit multiple you can command will be.

There is also a significant upside to the arrival of other players. He says, “We welcome the increased awareness and knowledge that have come with the arrival of private equity because we are, for the first time, getting law firms calling us to see if we would be interested in buying them.

“This has only started happening in the last 12 months. Previously we have had to go out there and court them.”

Size matters

Beech warns that, because the transactional nature of most legal work leads to unpredictable cashflows, anyone selling a law firm cannot expect the same kind of valuation as an accountancy firm that enjoys regular income from audit work.

Big, in the case of private equity, is beautiful, he says: “There is a general rule that the bigger you are, the higher the profit multiple you can command will be.

“If you’re at less than £10 million EBITDA, then I think your multiple will probably be single digit.

“Above £10 million EBITDA, the multiple you can command will start to increase because you will be talking to bigger private equity funds, which will have more scope to give your business the investment it needs to ramp up its growth.”

Even in the high single digits, though, the kind of profit multiples paid by private equity are much higher than the multiples of two-to-four times EBITDA that are usually paid when one traditional law firm buys another.

The banking sector ditched the partnership model in the 1950s

Being normal

Beech says that whether law firms raise capital by floating on the public markets, like Knights, or taking on private equity investment, the most important thing is to adopt a corporate structure and take on external investment, whatever its form.

He continues, “Just having private investment doesn’t make a business a great place to work. You need to have a decent investor and also decent management.”

He also says lawyers have nothing to fear from working in a corporate environment, whether that is with the backing of private equity or being listed on the stock market.

“It’s the normal business model for everybody outside the legal and accountancy sectors. The banking sector ditched the partnership model in the 1950s,” he explains.

“Corporatisation is just bringing normal, modern business principles to the legal industry. I see it as hugely positive for lawyers because it means they will be able to work, and progress, in their businesses without financial risk.

“We are planning to recruit around 100 salaried partners this year and they like the fact they can earn the same income they would in an LLP but without having to risk their own capital. The partnership model is just a quirk of the way the legal sector has developed, and I think it’s going to come to an end.”

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