Viv Williams, CEO of Legal Futures Associate 360 Legal Group, warns firms considering whether they may be purchased, sold or merged in the post-ABS world that they need to start getting their houses in order now
There have now been well over 100 alternative business structure (ABS) applications since 3 January 2012 and we should see the first approvals imminently. So, what does this mean for the estimated 75% of practices which are just sitting and watching and hoping this will all go away?
Should they be preparing to join the law firm beauty parade that will decide which law firms are purchased, sold and merged? Or are they right to wait on the side lines, biding their time?
We have already seen some significant developments at the upper end of the solicitor market. We read that Liverpool-based Silverbeck Rymer for the princely sum of £19.3 million by Quindell, whilst innovative Russell Jones & Walker has been bought by for £53.6 million.
Private equity has been hovering around the legal sector for some time. QualitySolicitors and Parabis are both raising significant sums. Does this encourage law firm partners to think they will be next and are waiting for their fairy godmother to arrive with a cheque? Fairy godmothers do not exist!
Most UK law firms have now accepted that the legal profession is about to change forever, with widespread consolidation, acquisitions, sales and mergers. Unfortunately many of the 11,000 or so legal practices are not an attractive proposition to any acquirer or investor and preparing your firm NOW is the only option for survival for most.
Knowing what your firm will be like in the next three to five years is an essential ingredient in preparing for the future. Who are your clients or customers? How many partners will you have? Who will be providing the work? How will you market and sell your services in the future?
These are all part of your forward strategy. You may wish to attempt to do this without a facilitator but beware of getting bogged down in minutiae. This strategy, when written down in a document which forms the basis of your business plan, is the first stage in becoming more attractive to a potential investor or acquirer.
The person tasked with managing the practice has to demonstrate strong leadership and be prepared to make some unpalatable decisions. Implementing change is never easy and even forward-thinking leaders can struggle when dealing with people issues.
Finding the time to implement change can also be a challenge – especially if the leader is expected to produce fees as well as manage the practice. Any potential investor or acquirer will look for a leader within the practice to demonstrate clear vision and leadership from the front.
Sound financial management
Access to capital will be a massive challenge for law firms in the future, yet many firms carry huge amounts of cash simply locked up in their practice. The amalgam of work in progress and debtors can often be well in excess of eight months and sometimes more. If firms dealt with this issue, their reliance on bank borrowings could well be significantly reduced.
Working towards a lock-up position of 120 days should be the goal for many firms. There are no other professions or industries where the clients are not told that WIP will be billed monthly wherever possible and bills will be paid within 30 days of the date of invoice.
If you don’t have the knowledge in-house, then outsource this function and you will be far more attractive to any potential suitor.
What does your brand stand for? Do you think that your brand is recognised locally? These questions will be considered by a potential investor or acquirer when reviewing potential targets.
Knowing your clients or customer is the first step in deciding what your brand represents. I frequently hear “We are looking to develop a high net-worth part of our practice” when the community served is traditionally a legal aid area. Finding products and services that meet your clients’ needs at a price they can afford will make you much more attractive to potential suitors.
We now have 25% of the legal profession trading as limited companies; this is both tax efficient and offers two significant advantages over competitors. Firstly, if you are considering an ABS solution, you are more likely to gain interest in a model that business understands. The partnership model simply does not work for most firms, certainly not those operating in the mid-tier. Valuation of practices has become a fine art with little or no value placed on goodwill.
Unless, of course, you buy your own practice. Converting to a limited company is tax efficient and you can release your capital into a loan account and effectively buy your own goodwill. Whereas a partnership usually allows the partners to draw down all of the profits, a limited company structure means you will be drawing a salary and will be leaving some profits in the business to pay shareholders.
It also assists with exit and succession planning where younger people will join a practice as a director without aspiring to become an equity partner.
There is no doubt that the legal landscape will be significantly different in the next few years. If you are considering your options and would be interested in becoming part of this legal beauty pageant, then getting your own house in order now will make you a more attractive proposition than many of your competitors.
Viv Williams is CEO of 360 Legal Group, which specialises in helping law firms successfully manage and market their businesses and buy, sell or merge their practices