Posted by Rod Ellis, director of Legal Futures Associate Re Legal
We were recently asked by a leading private equity investor for advice on where in the law it should invest. It was a surprisingly difficult question to answer that led to an interesting discussion on the basics of private equity, valuing businesses and much more. Below are some of the insights and shared thoughts of that discussion.
It was agreed that it’s difficult to value a law firm because we are using outdated business structures in a rapidly changing world and those structures were not designed to achieve capital value. Further, private equity firms are not fond of highly regulated businesses because a whimsical law change can affect a market significantly – with personal injury being the prime example.
We acknowledged that the world has changed and many law firms exist in their current formats because they have owners who have committed ‘long on property’ and to personal expenditure/lifestyles which require them to take out more money from the business than they are earning.
Many firms ‘committed to growth’ in the good time and made long-term decisions which have backfired. There are too many law firms and too many firms stagnating in a highly competitive market because they have done nothing to differentiate themselves from their competitors and haven’t got the resources to really invest in their businesses.
Many law firms are left with too much cost and debt in their businesses, resulting in tension between partners. Some partners are earning less than they are contributing, some are saddled with overheads they don’t need to effectively run their desks, leading to inflated targets and a selfish attitude to clients – what’s the point in sharing a client’s work around if it might mean you don’t make your target? Often the result is the client pays the ultimate price. Is this the way it was meant to be?
Moving on we looked not at the way things are now but how they should be, both for lawyers and for clients alike. We asked ourselves the question: ‘What if we could start again?’ Like a firearms amnesty for law firms, all would be forgiven, you would hand in your law firms, all your staff, all your property and all your liabilities and start again – we’d have one huge pre-pack without a buyer! In fact, it would be better to have no buyers at all; every man and woman would be for themselves.
Imagine the joy of being able to negotiate on property nowadays – loads of space, reasonable prices, no need to over-commit because you know if you grow you can expand easily. What about a really amazing city centre location and then really low-cost space outside the city centre where you have onsite parking to house administration functions, perhaps somewhere near a John Lewis and a gym – fee-earners can even work from there.
Imagine the joy of knowing that you have a few partners who all know they have good clients, a high level of expertise and there’s room in the market for a genuine boutique. The costs of setting up would be low, running costs also low and there’s a guaranteed place in the market.
A high percentage of your time would not be spent in internal meetings, worrying about politics or justifying high charge-out rates to the client because your own cost base is too high. The client would pay fairly for the service and advice and nothing else would come into play.
In this new world, some firms would make a good quick start and attract clients and lawyers due to excellent service and advice with good-value pricing, they would grow and make healthy profits. Imagine charging clients for advice and charging with good margins. Imagine giving the client exactly what they want and be able to make a profit. Imagine turning away work because you don’t need the turnover and because the work is not profitable. Imagine adding true value to the client and not having to chase every penny. Imagine that.
Imagine starting a business with a clear focus; you would never set up a business in these times and try and be all things to all men and women. You could focus on sectors or practice areas and work together with your partners to add value to clients in those sectors with knowledge based advice. Your SEO and networking would be focused as opposed to scattergun and you wouldn’t be asking ‘where do we start?’ Or ‘is it too late?’
Imagine the partners agreeing a small basic and then a share of profits based on contribution in a corporate structure with a yearly review based on performance. Imagine a remuneration structure which encourages everyone to work together with no squirreling and protection of clients.
Imagine a fresh bespoke IT set-up that makes you super-compliant, super-efficient and provides you with an accurate and easy-t-use management tool and makes life easy for staff.
Imagine less competition and a good work-life balance. Imagine making a good living, playing your own game, not worrying what the competition are up to and enjoying your holidays.
Impossible though it may be to create law firm nirvana, some of these things are already happening and out of this daydream comes a few lessons that seem obvious but are not always easy to achieve. Perhaps if you were setting up a law firm now, you could focus on the above. Imagine that.