A team of senior corporate financiers has joined forces with a law firm management consultancy specialising in alternative business structures (ABSs) to target mid-market law firms, Legal Futures can reveal.
Smith Square Partners and ABS Advisory Partners are aiming to advise firms with a turnover of £20m to £100m on the best way to structure and finance themselves, with a focus on developing a corporate structure that will enable them to incentivise staff and make acquisitions.
Smith Square is a relatively new corporate finance house focused on the mid-market, with seven partners drawn from senior positions in major investment banks. It advised on £1bn of merger and acquisition deals in its first year for the likes of Travelex. Solicitor Paul Harding, who runs ABS Advisory Partners, recently facilitated the merger of London law firms Wedlake Bell and Cumberland Ellis.
Smith Square partner Andrew Whitehouse argued that the post-recession commercial environment, rather than ABSs, is the force behind the drive towards consolidation. “There are simply too many law firms with the wrong cost structures chasing too little business,” he said. “In these circumstances consolidation is almost inevitable.”
The top end of the market is holding up best, he continued, meaning that mid-sized firms are “where the action is… in the mid-tier, traditional pricing structures are under serious strain, with margins still heading in the wrong direction after hitting their peak”.
There are two main approaches to consolidation, he said: the traditional merger of two partnerships “that sidesteps the issue of what each firm is actually worth”, or genuine acquisitions where the purchaser pays goodwill for the business being acquired by being a corporate entity and issuing shares.
There are also internal benefits to a corporate structure, Mr Whitehouse said. “The fundamental risk to most firms is losing their best partners. They have to find a way of locking them into the long-term future of the firm more than at present… Further, firms can make employees shareholders too, which is pretty crucial. The merits of equitising the business are very compelling.”
Smith Square, allied with ABS Advisory’s legal market know-how, would look to apply traditional corporate finance techniques, including valuation, to help firms determine the structure and financing needs, and transition to a corporate form. They could then move onto merger and acquisition activity.
Mr Harding, who has had experience of liberalisation in other professional sectors – advising on the first listing of an architects’ practice in the 1980s – said his work in the market has “flagged up a number of firms keen to be the acquirer or the acquired”.
He predicted that the move to a corporate structure would be driven by the over-55s, who want to capitalise on their ownership ahead of retirement, and the under-35s, who want to see a solid valuation of the business. It is existing partners in the middle who are likely to be happy with the current ‘tenancy’ model of ownership and so most resistant to change, he said.