Law firm leaders expecting market consolidation in 2021

Sparkes: Legal market is set to enter a period of sustained transformation

There are “high expectations” among law firm leaders of consolidation in the legal services market during 2021 and beyond, research has found.

But the genesis of “a surprising number of M&A transactions is not a robust process involving strategic review, market mapping, analysis, identification and approach”.

Rather, “known local entities”, partner referrals and leadership connections all play a significant part in the outcome of M&A transactions.

“Too much reliance on these methods is not strategic,” said David Sparkes, the head of recently launched M&A advisers Millbourn Ross.

He said the pandemic was “the catalyst for a period of rapid change within the sector”, leaving “financially robust, well governed” law firms in a good position to take advantage of opportunities.

Mr Sparkes based his report, M&A in the legal sector, on discussions with over 70 leaders at law firms with annual turnovers of £1m to £800m.

The report said: “The legal market is set to enter a period of sustained transformation. That’s not to suggest it has not been the beneficiary of change in the last decade, but that the pace of change will continue to accelerate.

“At one end of the spectrum, the pandemic has served to magnify the challenges faced by firms who were already wrestling with the pace of change pre-pandemic, and at the other end there are firms who are financially robust, well governed and in a good position to take advantage of the opportunities that are presented to them.”

It said the third quarter of this year was “a period of consolidation”, as firms “refined new policies and procedures, and looked to identify and interpret internal and external indicators that would underpin decision making”, particularly their half-year results.

The focus for the fourth quarter “shifted to longer-term strategy”, with many firms having “a higher degree of clarity on 2020/21” and planning for the future.

“Long-term strategies are under the spotlight. Now, more than ever, managing partners need to have clarity about their future strategy.

“They need to be confident that they have the support of the equity and wider partnership in order to be decisive and respond to opportunities that are presented.”

There was a “clear appetite” amongst all firms with a growth strategy to do so in a “controlled and measured” way.

“Firms who are sensitive to dilution of their culture and values through large scale M&A, all express an interest in teams and bolt-ons as a more appealing and less disruptive approach.”

Future financial “pinch points”, such as the indemnity insurance renewal season or the cessation of government Covid support, would need to be “planned for and navigated”, but they could also “serve to create fluidity in the market and ultimately play into the hands of the acquiring firms”.

Mr Sparkes’ report concluded: “Opportunities for growth will surface from a variety of sources. Firms who have found the pandemic magnifies their pre-existing financial or succession planning challenges will be seeking to engage with firms who can ensure a future, whilst disillusioned partners or teams may see this as an opportunity to find a new home more aligned to their own aspirations.

“Naturally, most firms risk profile suggests they will apply a cautious and conservative approach to M&A, ensuring that culture and values are not diluted over growth and profit.”

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