Mieszkowski: Roll-up strategy is tried and tested
The need for law firms to keep growing – because “if you’re standing still, you’re going backwards” – is making the option of private equity (PE) investment increasingly attractive, according to a lawyer advising on these deals.
Thomas Mieszkowski, a corporate partner at Leeds firm Walker Morris, also said PE houses have an “unfair reputation” as asset strippers.
Walker Morris has acted for three law firms on their acquisition by PE consolidators – Farleys and Slater Heelis, both bought by Lawfront, being the two it can name publicly – and Mr Miezkowski said he had also advised a PE investor on an ultimately unsuccessful deal.
“From the private equity perspective, the roll-up strategy for professional services firms is a tried-and-tested model,” he said.
“They’ve done it quite successfully with other professional services businesses, such as accountants. A recent example is Horizon Capital – they invested in accountants Dains, did a roll-up strategy, did what looks to be a very successful exit last year, and they have now entered the legal services market by creating the Adeptio Group and buying FBC Manby Bowdler. Logic would suggest that they’re looking to do the same.”
We reported in May that while Horizon bought Dains for less than 7x EBITDA, it sold the firm for 14x.
Mr Mieszkowski said part of the attraction for PE was the nature of law firms’ revenues. While not the same as with accountants – who have annual milestones like audits – “if you find a good-quality law firm with a strong client base, you can take a view that the quality of that revenue is good”.
The fragmented nature of the legal market was also appealing to PE, he went on, with plenty of firms in the £1m-£15m turnover range “ripe for a buy-and-build strategy”.
Among the challenges the PE backing could help law firms with were IT investment. “Not only is there a cost involved, but also there is the strategic question of whether you are investing in the correct thing.
“You could see how being part of a larger group, where technology is effectively centralised, takes away not only some of that investment cost but also some of the jeopardy around decision-making.”
Mr Mieszkowski continued: “Growth is going to be key for a lot of law firms – I know it’s a bit of a cliche, but if you’re standing still, you’re going backwards. For a lot of firms, especially in the lower to mid-market, there is a point around critical mass.
“You’ve got certain clients who will look and ask where you are in the top 200. If you’re not in there, is the firm relevant? ‘Is this the firm we want acting for us?’ And growth obviously requires investment.
“If you look at the ways to fund growth, it’s either asking the partners to put their hands in their pocket or borrowing from the bank. It could be argued that, actually, you may be better off being part of a larger group.”
The other driving factor was succession planning, the solicitor said, with the next generation of partners perhaps less willing to take on the financial burden of paying out older partners’ capital accounts.
One of the key challenges with law firm deals, Mr Mieszkowski said, was ensuring that all of the partners were on board.
“Let’s say you’ve got an LLP with 50 partners – they’re not all going to be involved in the deal. Sometimes it’ll be the equity partners who negotiate the deal and then they’ve got to sell the benefits of it to the remaining partners and effectively get them signed up.”
He did not see the fact that any PE investor would be looking to sell the law firm on in a few years as a problem. “Any future investor or buyer of that firm will only want to buy it if it looks like there is sustainable growth…
“A lot of effort and diligence that goes into making sure that there is a good cultural fit from both the investor side and law firm side. Even on an exit by an existing investor, any future buyer is going to want to make sure that culturally we’re aligned with the partners who are in the business at that particular time.
“Because ultimately if you’re not culturally aligned, there can be difficulties retaining people. So it’s got to work from both sides.”
Mr Mieszkowski said PE’s asset-stripper reputation was unfair. “If you look at what private equity has done in other professional services industries, such as accounting and wealth management, generally speaking there’s been a positive impact for the business.”
It was critical for PE to be “comfortable that people at all levels who are contributing to growth feel properly incentivised. And I’m sure they’d argue that effectively moving away from the traditional partnership model gives flexibility in terms of the types of incentives which can be offered to fee-earners”.
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