Lewis: You have to tell your story in the right way
Competition among private equity buyers has pushed the value of law firms to the “upper end” of their “legitimate range”, it was claimed yesterday.
Jonathan Lewis said that although the range of law firm valuations was still “unhelpfully broad” at 2-8x times EBITDA (earnings before interest, taxes, depreciation and amortisation), things had tightened up in the last year “towards the upper end”.
Mr Lewis, corporate finance partner for Yorkshire at accountants Armstrong Watson, said “mid-market” law firms with “good brand names, good scale, looking to grow” were probably worth 6-8x EBITDA.
However, law firms looking for 10x EBITDA had not seen transactions completing.
Mr Lewis said it might be possible for “large players with EBITDA of tens of millions” to achieve a multiple of 10.
He was speaking to Thomas Mieszkowski, partner at Leeds-based commercial law firm Walker Morris, in a webinar on private equity investment in law firms.
Mr Lewis said there were reasons why the legal sector had attracted so much investment from private equity, particularly over the last couple of years – research published earlier this year showed it reached a record £534m last year.
For a regulated industry, it was “relatively easy” for private equity to invest in the legal sector, partly because of a “very amenable regulator” in the Solicitors Regulation Authority.
The sector was “highly fragmented”, in terms of different kinds of work but also regionally. “That’s something that private equity is really, really attracted to, not just in the legal sector but in other sectors as well”.
Mr Lewis went on: “You’ve also had quite a lot of changes in the legal market itself. You’ve had US players coming in and being more prevalent across the sector. That’s brought with it, at the very top level, an increase in fees and salary expectations and that has kind of trickled down through the market.
“There are more benefits of scale than there have been in the past, both from a pricing and a talent protection point of view. You’ve also had quite a lot of technological change.”
Mr Lewis said that, when it came to law firm valuations, different factors came into play, such as the scale of the firm, the brand name and whether the revenue was concentrated or diversified across different departments.
“The credibility of the next tier down to drive the firm forward will play a big part in the valuation – more so than in other sectors because it’s such a people-driven business model. It’s not just a financial equation.”
Law firms wanting to achieve a good valuation from private equity should make sure their accounts showed “steady growth and diversification” and they “really understood” their costs base.
“You have to tell your story in the right way and explain it to them in a way that is credible. Double-digit, year-on-year growth is something they’re focused on.”
Succession planning also had to be in place. “The firm must be giving opportunities for the next level down from the equity partners to come to the forefront.”
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