The “inexcusable delay” in enabling the Solicitors Regulatory Authority to start licensing alternative business structures (ABSs) could make private investors think twice about entering the legal sector, the head of corporate finance at accountants Baker Tilly said this week.
Tony Pierre told the Legal Futures conference, which was sponsored by NatWest, that there was a lot of interest from private investors in the legal sector ahead of the implementation of ABSs. However, while lots of equity investors are looking at cash injections into law firms, confidence is being dented by the SRA not being in a position to license on the anticipated 6 October launch-date.
“There are problems within the UK economy and private equity generally but there has been an inexcusable delay,” he said. “There are planned deals between £10m and £100m in value that have been delayed and this is making law firms unknown commodities. These delays could cost lawyers dear.”
George Bull, head of Baker Tilly’s professional practices group, warned that there are also some issues remaining over how a “fit and proper” investor in an ABS is to be defined, which is also making potential investors wary.
“There is a lot to be done in that area but [the SRA] is seriously running out of time,” he said. “All these questions need to be resolved in a very short time.”
For those law firms hoping that private investors are not dissuaded by the delays, Mr Pierre provided a list of issues to address in order to attract in external investment.
“Investors are typically looking for growth over a three-to-five-year period and also be part-owners of the business,” he stated. “They are interested in businesses that can show an economy of scale and growth potential.”
A law firm with a turnover of under £10m is likely to be too small to be of interest, Mr Pierre continued, but added that senior lawyers should be looking to demonstrate potential capital gains as well as an exit strategy to investors. Firms must review a number of internal factors if they wish to pursue the private equity route, chief amongst which is discarding the treasured partnership model.
“Law firms must create the right structure,” he added. “A shareholder agreement is much better for external investors than a partnership agreement.”
Other issues that private equity investors are looking for include a strong management team, a clear business plan, financial stability and better investor relations, he said.