Merger mania returns

How many firms are seeing a hike in
their professional indemnity premiums and
how many have not obtained cover? Finding homes for
these distressed firms will be
a challenge at several levels yet we are still experiencing
an appetite to grow by acquisition.

When considering your future growth and development, there
is an opportunity to increase market share in certain sectors, and doing so can create critical mass from which economies of scale can be obtained.

By acquiring potential targets, you could attain a workforce with increased skills, which will enhance and develop your offering to existing client bases, as well as bring in new ones that your current services could be marketed to.

The key is to have a vision, objective and strategy in place before thinking about any acquisitions, as well as the ability to raise sufficient capital
to meet the working capital requirements of any acquisition.

A policy to grow by acquiring other firms will result in several complications. First, you
must recognise that a single transaction is unlikely to achieve your objective in full.

The legal profession seems
to have realised recently that there will be unprecedented consolidation. Some 8,000
legal practices that contain
four partners or less have just become aware of the need
for succession planning and
exit strategies; this may well
be too little too late for many.

The average age of an equity partner is 61 and, as averages suggest, many are 70 and 80-year-old partners who
still practise, with little hope
of exit.

What value could be placed on these practices, and what value could they bring to the table in merger discussions?

The legal profession, unlike others, has been conducted
on a transactional basis, and very little emphasis has been placed on the lifetime value
of the client.

Succession issues

The fundamental challenge facing these 8,000 or so practices is the lack of younger potential partners prepared to become equity partners. This traditional method of exit for many senior partners in the past has completely disappeared
in the current environment.

Some 70 per cent of new entrants joining the profession are female, already juggling career, home and family, and are reluctant to take on further debt and become equity partners. Who can blame them? Why would any younger fee earner
or salaried partner want that
sort of responsibility when the profession has to consolidate?

Merger and acquisition discussions are currently at levels never seen before, and most partners need an urgent reality check to consider the true value of their practice to any potential merger candidate or even a potential acquirer. Partners who try to negotiate on their own soon find the potential transaction falls apart, predominately due to unrealistic expectations on the part of the firm eager to merge.

It is imperative that you appoint someone to help you
if you are currently managing partner of your own practice then you will have enough
on your plate without going through the process of
acquiring other firms. Appoint
a professional organisation who has worked on mergers before, understands the market and has specialist knowledge (or can get it) within the type of acquisition you are considering.

The role of the adviser is
not just to introduce potential merger partners, but to approach them anonymously on your behalf and to manage the expectations of the partners wishing to be acquired.

Purely on paper, acquiring seems an attractive option to boost turnover and increase the size of the practice, but as eight out of ten mergers actually fail, it is imperative that if you adopt this growth strategy, you have the necessary resources to integrate other firms. SJ

Copyright & permissions