Posted by Jeff Zindani, managing director of Legal Futures Associate Acquira Professional Services
Zindani: An M&A strategy can quickly realise market opportunities
A law firm without a growth strategy is like any business that fails to plan for the future. It may continue to thrive in the short term but in the long term it is unlikely to succeed as stagnation and decline start to set in.
Having spent the past few weeks talking to managing partners across the country, there is a clear message: growth in itself produces a kind of momentum that lights up a firm. Without it, key talent will not be attracted to join and key players may well leave.
For most firms, the focus has largely been around organic growth, with the traditional marketing levers being pulled when growth is required. The fundamental weaknesses are all too obvious: marketing is expensive and in practice a slow-burn approach.
Simply spending more cash on marketing will not do the trick. Peter Drucker, the great management guru, was right when he said: “The greatest danger in times of turbulence is not the turbulence; it is to act with yesterday’s logic.” Sticking with the old ways will not give you the growth that you need.
Why buy to build?
This fundamental question can only be answered by your firm but the qualifying question I commonly raise with law firm owners is whether or not it is cheaper to buy than to build over time.
This will, of course, depend on the level of growth that the firm is aiming to achieve, and the costs associated with traditional marketing versus external growth.
Most partners believe mergers and acquisitions are for the big firms, even when some of the consolidators have been snapping up smaller practices.
This ‘big fish eating up little fish’ can work even if you are not a consolidator. You don’t have to be a Knights PLC. This is a quicker route to growth and, if done properly, brings about pound for pound a great return on investment.
Also, one of the key nuggets of wisdom I’ve picked up over the years is that you should not make acquisitions because they are available, but rather because they are right for your practice.
What to buy?
This may appear to be a pointless question, but a firm needs to be very clear about whether it enters the market to purchase a firm as a going concern or simply acquire the assets, for example caseload acquisitions or the purchase of a discrete part of a firm.
The advantage of acquiring assets is that it is less risky as you are not taking on the firm’s liabilities. Obviously, the seller will want to sell the practice as a going concern.
From my experience, it will all depend upon the seller’s liabilities. At the high volume end of the personal injury sector, this is a source of real trouble.
However, like all challenges, there are opportunities, particularly if the seller simply wants to exit and to clear off any historical debt which they cannot unwind.
Law firm value: what’s the firm worth?
How do you determine the value of value of a law firm? What is it worth, given it is a ‘people’ business?
A straightforward approach is to look at value based upon the cash flow that you expect it to generate from the practice over time. You may use an EBITDA (earnings before interest, taxes, depreciation and amortisation) and multiples of earnings to get to a more precise figure.
Overall, you need to look at the value drivers of the firm.
Some will say this is a waste of time as the price is only what a buyer will pay. This is utterly flawed as it has to have a financial basis: let’s face it, we are not dealing with the sale of a Picasso.
However, demand may well drive-up multiples, so we have to factor market behaviour into any valuation. This will turn on specific market factors.
For example, there is currently a real premium for niche-based practices or firms that have a subscription-based model, and a high demand for personal injury and clinical negligence caseloads, with buyers paying more than they did pre-Covid.
Also beware of those who claim to know the price of a law firm. As Oscar Wilde once said, a cynic is someone who knows the price of everything and the value of nothing. Remember, law firm valuations, like all business valuations, are usually wrong!
Lastly, on value, I have seen the Ikea effect at play, with certain law firm owners who believe that, as they have built the firm, it’s worth more than it is actually worth in the marketplace.
A modern growth strategy: better to buy than build?
Law firms acquiring smaller firms through so-called buy-and-builds — the bolting together of smaller practices into a larger group – are becoming more evident in the legal sector.
By merging small practices, firms can boost fee income and access larger financing pools for expansion, compete with the bigger boys and girls, together with increasing the overall value of the business.
In my view, law firm owners must challenge the conventional wisdom that growth can only be attained by organic strategies. By embracing an M&A strategy, even on a modest scale, market opportunities can be quickly realised.
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