Posted by Nigel Wallis, partner at Legal Futures associate O’Connors LLP
Wallis: Understanding a potential buyer “will pay dividends”
Imagine returning to the office after your summer holiday to find a sealed envelope marked ‘Strictly Private & Confidential’ sitting on your desk.
As managing partner, you open it to find an invitation from a well-respected competitor to discuss the purchase of your law firm – an offer that looks genuine and that could make logical sense for your firm.
What do you do?
Given the rate of consolidation in the legal sector this is not an unlikely scenario, particularly if your firm is good at what it does. Over the last few years we have worked with many managing partners faced with a situation like this. As it happens, we have also worked with some of the sector’s leading law firm buyers.
Trying to understand why a potential buyer is interested in your law firm will pay dividends. Knowing this can dictate how you play things and enable you to determine what special value a potential buyer might place on your business.
So, after splashing on the Factor 30 in sun lounger and before you reach for your Kindle, take a few moments to reflect on the key reasons why people buy businesses and how they might apply to your law firm. Just in case that envelope is there waiting for you.
Successful acquisitions that create value tend to fall into the following categories:
- Improving a target’s profitability: In this scenario the buyer buys the target and then improves its productivity by cutting wasteful costs, upgrading business systems and driving sales. Every buyer believes they can do this but only a very few fully achieve it.
- Taking out a competitor: Here, the buyer acquires a business with which it has been competing with a view to securing margin improvement and economies of scale.
- Achieving rapid diversification: Whilst it is always possible to set up a new division within an existing business, acquiring a ready-made division with a skill-set, client following and management team can accelerate the process. If a buyer recognises the need to diversify rapidly, perhaps as a consequence of some market shift elsewhere in their business, making a bolt-on acquisition is usually the most viable way to do this.
- Boosting fire-power to secure market share: Some good, niche businesses fail to achieve their full potential because they lack the critical mass to be taken seriously by new, perhaps larger, customers. The joint resources of a buyer and a target can often unlock market opportunities for both parties and enable the combined business to grow its top line and profit margin.
- Leap-frogging R & D: Acquiring a business that already has an established technology, brand, know-how, skill-set, regulatory status, geographical footprint or even web domain can be far quicker and cheaper than investing time and money in creating something from scratch. Not always safer though.
- Capturing early-stage innovations: Here the buyer looks to acquire a business with a way of doing something that will one day transform a market before the business is sufficiently established to poke its head above the parapet and attract wider interest. Companies like Google and Unilever have proved themselves to be masters at this – and have the deep pockets to do it.
- Bagging a bargain: This is what every buyer would like to do but very few genuinely achieve it. There is usually a reason why a business is going cheap, though market sentiment can play a role. Win-win deals are usually significantly more successful.
Great article, Nigel (I would expect no less!). Still seeing some that result from a lack of good succession planning, and that’s possibly where bargains can be had.