Introduction
Recent times have seen increased activity around mergers & acquisitions in the legal sector with law firms using this as part of a growth strategy or to secure their future through joining a larger practice.
Several reasons drive a decision to acquire, merger or sell a law firm including but not limited to:
- Security through joining a larger practice.
- Strategic merger of similar size firms in key locations to create a larger entity to compete.
- Part of succession or exit plan.
- Financial instability.
- Growth
- Change of overall strategy.
- Acquisition to move into new areas of law.
In the immediacy and with the issues that some firms are facing due to the impact of the recent current COVID-19 pandemic, all firms are looking to their future and how they will exit the current crisis and what changes they will need to or may need to make to sustain the firm.
Regrettably, there are firms in contact with The Strategic Partner, who are not confident in surviving through and out of the current crisis and one of the options they are seeking to discuss is a sale or merger.
Other firms are recognising that although a change in their firm is inevitable, they will come through the crisis, and an acquisition is part of a strategy to assist them further in securing their future. Fundamentally, such firms are looking at where they can use their infrastructure to gain economies of scale and turn an acquired firm into a profitable situation when combined with their firm.
Whether you are a freelance solicitor, sole practitioner, or partnership (of any size), if you are concerned about the immediate future of your firm and would like to discuss options, The Strategic Partner can assist with general guidance and even introduction to firms who are both buying or selling.
This article is written to assist you in some of the areas that law firms and their owners should consider if they are looking at an acquisition, merger or sale.
If you would like to contact us to discuss any issues arising from this article, or simply to discuss options you can call us on 0203 911 9710, email us info@thestrategicpartner.co.uk or visit our website to make an online enquiry.
Initial Considerations
Whether you are being forced to consider a sale, merger or acquisition or if it is something that you have been considering for a while, some key elements should be addressed before you commit to the strategy.
Whether you are looking to buy or sell there is a checklist of key information that is going to be required as the due diligence stage will require sharing of data, systems and processes to ensure that the acquisition or merger is the right decision. This checklist may offer some assistance:
- Bring the firm’s annual accounts up to date and prepare up to date management accounts.
- Are you able to answer any issues that arise from the accounts?
- Who will manage your negotiations?
- Who will undertake due diligence? (internal or external)
- Are all owners bought into the process and supportive and if not, what is the mechanism for resolving a possible dispute?
- What are the owner’s requirements? (both financial and otherwise)
- Your future as an owner and what position (if any) you will want in the future firm, for how long and for what remuneration? (applies to all owners)
- Have you assessed the impact on the staff and how they will be affected and what they will be told and when?
- How will this affect your clients and how they will react?
- The brand and what will happen to it, what do you want to happen to it?
- Does the firm have any regulatory issues and what information will you supply or are you prepared to supply and at what stage?
- What is your claims history and how will you address questions on claims?
- What is the impact there may be on professional indemnity insurance?
- The succession rules and how they will impact on you and the acquiring firm. Will they be a true successor practice or not?
- What undertakings do you have outstanding?
- Are your risk and compliance registers up to date?
- Indemnities and warranties that may be required to be provided and if you are ready to provide them.
- What happens if the merger does not work – how do you get out of it and can you?
- What are your contractual commitments to suppliers, you will need to obtain copies of all contracts and leases that you have and confirm the time to run, cost and termination provisions?
- What are your borrowings and loans, copies of agreements, repayment terms and balances?
- Prepare your debtors lists.
- Prepare your creditor lists.
- Identify bad debts.
- Prepare a general MI suite or be prepared to revealing key information
- Billing
- WIP
- Live cases
- New cases
- Cash receipts
- Expenditure
- Etc
The journey of preparation will force you to consider your firm and through this exploratory phase, it may direct you on whether the firm is even ready for M&A discussions with another party.
The Detail
The following section provides some more general and detailed areas for firms to consider.
Why Acquire – What are the primary reasons for acquiring, seeking a merger, or looking to sell your firm? There are reasons for your decision and being honest about this will help you plan the appropriate target and ensure you do not waste your own and other peoples time in pursuing a relationship that will simply not work. When established, you can confirm what you expect to achieve from the acquisition and protect your goals to ensure they are realised.
Personal Requirements – An essential element to address before engaging in M&A discussions is what are the requirements and expectations of each of the owners and importantly, ensure that each owner is clear, and it is preferable to resolve issues internally before exposing them to a potential partner as this could be used to exploit your position. Whilst it may not always be possible to resolve disputes (it may be the cause or a decision to sell) understanding and addressing what you can is essential. Ideally, the owners will arrive at a unified standpoint enabling them to speak in unison. There will be different requirements on a personal level outside of the firm requirements and where possible these should be understood and addressed.
Review your systems and processes – Take a hard look at your systems and processes. An acquisition may put a strain on these and they need to be healthy. Part of the discovery process will drive both firms to understand each other, and this may lead to the identification of better ways of working that should be adopted. You should be seeking to secure best practice so be open to new ways of working and importantly, make sure you understand the strengths and weaknesses in your systems and processes so they can be discussed and resolved.
Whilst there is likely to be commonality there will be elements that are unique to each firm. It is important to assess processes objectively to ensure that the best method of operation is established and that the acquiring company does not force through process changes that actually take the business backwards rather than forward.
Review your plans and targets – Review what your targets and plans are and how a merger or acquisition will impact on these. They may need revisiting if an acquisition or sale was not part of the strategy when written or if included, were the targets you set realistic and how are your achievements against these? Where you have not met your projection, be prepared to confirm why with detailed reasoning. If you do not have written plans, targets, or objectives it would be wise to generate some even if they are an outline of what the firm’s strategy is and what it is seeking to achieve. Revealing your approach and strategy will assist in reaching an understanding and lead to easier negotiations.
Contemplate the outcome of the acquisition, sale or merger – What is the expected outcome of the acquisition or sale? Much of this will depend on the reason you sought the acquisition or sale in the first place. Being very clear about what you expect the outcome will enable you to take action to ensure you get there and importantly direct the necessary time, resource and finance to ensure your chosen strategy is successful. You will also need to identify a change in your own business and plan for how that will be handled. Change management is a significant aspect of M & A and by being able to identify what you know will be an issue and impact your business you can start to establish a solution and hopefully avoid the problems from occurring or at least minimise their impact.
Consider the impact – Look at the overall impact on your firm. Where will your firm be affected and where will the other party be affected? The overall objective for most acquisitions is to secure growth and protect the acquirer and acquirer firm. You need to protect your investment and ensure the acquisition, sale or merger is successful. Change must be recognised and dealt with. The impact will be across several areas of both firms and you need to ensure that you appreciate what these are and prepare for them to deliver quick and effective solutions.
Look at your people – An acquisition or merger brings change and change brings uncertainty. People in both organisations are going to be affected (jobs, systems, ways of working etc) and you need to ensure you are ready to communicate when you need to and answer the important questions to keep the people you need onside. It is often the case that roles will change, and, in some cases, positions will be removed, and it is important to address such elements properly. Also, consider who from your firm will be involved in the acquisition process and the time they will take to do so and how their current role may be affected by the additional work they will now undertake. You may be forced to reveal your plans to certain people before you would ordinarily want to and securing their confidentiality is essential.
Change is not always welcomed by everyone and more often than not, change is resisted. In any acquisition or merger, it will bring about change that will impact both businesses and it is important to consider the human impact of the acquisition and the changes that are likely from simply working with new people, through to the changing of job roles or possible redundancy there will be an impact on staff. To minimise damage to both businesses, consider the impact of change and have a change management and communication plan in place to cater and deal with this and reduce the potential for negativity.
Roles – What roles in each business have common features or could be mirrored, can these be rationalised and if so, what is the impact? If roles are being merged, who is the best person to fulfil the role? Ensure you are objective and have a fair selection process. Where there is a risk of redundancy ensure this is approached with sensitivity and caution and above all, undertaken fairly and correctly to avoid negative ‘fall out’ or employment claims being raised.
Consider your technology – Likely, the two firms will probably be making use of different technology and operating from completely different platforms. Integration of systems and processes is one of the hardest elements to achieve and in too many cases firms never get to truly merge their systems, processes and operations which can and does cause longer-term damage. You need the best of breed and there may be technology in the marketplace that you can make use of, your acquired business may have the technology you need, or your business may have the technology to deploy into the acquired company. Make sure you are up to date on what is available to you and what is being acquired and plan for effective deployment.
In much the same way as processes will have commonality, so may systems. There are many case management and accounts systems in the legal market which all have different user interfaces, methods of working and availability of technology. It is important to objectively assess which system is better and what can be learned or taken from each system to ensure the newly formed structure benefits from the overall knowledge acquired with the result being that the best system is retained or acquired to take the new firm forward.
Timing and Resource – Consider the time that you are prepared to allow for the acquisition or merger to take and the resources needed to achieve that. Too often discussions are becoming protracted which can prevent the ‘deal’ from happening. Build and agree on a timetable and work to achieve it. Once the acquisition has occurred, the hard work starts. The integration!
Locations – Where there is more than one location is it possible to bring these together? What will be the impact on staff and clients by moving or closing an office and how can this be managed and the negative impact minimised. As with all these points detailed, consideration needs to be given to this but moving and changing premises is fundamental and long term and making a poor decision can have severe consequences.
Clients – It is often the case that clients are not aware of the acquisition or merger for obvious reasons, however, through due diligence, establishing which clients may be concerned about the structural change will enable, at the appropriate time, an approach to address any issues. For most clients, they should not see any appreciable change and certainly not negative consequences. It is appropriate to consider how the acquisition will affect clients and what they may perceive and what may be reality. How you handle this and communicate with them is important to ensure you retain their loyalty. In much the same way as staff will form views on an acquisition and will decide if it is positive or negative, clients will do the same. Understanding, appreciating, and addressing any concerns is essential. Be aware of contractual relationships with businesses and work providers that terminate on a structure change and ensure you address such relationships as part of the due diligence process as the loss of such a contract could have devastating consequences.
Contracts – What contracts are impacted by the acquisition of a business? Most commercial contracts will have a clause dealing with what happens in the event of a change of ownership. Have you truly understood the implications, and have you made provision to avoid a negative impact of a contract terminating due to a change of ownership? This is an obvious example of where a business will need to tackle implementation before a completion date as the impact of losing clients or a major client may throw the acquisition itself into doubt.
Identify competing contracts and where there will be a duplicate spend due to both businesses having a service or product, and both will not be needed. What is the financial implication of terminating or keeping both contracts in place and do you make use of the service or accept the loss of income without using the service itself? In many scenarios, it may be possible to agree with service and product providers an exit strategy that will have an ultimate benefit for all parties. Where this is not possible prepare and provide for the financial consequences.
Online Presence – Both firms will have an online presence. Whether this is through the website, social media or review profiles, there will be a presence, and this will need to be managed to ensure that changes are communicated in a positive way. Firms also need to ensure negative press or observations are minimised. Ultimately, depending on the final goal, whether that is to have one online presence or retain separation, it is important to monitor online activity and be ready to address it quickly. The web is awash with positive and negative information and your role in an acquisition is to manage this information and control the message to the best of your ability.
Branding, Marketing & Advertising – What will the future brand consideration be? Will both firms continue to run with the brands intact or will there be a change and if so, is that one of the brands is ultimately absorbed and disappears or will there be a merger of names? This is often a difficult area to address as firms will want to ensure any goodwill is not lost but equally, cannot allow the two firms to continue to run independently unless there is a powerful reason to do so. If this is not considered and addressed the firm could end up continuing to compete against each other and that may negate the reason for the merger or acquisition in the first place.
Consider the marketing and advertising strategies of both firms, where do you compete and where are the synergies. Through an effective merging of marketing strategies, both firms should save money by bringing their presence together and ensuring that spend is controlled to avoid duplication of costs but save money.
Website – If websites are to be merged or even deleted, there will be a history and following for the website that is to be adapted or deleted. Experts will help you ensure the presence and traffic is not lost so there continues to be a benefit even when a website is removed. At The Strategic Partner, we work with FireTap Ltd to assist firms in website and marketing strategies for law firms.
Integration – When you are well into the due diligence, the firms will start to realise what change will happen and where it will impact on which business. When implementation is ready, it is essential to know what and where the impact will be to ensure the appropriate resource and time is allocated to effect change positively. In most scenarios, there will be an integration project and experience shows that the quicker this is completed, the more successful the acquisition will be. Set out an implementation schedule and ensure those involved are aware of the expectations and the project timelines and monitor performance against these.
Conclusion and Contact
If you are considering a merger, acquisition or sale and would like to discuss strategy planning or assistance with due diligence or integration, The Strategic Partner are experts ready to support and advise you and your firm.
If the need for an M&A strategy is unexpected, planning is still essential, and we can assist you regardless of your reasons for seeking this route to ensure the ultimate goals are achieved.
If you would like to contact us you can call us on 0203 911 9710, email us info@thestrategicpartner.co.uk or visit our website to make an online enquiry.