Why merge with a “consolidator firm”?

What are the benefits of joining with a consolidator.

 

There is a new type of law firm slowly gathering traction in the legal market, and these are the consolidators. Primarily these have been in London but they are now spreading out into the regions.

 

So what is a consolidator and why are firms attracted to them?

 

Put simply a consolidator is a firm whose business is to acquire other smaller firms and by using economies of scale make the acquired firm more profitable for the benefit of all. To take an example, we act for Cubism Law in London which has grown from £0 to £8m in 10 years. As part of this growth, we have placed 6 firms with them, all of whose Partners report less stress and more profit. If one analyses the 9 CBD postcodes in London there are c350 1-3 partner firms. Most of these are good firms with long histories and run by good partners, but all are dealing with landlords, the bank, PII, SRA, recruitment, current staff, photocopier leases etc and myriad other non-law elements which are a distraction. Partners report that running the business of the firm takes about 1 day per week and therefore they are all losing 20% of their competitive edge to rivals. Joining a firm such as Cubism takes away all of these distractions and so immediately they are able to be 20% more productive.

 

“But we value our independence” is generally the stock answer to such an idea. That is not a problem, if your firm’s brand has real value, then keep it as a trading name. However, be honest and ask yourself what is your independence really worth? By joining a larger umbrella organisation which will run everything from the offices, to billing, to marketing, to compliance in return for a % of fees generated what have you lost apart from your problems?

 

Simply calculate what your draw currently is, and if it is less than the 60-70% Cubism would pay you then such a move will make money. Then consider the ability to cross-sell to other members of the group. One of our firms was primarily a conveyancing business, but the partner had a client with a major litigation matter. He could not deal with this but passed it to his litigation colleagues and earned 20% of the fee, in this case a six figure sum. Finally consider that your succession is now dealt with and suddenly independence might look like an expensive luxury.

 

There are a few other firms out there doing this, Gordon Dadds is a great business looking to go national and there is Star Legal and now Echelon Law as well, so if traditional merger with a similar firm is not the answer, and often is not because you just get a larger firm with the same issues, then the consolidator route could be for you. One thing to note, with this type of fee % model there is nowhere for unproductive partners to hide, but for those that are driven they offer a very sensible option.

 

We act for a number of consolidators, if you would like a conversation about whether this option might be for you, please get in touch.

 

What is my firm worth?

If there is one question we are often asked it is what is my law firm worth. The simple answer is nothing and that seems so unfair until you consider a few points.

Investment. Most partners draw all the profit out and do not invest in the firm. Indeed there is not at lot to invest in which would bring value. Premises maybe and IT certainly but any firm looking to acquire your firm will most likely have different premises and IT. You can invest in staff, but they can leave so it is understandable why partners draw out all the profit.

I often use the analogy of a bakery. If a new baker sets up a bakery and builds it up to £2m turnover, with a factory and new ovens, mixing machines and conveyor belts, with long term clients and future contracts then when he comes to sell this has a real value of something like 3 or 4 times EBITDA. However a lawyer in the same situation has nothing structural to invest in and will not have any long term contracts and so it has no value. The upside is that he or she has drawn all the profits out along the way unlike the baker, the downside is that at the end of the day there is nothing to sell.

The second point is insurance. In every market other than England & Wales, whichever insurer insured a firm in 2014 for instance is liable for any negligence in 2014. This seems fair, they took the premium they should have the liability. Not here though, the last insurer is left with liability and run-off. Lawyers complain about having to buy run off and it being 3 x premium, but look at it for the insurers point of view. The final insurer is obliged of give 6 years cover for 3 years premium. They don’t want it any more than you want to pay it and so as a partner gets to their end of their careers I see premiums going up as insurers “encourage” that firm to go elsewhere.

Run-off is also only for 6 years and whilst the law society is looking at a number of insurance products to cover the rest of life, how do you price that? Currently 11% of claims are post run-off, so to be clear that is where a Solicitor has closed their firm, bought run off and retired, but at some point there was a coveyancing error, or a child was mid-advised and the resulting liability falls on that partner directly. He has not worked for a number of years and is in no place to fund the claims and more often than not the only option is an IVA. No one wants that, and the only cast-iron certain option is to find a firm to be successor practice. This saves run-off and a pound saved is a pound earned but most importantly protects the partner for life. Maybe Sleeping soundly and saving the 3 x premium is a fair value after all.

So is it really that bad? No, most of the deals we do are with good firms, well run but just where there is no succession in place. Local hero firms if you like, who have fulfilled a need for legal services in their community for a number of years and we act for a number of buyers of such firms. Generally the kind of deals are they will pay 1 x the average of past 3 years profits paid over 12 or 24 months and if done correctly can attract entrepreneurs relief at 10%. So if he or she is clever, a partner can draw profits throughout their career, hand the firm over without run-off cover and sleeping soundly in retirement plus get a series of cash payments at 10% tax over the first couple of years of their retirement. That’s not so bad after all.