As the first quarter of 2024 passes by, extraordinarily quickly it must be said, legal practice mergers & acquisitions (M&A) activity is notably on the rise. It was a less buoyant market than expected last year, perhaps due to some unhelpful examples of legal M&A deals gone wrong (I’m sure I don’t need to remind most of the Axiom DWFM debacle), but we did see the emergence of interesting trends in the market which have continued into Q1 of 2024.
Practices looking to merge
The variety of transactions we are currently working on is exciting, including the merger of two established practices in London, the introduction of firms to Private Equity (PE) contacts, the consolidation/growth of specialist regional firms and the creation of exit pathways for retiring sole practitioners.
“The ongoing geopolitical pressures and tough economic conditions (including higher interest rates and energy costs) are encouraging practices to look to merge as a solution.”
PE investment has been steadily increasing in the professional services industry. We have seen the legal market lagging behind the accountancy sector in this regard. However, the likes of Stowe Family Law, Lawfront (part of the Blixt Group), MAPD Group, ETL and others have been active in 2023; a surge that’ll only continue for the remainder of 2024. With such corporate investment in the sector, we are increasingly working with reputable practices looking to grow via acquisition, to either appeal to PE houses for inward investment, or to counteract the perceived threat of a shrinking market share as PE-backed firms consolidate the market.
Largely, the other drivers for practices looking to merge, acquire or sell remain the same, except in some cases they are more profound than ever. The ongoing geopolitical pressures and tough economic conditions (including higher interest rates and energy costs) are encouraging practices to look to merge as a solution. Smaller firms are more encouraged to concede independence for greater stability and economies of scale, whilst larger practices, particularly in the regions, see the opportunity to combine forces and achieve significant cost savings (potentially reducing rent for office spaces or lowering their Professional Indemnity Insurance (PII) premiums).
“The Legal Sector 2023 Report by NatWest said that a third of SME firms described themselves as either likely or very likely to seek a merger or acquisition in the short term.”
PII was a hot topic last year, but thankfully there has been a plateau in premiums after the steady annual increases since the pandemic. This will likely come to the aid of firms under pressure with rising costs, nevertheless PII premiums still represent between 5%-10% of the revenues of a lot of practices. When employee salaries are generally a third of the costs of a practice, you can quickly see how headaches are caused for smaller firms with tight margins. The allure of joining a regional practice, either to merge in or become a new office location, is one of the most common forms of M&A activity we are experiencing in the SME space.
Planning ahead is key
A lack of succession from within remains to be the main driver for legal practice M&A. Interestingly, the Legal Sector 2023 Report by NatWest said that a third of SME firms described themselves as either likely or very likely to seek a merger or acquisition in the short term. This issue isn’t reserved solely for the SME market. We have worked closely with larger practices where there is a significant gap in the equity partnership. A reducing appetite of senior lawyers to buy into equity is an emerging trend affecting this, as well as the ongoing battle for talent. This is where tactical mergers can play a significant role in finding solutions to internal succession issues. We expect the trend to continue for the remainder of this year and next.
When internal successors are not readily available, practice owners should look ahead and plan to sell long in advance of their desired retirement or exit date.
By initiating the sale process 3-5 years ahead of retirement, partners can ensure that succession planning is in place and the legacy of their practice is preserved.
This allows sufficient time to identify external buyers who possess the necessary profile and vision to lead the firm forward. By sourcing a succession pathway in advance of retirement, partners can ensure the risk of run-off cover is mitigated and is not a factor for a buyer to take advantage of when negotiating the purchase price. Acquirers are also keen to retain the outgoing partners for at least a year to facilitate a smooth transition and to retain the value of existing client relationships. When the vendor is not urgently looking to exit, they are more likely to realise value when selling.
The right time to sell is a significant factor this year. Much depends on the outcome of the general election, but there is a possible change in Capital Gains Tax (CGT) policy coming.
“We are expecting a surge in practices coming to market with a view to selling before any new tax thresholds are implemented.”
This could result in interesting opportunities emerging for opportunistic acquirers, where scarcely available niche or boutique practices look to sell ahead of time to take advantage of the more favourable tax position on sale. A first-past-the-post environment could emerge to ensure sales take place ahead of the new tax year, when the changes will likely be implemented.
Attrition affecting the sector
There are also sector-specific conditions that are influencing the market. A survey conducted by PA Consulting, commissioned to inform the government’s review of civil legal aid, has revealed that 4 in 10 civil legal aid providers plan to exit the sector within 5 years, with 42% considering a departure or reduced workload in the next 12 months. Attrition has affected the sector for some time, creating exit needs and possible consolidation opportunities for those continuing to offer the services.
In other sectors, a report by law firm Shoosmiths stated that 82 per cent of in-house senior lawyers expect an increase in spending on dispute resolution over the next three years. Full-service firms are looking for opportunities to bolster their litigation departments via acquisition or merger. We also receive frequent requests for specialist firms in the Intellectual Property, Employment and Corporate Tax sectors.
AJ Chambers work closely with numerous funds, large networks and other independent acquirers who are actively looking for great opportunities in the market.
If you are a Legal Practice Owner and would like to discuss any of the above further, including your exit plans, merger, or growth plans via acquisition, please get in touch for a confidential, no obligation conversation. We are well-equipped to advise you of the options open to you, no matter the size of your business, and help ensure you achieve your objectives for the next chapter of your life or business.
Article by Elliot Tayler
Please contact me at: elliot.tayler@aj-chambers.com | 0207 0969 022
Elliot is a Legal Market M&A Consultant, acting as an intermediary for legal practice mergers, acquisitions or external investment.
Elliot previously qualified as a Corporate Solicitor and spent four years working for a large regional legal practice. He has extensive M&A experience, advising on both share and asset acquisitions and disposals. Prior to legal training, Elliot attended the University of Law, where he completed the Legal Practice Course with Distinction and achieved a Masters in Law, Business and Management.
His prior education, and training as a Corporate Solicitor, led him to the role of Mergers & Acquisitions Consultant at AJ Chambers, where he assists legal practices throughout the UK.
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