In Industry Insights

The ability to work from home is a major consideration for legal professionals when considering a career move, and law firms not offering this kind of flexibility are at a disadvantage in a tough recruitment market. “It comes up every single time”, said Jonathan Fagan, Managing Director of Ten Percent Legal Recruitment, speaking at a recent panel discussion on law firm insurance, recruitment and mergers.

According to Jonathan, firms must be able to persuade candidates that they will become an integral part of the practice and that there is plenty of work for them to do. This is particularly relevant for property firms, many of whom are experiencing a downturn in instruction volume, and where potential recruits are likely to have concerns about being ‘last in, first out’. 

Law firms are also advised to weed out candidates who use job offers to leverage a pay rise from existing employers. “The question I would ask is ‘If we offered you the job tomorrow, would you take it?’,” said Jonathan. “The answer will give you an idea about how committed a particular candidate is.”

Law firm M&A: There are lots of deals going through, but we have no idea how many

Jeff Zindani, founder and Managing Director of law firm brokers Acquira Professional Services, reported a buoyant market for law firm acquisitions and mergers. However, the lack of data from regulators means that there is a “lot of noise…and nobody really knows what is happening with smaller firms”.

Wearing his law firm broker hat, Jonathan Fagan added that a lot of deals are “dressed up as mergers or something more positive”, when in actual fact the driver of the acquisition is that one party is in distress.

“Some buyers are very strategic,” according to Jeff. They are very careful about what they are looking for, not just adding an office for top line growth. As an expert dealing with boutique firms, he highlighted some practice areas that are in high demand, such as tax advisory, regulatory compliance and certain types of litigation.

On the flip side, buyers may “get spooked by a firm with a large conveyancing practice”, mainly due to insurance concerns, and low value personal injury and consumer work is unlikely to be attractive to strategic buyers. 

Firms looking to sell do need to plan for their exit. “Try to get as far away from the day-to-day fee earning as you possibly can”, advised Jonathan, so that the buyer can see that it can run without you. Geography, the firm’s regulatory history and whether has already converted to ABS, can affect the attractiveness of a practice. “Firms with a poor claims record tend to struggle”.

According to Jeff, “the exit planning side is critical”. Accessible financial information from reliable case management systems is important, as is making sure there is an alignment between your website and what your practice actually does. But he “wouldn’t be spending too much on website redesign when you don’t really need to.”

The insurance aspect of law firm M&A is “challenging and circumstance-specific”, according to Gary Horswell, Managing Director of Ntegrity, the specialist law firm insurance broker. “The insurers are really looking for a fair presentation of risk, and they do look at websites and they do look at regulatory history”.

“Specialist brokers will know the risk appetite of all the main carriers,” Gary commented. Getting as much due diligence information on the target firm, including the last PII renewal details, and getting insurer input from an early stage, will give buyers a head start.

Funding deals – not just the acquisition price, but also the working capital requirements – is a fundamental and often overlooked part of the M&A picture. “The funding challenge needs to be tackled,” added Jeff Zindani, otherwise insurers will identify financial risk issues that need to be addressed.

Jonathan Fagan commented that sellers are sometimes equally guilty of failing to find out how the buyer intends to fund working capital to ensure the continued success of the firm. 

One of the headline compliance issues involved in law firm M&A is conflicts of interests – particularly where buyer and seller work in similar markets. Confidentiality issues throughout the deal can be tricky to manage, too. Racheal Eyre commented that ethical walls may need to be built around practice areas or even individual team members, to ensure there are no inadvertent breaches of professional duties.

She added that “one of the biggest bugbears with risk and compliance is getting people out of the mindset of doing things the way we have always done them”. When two firms are merging, careful consideration needs to be given to how policies, procedures and controls can be aligned, as well as culture. 

“Risk and compliance can completely torpedo a deal”, agreed Jeff, and yet it is often overlooked by sellers because they are emotionally invested in the deal itself. 

Buyers and sellers should also do more due diligence around culture and people, according to Jeff. “The best buyers treat it as a process over a number of months, getting to know that firm really well – that will reduce the risk. Getting into bed with a firm with a completely different culture may make it impossible to work together”.

“Both sides need to trust each other”, concurred Jonathan.

Insurance update: Two thirds of law firms still renew their PII at the end of September

Gary Horswell noted that this post-Summer rush to renew “inevitably creates bottlenecks and insurers have got surprisingly little time to take a look at risks, so the presentations are key, they are so important”. 

Gary advises that firms take sufficient time to prepare their renewal proposals, making sure that they are clearly understandable, that the numbers add up correctly, and with supporting information where possible. Insurers are increasingly looking at whether firms are well run, on top of compliance and financially sound. This should be a focus of the firm’s presentation.

However, there are reasons to be cheerful about market conditions generally. Ntegrity’s experience during this renewal cycle is that most firms are not seeing increases in premium as a percentage of turnover. Indeed, some insurers are competing for the business of larger firms and “encouragingly, we are seeing a slightly more relaxed approach to conveyancing”.

What is driving these more favourable market conditions? “We’ve been through a pandemic and there was a lot of panic, which probably turned out to be unjustified, around people working from home, not being scrutinised and monitored,” Gary commented. “And quite simply, a lot of insurers’ results have been coming through quite healthily so they are all looking to grow their books of business”.

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