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A short guide to effective planning and implementation
Consolidation in the legal market is inevitable. It has become almost a cliché. The truth is that whilst there are not only too many law firms in the UK, there are also too many solicitors. There are some 108,000 practising solicitors (83,000 of whom are in private practice), 24,000 legal executives and 500,000 paralegals. If you add in all other “back office” staff, the UK legal market employs more than 750,000 people. It is a £20bn + market accounting for 1.4% of GDP.
The trouble is that it is woefully fragmented and extremely polarised. It is therefore systemically inefficient. There are 10,000 practices, 9,975 of which employ on average fewer than 6 lawyers each (58,000); hardly a scale that is relevant or sustainable in the market we face today. But the scary thing is that the other 25 firms – the UK’s largest - employ nearly 25,000 lawyers, or 1000 per firm. That’s 165 times the capacity of the smallest firms. Of course, there is nothing wrong with small businesses per se; I like them. However, the market simply cannot support so many. They are not economically viable.
Look no further than the 200th ranked law firm to find a small business turning over £6.5m and employing fewer than 25 lawyers. Unless such a firm is a niche firm and among the very best practices in its niche, it faces an uncertain future. Stiffer competition, accelerated by the current economic climate and the Legal Services Act, means that even in the upper reaches of the market the issue of consolidation is a fact of life. And that spells merger.
But of course, not every firm can occupy the driving seat. With so many firms now facing potential extinction, it is no longer realistic to expect to be the larger party in a merger. Think about it. If every firm maintained this position, there would be no mergers and many firms would simply wither. During the last year or two, attitudes have changed. The more enlightened firms have opened their minds to the prospect of securing a future within a larger practice. The most important issue, they have discovered, is finding the right merger partner for the long-term sustainability of their business.
It’s a question of retaining control over the destiny of one’s firm. In the past, some partnerships have confused being the smaller party with losing control over their destiny and have then retreated into a defensive position. But the senior and managing partners of numerous small firms are now taking a different, more bullish view. They are happy to consider, as an option, finding a larger, more secure home for their practice (their people and clients). This is responsible, selfless stewardship. No more, no less.
The question is this: how can merger be achieved in a way that all those involved actually feel involved in the process and remain an engaged and energised part of the combined entity?
Planning and executing a successful merger is more of an art than a science. Here are a few tips gleaned from direct, personal experience of merger management over many years:
Firstly, it is important to remind ourselves of a simple truism. Whether merging with a smaller or larger firm, it is essential to ensure your house is in order in terms of profitability – most particularly your equity structure, liabilities and overheads.
Secondly, to the extent that you don’t already have one, establish an unavoidably clear vision of the future for your firm and its people. Thirdly, achieve watertight agreement internally to the key success criteria that must be satisfied by any merger partner.
The next tip is an obvious one, but one to which most firms and advisers still pay a surprising degree of lip service: research the market properly. Ensure you seek truly objective advice firm professional researchers who have a deep knowledge of the legal market. All too often, firms and their search consultants rely too heavily on instinct and personal relationships without attaching enough importance to the questions that really matter.
It is vital to gain an holistic assessment of short-listed targets from the perspective of cultural, directional, strategic and financial compatibility. In that order of priority. Then agree the points over which you are prepared to compromise and remember, compromise is not necessarily always bad.
Once you have agreement in principle to merge with another firm, you will need skilful representation during the process of due diligence. At this point, it makes sense to ensure you are advised by someone who has lived through the process of both merger and post-merger integration. They will help you navigate the myriad of sensitive negotiations and ensure you benefit from real, practical insight.
Keep the merger negotiation team small. Once the merger is given the green light, then you can broaden it out to involve as many people in the planning process as is practicable. Design a well thought through project plan that takes account of the short, medium and long-term projects that need to be delivered. And pay particular attention to consultation and communication. It is impossible to over-communicate!
Above all, prior to signing binding heads of agreement, subject your firm to the “marry in haste – repent at leisure” test by asking these questions one last time:
1) Will the combination get you to where you want to go in terms of achieving your strategic objectives/vision?
2) Are your respective cultures as close as they can reasonably be so that they will enrich one another and enable you to achieve effective integration in a timely fashion? Have you really tested this?
3) Will the merger position the combined firm in the market such that you gain access to the best talent? And will it provide the other resources necessary to achieve distinct competitive advantages that would be unattainable alone?
4) Will the merger enable you to sell new services to existing clients or win new clients that are currently out of reach?
5) Is the combination viewed by both parties as a true merger? If it were an acquisition, would you still want to be acquired by the other party?
6) Will the market sit up and take any notice?
If the answer to any of these questions is not a resounding “yes”, it will be time for second thoughts. After all, consolidation is inevitable, so you may as well get it right.
If the answer is a resounding “yes”, there are four critical success factors in the implementation process:
• Protect and bind in “key knowledge holders” – key players whose retention is crucial to the success of the combined business. Secure their early buy-in
• Envision a desired culture for the newly combined firm and build a sense of community around it
• Integrate quickly – speed and fairness are vital during the process of structural change
• Don’t take your eye of the existing ball. Keep clients in pole position
By all means, continue to make intelligent use of your merger consultant during the initial stage of integration, but soon thereafter take full control of the medium to long-term harmonisation process.
© Simon Slater. Managing Director of First Counsel Consulting Limited
M&A: merger search, facilitation and implementation
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Successful law firm mergersA short guide to effective planning and implementation
Consolidation in the legal market is inevitable. It has become almost a cliché. The truth is that whilst there are not only too many law firms in the UK, there are also too many solicitors. There are some 108,000 practising solicitors (83,000 of whom are in private practice), 24,000 legal executives and 500,000 paralegals. If you add in all other “back office” staff, the UK legal market employs more than 750,000 people. It is a £20bn + market accounting for 1.4% of GDP.
The trouble is that it is woefully fragmented and extremely polarised. It is therefore systemically inefficient. There are 10,000 practices, 9,975 of which employ on average fewer than 6 lawyers each (58,000); hardly a scale that is relevant or sustainable in the market we face today. But the scary thing is that the other 25 firms – the UK’s largest - employ nearly 25,000 lawyers, or 1000 per firm. That’s 165 times the capacity of the smallest firms. Of course, there is nothing wrong with small businesses per se; I like them. However, the market simply cannot support so many. They are not economically viable.
Look no further than the 200th ranked law firm to find a small business turning over £6.5m and employing fewer than 25 lawyers. Unless such a firm is a niche firm and among the very best practices in its niche, it faces an uncertain future. Stiffer competition, accelerated by the current economic climate and the Legal Services Act, means that even in the upper reaches of the market the issue of consolidation is a fact of life. And that spells merger.
But of course, not every firm can occupy the driving seat. With so many firms now facing potential extinction, it is no longer realistic to expect to be the larger party in a merger. Think about it. If every firm maintained this position, there would be no mergers and many firms would simply wither. During the last year or two, attitudes have changed. The more enlightened firms have opened their minds to the prospect of securing a future within a larger practice. The most important issue, they have discovered, is finding the right merger partner for the long-term sustainability of their business.
It’s a question of retaining control over the destiny of one’s firm. In the past, some partnerships have confused being the smaller party with losing control over their destiny and have then retreated into a defensive position. But the senior and managing partners of numerous small firms are now taking a different, more bullish view. They are happy to consider, as an option, finding a larger, more secure home for their practice (their people and clients). This is responsible, selfless stewardship. No more, no less.
The question is this: how can merger be achieved in a way that all those involved actually feel involved in the process and remain an engaged and energised part of the combined entity?
Planning and executing a successful merger is more of an art than a science. Here are a few tips gleaned from direct, personal experience of merger management over many years:
Firstly, it is important to remind ourselves of a simple truism. Whether merging with a smaller or larger firm, it is essential to ensure your house is in order in terms of profitability – most particularly your equity structure, liabilities and overheads.
Secondly, to the extent that you don’t already have one, establish an unavoidably clear vision of the future for your firm and its people. Thirdly, achieve watertight agreement internally to the key success criteria that must be satisfied by any merger partner.
The next tip is an obvious one, but one to which most firms and advisers still pay a surprising degree of lip service: research the market properly. Ensure you seek truly objective advice firm professional researchers who have a deep knowledge of the legal market. All too often, firms and their search consultants rely too heavily on instinct and personal relationships without attaching enough importance to the questions that really matter.
It is vital to gain an holistic assessment of short-listed targets from the perspective of cultural, directional, strategic and financial compatibility. In that order of priority. Then agree the points over which you are prepared to compromise and remember, compromise is not necessarily always bad.
Once you have agreement in principle to merge with another firm, you will need skilful representation during the process of due diligence. At this point, it makes sense to ensure you are advised by someone who has lived through the process of both merger and post-merger integration. They will help you navigate the myriad of sensitive negotiations and ensure you benefit from real, practical insight.
Keep the merger negotiation team small. Once the merger is given the green light, then you can broaden it out to involve as many people in the planning process as is practicable. Design a well thought through project plan that takes account of the short, medium and long-term projects that need to be delivered. And pay particular attention to consultation and communication. It is impossible to over-communicate!
Above all, prior to signing binding heads of agreement, subject your firm to the “marry in haste – repent at leisure” test by asking these questions one last time:
1) Will the combination get you to where you want to go in terms of achieving your strategic objectives/vision?
2) Are your respective cultures as close as they can reasonably be so that they will enrich one another and enable you to achieve effective integration in a timely fashion? Have you really tested this?
3) Will the merger position the combined firm in the market such that you gain access to the best talent? And will it provide the other resources necessary to achieve distinct competitive advantages that would be unattainable alone?
4) Will the merger enable you to sell new services to existing clients or win new clients that are currently out of reach?
5) Is the combination viewed by both parties as a true merger? If it were an acquisition, would you still want to be acquired by the other party?
6) Will the market sit up and take any notice?
If the answer to any of these questions is not a resounding “yes”, it will be time for second thoughts. After all, consolidation is inevitable, so you may as well get it right.
If the answer is a resounding “yes”, there are four critical success factors in the implementation process:
• Protect and bind in “key knowledge holders” – key players whose retention is crucial to the success of the combined business. Secure their early buy-in
• Envision a desired culture for the newly combined firm and build a sense of community around it
• Integrate quickly – speed and fairness are vital during the process of structural change
• Don’t take your eye of the existing ball. Keep clients in pole position
By all means, continue to make intelligent use of your merger consultant during the initial stage of integration, but soon thereafter take full control of the medium to long-term harmonisation process.
© Simon Slater. Managing Director of First Counsel Consulting Limited