M&A for law firms in the current climate – Part 2. For firms who wish to merge post-Covid.
Once the lockdown ends, I expect the M&A market to be very different. There will be a largish minority of firms who had the practice areas, systems and deep pockets to have come through relatively un-scathed, another largish minority of firms who have survived and who will set about re-building themselves and the final segment of firms who have made it through thanks to the largesse of the government but who are either in no fit state to continue, or more likely where the partners do not have the appetite to do so. So which one of these categories will your firm fall into?
This will become pretty self-evident from your partner group discussions on the future and really boils down to one question. After this is all over do you see yourselves as the predator, the prey or an observer. Each of these 3 mind-sets is equally valid and it is sensible to take the time now to prepare properly for the post-Covid market.
Predator: These are the strong firms with good management and systems who have weathered the storm better than most. There are likely to be two avenues to explore, either bolstering current offices or opening in new locations. The post-Covid world will be an ideal environment for these firms because in either scenario there are likely to be a number of willing targets.
The managing partners of these firms should take the time to assess their current office strengths and decide where to grow first, then second and then third because no M&A strategy works when there are two or more firms joining at the same time. Once they have this information, they can conduct simple desk- based research (or use a broker of course) to research those markets, find the right target and make an approach before anyone else does.
Prey: Looking at the demographics of the profession, these will often be run by older partners who have survived a number of downturns and just do not want to face the prospect of doing so again. They have good firms which have supported them, clients and the staff over a number of years, but now it is time to pass them on.
The most important actions are to do the house-keeping and prepare a strong bundle of documents. In terms of house-keeping this might be looking at excess storage over 6 years, any long supplier contracts that are coming to an end and also cutting any superfluous staff. Essentially, this is all about trimming the cost base to make the firm more attractive.
The bundle should contain copies of the lease(s) including storage, employment contracts and supplier contracts. Financially it will need the top 20 clients over the past 3 years, 6 months MI and 3 years accounts. On the PII side, it will need the most recent PII Proposal form and 6 years claims history. These are the basics any predator firm will ask for so having them ready will create a positive impression.
The Partner group should also start to consider what kind of firm would find them attractive and why, and then play to these strengths. Once everything is prepared, using desk research (or a broker) they can find and approach suitable firms and start the acquisition process. One final point regarding being the prey, it is vital for all owners to sign off on what a good deal will look like so that this can be negotiated. We often see situations where mission-creep enters or partners start to diverge in what they want in which case the project is doomed.
The last group is the Observer type firm and these will concentrate on re-building what they have already got, letting M&A activity pass them by for now at least.
To conclude, once this period is over I am convinced that M&A activity will boom and the long-heralded consolidation will take effect, so now is the ideal time to work out which of the three types of firm you are, get prepared and then seize the moment.