The Legal Services Bill will open up law firms to external investment. Andy Matthews assesses what attributes might attract a potential investor, be they a venture capitalist or a new equity partner




‘If you know what investors want, you can rule.’ OK, this is not an exact quote. It is in fact a one-word variation on JM Perkins’ line ‘If you know what women want, you can rule’ from the 2001 film ‘What Women Want.’ Knowing what or who you are after, how they are thinking, and then planning properly to exploit this, can give you a strong competitive edge over your rivals. And it can surprise – an important weapon in business.



Lawyers are talking about external investment a lot at the moment. Even, I am sad to say, at midnight over the dying embers of a barbecue. I overheard this recently and am sure that is definitely not what most women want.



The Legal Services Bill will open up new options on getting investment into law firms. Undoubtedly, if you can get into the mind of a potential external investor and deliver what they are looking for, you give yourself a good competitive advantage.



It is naive, however, to think that this is a thought process to consider only once the Bill is passed and you are thinking of taking in genuine external investment. Every new partner is an investor – whether they are lateral hires or internal promotions.



And new equity partners are rightly becoming much more commercially savvy. They are putting money into a business and they want to know if it is a good investment. They will, or should want to, check the firm out in the same way an independent investor would, assessing areas such as:



Strong leadership

Good quality leadership is a pre-requisite for any sensible investor, particularly in such a changing market. Leadership can come from a lawyer or a proven leader from another industry. The leadership could be outsourced in part.



Wherever it comes from, it must engage the whole firm and it must work so others in the business also show leadership. However, this is different to ‘management by committee’, which almost always leads to conservatism and the likelihood of being left behind by more aggressive firms. A strong business will also invest in professional management in key functions such as IT, HR, finance and marketing.



Sound financial management

This obviously means strong central controls on lock-up, but also on profit growth. A large private equity house may be looking for profit growth of four times inflation every year for five years. It also means being more prepared to weed out underperformers who dilute productivity.



Distinctive brand

It is difficult to stress the importance of a strong sense of firm-wide identity. A consistent, distinctive brand that is lived and breathed by all your people will add value to your business by making it less reliant on a few individuals to bring in the work. New entrants to the legal market will build strong brands and will trade on these to give potential clients security and reassurance. You need to ensure your brand delivers on the promises your clients want from you.



Real sense of purpose

You can tell when you walk in somewhere. Grimy windows, inattentive receptionists and dirty coffee cups can often hide a deeper malaise.



Clear direction and strategy

It is important to know exactly who you are trying to sell to, what they want to buy, and how they want it delivering – now and in the future. This process will, very likely in many cases, involve some difficult decisions on areas of the business that are not providing adequate returns.



Loyal client base

One element of the legal industry that may make it attractive to investors is the availability of long-term clients who are often loyal and provide recurring revenue. I am convinced that many busy firms could benefit from stepping back and analysing what it is they are busy on – is it unprofitable work that would be better left behind to allow a focus on ‘better’ clients?



Surprise and enjoyment

Being considerably more business-like does not mean there should not be surprise and fun. In fact they are two important weapons in the war for talent.



A reason for investing

Any new investor, be they internal or external, will want to see a need or a driver for the investment. This may be the wish to secure someone as a new partner, it may be for an acquisition or a move to a new geography. It should be a step to something else, rather than a route to a cash-out.



There are countless good reasons why investors will be interested in law firms. Legal services is one of the UK’s most successful industries, offering solid growth, margins and cash generation, plus the ability to retrench and cut costs if need be.



The key is to understand how a potential investor or new equity partner will assess the value of your firm. Look at your business through the eyes of an investor and make it as attractive as possible – even if you have absolutely no intention of accepting investment other than from the occasional new partner.



Andy Matthews, a former managing partner of regional law firm Berryman, is co-founder of legal consultancy V Formation