As the first UK law firm flotation looms, what hard lessons can legal consolidators learn from accountants?
Accountants like to preach that when it comes to running a legal practice, lawyers don’t just need practice, they need educating. Well, the time has come for lawyers to show that they can run a business, and a progressive one at that. And avoid making the costly mistakes accountants made when they tried share funding.
Gateley has announced that it intends to raise capital from an initial public offering later this year, making it the first UK law firm to do so. The first in the world was Slater and Gordon, which went public in Australia in 2007.
Gateley’s chief executive, Michael Ward, certainly gives the impression that there is structured thinking behind the move. He believes that the catalysts for value creation are to ‘acquire, incentivise, differentiate and, where sensible, diversify’.
Whilst this is absolutely sensible it is also behaviour unlike that seen from the vast majority of law firms. The concept of capital value creation is not normally associated with the legal sector; historically lawyers have withdrawn surplus funds with undue haste – and, on occasion, even faster than that. From the accountant’s perspective, re-investing and retaining funds are against the wishes of many partners in law firms so this change is a welcome long-term view.
That said, when it comes to IPOs, the accountancy profession has no right to hold its head high. Fifteen years ago, the accountancy consolidators overpaid for the acquisition of accountancy practices, and the cost of financing and integrating them ultimately led to unserviceable debt levels.
Gateley’s strategy seems more measured, and Michael Ward’s reference to possible diversification, suggests that he may have a portfolio-based approach in mind.
I am sure the rest of the legal sector will watch with interest the multiples that Gateley uses in its acquisitions. Going too high not only threatens a business model, but also sets an unrealistic bar for future deals that may be the lifeline that some firms, and their partners, require. No matter where in the legal food chain a firm is, that prospect would not be healthy in a legal services market that is screaming out for consolidation.
Gateley I am sure will be drawing up its shopping list shortly. It will probably contain services complementary to its core offering, and may even follow Slater and Gordon’s approach and look beyond its own country and hemisphere.
In today’s market, law firms need a global reach. Gateley already has a Dubai office, which will undoubtedly stand it in good stead in today’s international marketplace.
Meanwhile, back in post-recession Britain, the shared-ownership model is still being paraded as the epitome of enlightened business, and is supported by tax incentives for employee share schemes. Gateley appears committed to this also and this would not only be another positive sign, it could be essential to its success. As it acquires and grows, it will need to engage staff at all levels to set the cultural and performance standards necessary to maintain its brand.
Share schemes and staff engagement generally can go a long way towards keeping everyone motivated on that journey.
Failure to do embrace its stated strategies will likely invite a repetition of the failures of the accountancy consolidators. Best of luck to Gateley in its venture. Other law and accountancy firms will be watching with interest.
Peter Noyce, head of professional servies at Menzies LLP