Law firm M&As: Getting together

A steady flow of mergers and acquisitions (M&A) continues to remodel legal services, from magic circle transatlantic mergers to private equity-led consolidation of the UK regional consumer market. According to a report by Acquira Professional Services, which specialises in M&A for law firms and legal tech companies, there were over 150 UK law firm mergers in 2024, up from 122 in 2023. 

M&A activity has been intensified by external factors. Paul Bennett, partner at Bennett Briegal, which advises law firms on M&A, business and regulation, explains: ‘The October budget created what was effectively an M&A season. This concluded at the end of the current tax year because of changes to business asset disposal relief, which used to be known as entrepreneurs’ relief.’ There were also changes to the capital gains rules that apply to the liquidation of limited liability partnerships, making M&A a more attractive exit option. ‘While the tax rate benefit has gone, the market remains slightly elevated because people who might have been looking for a merger partner for five or six years have decided to commit.’  

External investment is another key trend, notably the growing interest of private equity (PE) in the legal sector. Chartered accountant and business adviser Saffery reports: ‘Eleven of the transactions completed in 2024 represented either direct private equity acquisitions or acquisitions by private equity owned/backed companies… which appears to indicate an increasing private equity appetite in the UK legal sector.’ While this is having a significant market impact, it is limited to segments that can potentially provide investors with the necessary returns. 

What is driving M&A?

Growth is the main driver for acquiring firms. ‘Firms look for mergers to grow their practice either in a specialism or in a geographical area,’ says David Sparkes, founder and CEO of Millbourn Ross, who facilitates acquisitions for firms with revenues of between £1m and £80m. ‘When it comes to geographical expansion, firms tend to grow out in well-managed concentric circles. They look for somewhere that overlaps with their existing client base but provides enough opportunity to find more clients in another area.’ 

Firms may also be acquired by consolidators that operate across the UK. These tend to operate a ‘buy and build’ model and are increasingly PE-backed. As Bennett explains, consolidator firms operate a variety of models. For example, Lawfront, which recently acquired Trethowans in the south-west, acquires larger regional ‘platform’ firms, and follows up with smaller ‘bolt-on’ acquisitions. Listed firm Knights, also PE-backed, focuses on larger regional firms. The objective is strategic growth, using economies of scale to boost the balance sheet. And there are clear advantages. 

Jeff Zindani, founder and managing director at M&A broker Acquira Professional Services, observes: ‘The capital injection that [private equity] investors provide allows law firms to build practices and roll out the changes required to create operational efficiencies and future-proof their practice.’ However, he acknowledges the potential drawbacks associated with a lack of cultural synergy. For example, the introduction of artificial intelligence and automation must be managed to protect the human capital – a firm’s most valuable asset is its lawyers.

'You can’t just close down a law firm, you have to buy run-off insurance and store files. If you can get someone to take over, that’s a good result. You’ve saved £200,000 in costs'

Andrew Roberts, Ampersand Legal

For firms on the sell side, the common driver is succession. ‘Increasingly, smaller firms cannot find a younger generation that wants to take on the responsibility of running a firm, or invest in the partnership,’ says Sparkes. 

Andrew Roberts, director of merger broker Ampersand Legal and founder and chairman of the Association of Law Firm Merger Advisers, a trade body that brings together specialist M&A consultants, explains that a merger or sale is a preferable exit strategy: ‘You can’t just close down a law firm, you have to buy run-off insurance and store files. If you can get someone to take over, that’s a good result. You’ve saved £200,000 in costs.’ 

Colin White, founder and managing director of Ortus Group, sits on the other side of the negotiating table, advising smaller community law firms looking for buyers. ‘Typically,’ he says, ‘they have an ageing equity partnership where the traditional succession model doesn’t work anymore. Fewer people want to take the risk of ownership. At the same time, the dynamics of regional and community legal practice have changed. There are fewer smaller firms, and while there are not more large firms, large firms have been getting larger and vacuuming up the legal talent.’

The combined burdens of professional indemnity insurance, compliance and regulation contribute to merger motivation, particularly for smaller firms. ‘If a firm is under a certain size it cannot afford to employ someone to manage this, so the owners get dragged into doing it. This has the double impact of them doing something they don’t want to do and it takes them away from the client side,’ says White. ‘If they sell their business, they can hand over those responsibilities and join another practice as a fee-earner.’

Match fit

A successful merger is ultimately about finding the right match. ‘Whether you are acquiring or selling, it is worth finding a broker with a big database, who knows the firms in your target areas,’ says Sparkes. Critical success factors include cultural alignment, clarity around valuation and due diligence. ‘There is no template deal, as every firm is nuanced by the age of its partners and owners, the makeup of the business, and its location.’ He adds that location has a powerful bearing on charge-out rates.

‘The merger process takes about nine months,’ explains Roberts. ‘Three to four months’ negotiation; three to four months’ due diligence, IT and other contracts. The first question is how long is your lease, which might cause issues unless the buyer is a regional or US firm opening in London.’ 

Sparkes agrees: ‘Most acquiring firms aren’t interested in paying for work or premises. They are looking for high-quality lawyers.’

White explains his approach to firm valuation: ‘I work on adjusted EBITDA [earnings before interest, tax, depreciation, and amortisation – typically used to measure a company’s operating profitability]. There are sometimes one-off costs. If you have three equity partners who are taking a profit share, you have to allow for their salaries. So, if they are making a net profit, but those partners need a salary of £100,000 each you have to allow for that at the outset. If EBITDA is zero, they have to go for a net asset deal.’

Sparkes clarifies: ‘When people ask, “how much is my business worth?”, the reality is your business is worth somewhere between zero and five multiples of an adjusted or corporatised EBITDA. But LLPs distribute all their profits at the end of the year, so they’ve got a zero EBITDA.’

White says: ‘Other considerations include claims history – a bad one tends to mean a low valuation – or a long time remaining on a lease, or software contracts.’ While none of these are deal-breakers, they impact the valuation multiple. ‘In community law firms, another potential sticking point is the partner capital account or directors’ loan accounts. Owners often fail to recognise that they’re unsecured creditors. When they say they want to get their capital account back, maybe there isn’t enough money in the business to do that. Part of my job is setting people’s expectations at the outset. A lot of work goes into setting the scene, and that drives target identification.’

These factors are used to consider the deal structure – share purchase agreements, asset purchase agreements and so on – and find tax-favourable ways to extract value from a business. ‘With smaller firms, we generally see a net asset deal (when the acquirer purchases the assets and liabilities of the business), rather than a share purchase deal,’ says Sparkes. 

Getting the deal done

Early preparation is key. Sparkes advises firm owners to ‘get their house in order’ in terms of finance, governance and risk. ‘Some smaller firms have a huge number of retained balances on client account. This kind of detail can be a deal-breaker because no one wants to go through thousands of client files that have tiny balances.’ 

Corinne Staves, partner at CM Murray, advises on law firm mergers when the parties have initiated discussions and are negotiating heads of terms. She explains that a merger agreement is usually a business transfer agreement where the assets and liabilities of one firm are transferred as a going concern to the other to deliver strategic objectives. ‘So most mergers tend not to be for a financial consideration. Rather, the consideration is where the value is for the firm, the upside following the merger,’ she says. ‘So if you deliver on the strategy and the profit swells, people will get larger profit shares post-merger than they would have pre-merger.’ 

Economies of scale and driving down costs also boost profitability. Staves says: ‘Key points to address in heads of terms are who is being acquired by whom, and what does profit sharing look like, especially when there are different levels of profitability. What are you doing about capital, property, insurance and loans? It’s worth getting tax advice, too.’ 

Although mergers are generally negotiated by a tight project team and lawyers for both parties, Staves recommends introducing confidentiality agreements early to avoid speculation. Also, prepare an emergency statement to ensure everyone is on the same page in the event of any rumours about the deal reaching the media. The next step is due diligence, where the firms share and review information, negotiate the terms and eventually sign the documents with a future date for the merger to complete. 

Need to know

Communication is a challenge before the deal goes through. Staves believes it needs to be discussed as part of the heads of terms discussion, because partners are generally involved in the decision to merge. ‘Often law firms have a management board or a managing partner who needs to decide when to involve the partners,’ she says. ‘We usually advise the partners to authorise the project team to go ahead within certain parameters, which also means you won’t have individual partners holding the process to ransom at the last minute.’

The heads of terms should include decisions about the management and governance of the merged firm, and who is going to head the practice groups. Staves says: ‘It can be tense when you drill into the detail that people care about, and you don’t want to upset partners because they are the assets in the firm. You have to make sure they see what the upside will be for them on the other side and manage any downsides. People in the firm need to understand what’s going on.’ A firm’s other key asset is its clients. Once the merger documents have been signed, clients need to transfer their engagement to the merged firm. 

Communication is challenging from a regulatory perspective because, Bennett asserts, current Solicitors Regulation Authority guidance is contradictory. At the diligence stage, potential parties cannot exchange information and check conflicts without client permission, yet there is a sharp focus on diligence. 

Says Staves: ‘The solution is to ask for advance permission and letters of engagement in the event of a merger. So a lot of the time there will be engagement with stakeholders, including key clients and key people in both firms to understand how they would react to a potential merger.’

Bennett advises contacting clients as early as possible to seek their consent. Internal communication also depends on the context. ‘In a split exchange and completion, tell the internal team two to three months before completion and clients one month before,’ he says. ‘Ideally, get the internal comms right first and win people’s hearts and minds, then tell the clients.’

Culture is key

Successful deals are based on good professional advice, good project management, cultural fit, and most importantly managing people’s expectations throughout the process. This includes planning. Staves highlights the importance of including an integration plan from the outset, including deadlines and designation of responsibilities, so that the combined firm can monitor its success against the original merger objectives. Maintaining momentum is another critical success factor. ‘It’s all about cadence,’ says Roberts. ‘If you go too slow it kills good deals, so you need a project manager to manage the process.’

For Staves and White – on opposite sides of negotiations – deal-breakers are mostly surprises. Staves’ critical success factor is making sure everything is covered at the start. White highlights debt and other financial issues and insurance liability, notably long-tail claims around disputed wills and probate derailing deals for smaller consumer firms. While there are options for risk mitigation, ultimately this is about conducting thorough due diligence. ‘You’ve always got to look at contingent risk, not just the liabilities on the balance sheet,’ he says. 

Ultimately, M&A comes down to culture. Bennett references John Kotter’s mantra that culture eats strategy for breakfast: ‘Are your values aligned in terms of how you treat clients and staff? Will fee-earners be able to perform well [post-merger] because the cultural fit is comfortable, or will they be inhibited?’ He advises parties to ‘look candidly at what both sides do really well, to make sure you get the best of both. If it’s a 75-25 merger, the bigger firm will dominate. But the smaller, more nimble firm will have some critical lessons for the bigger partner. What do both firms deliver in terms of productivity and client excellence?’ 

Bennett advises merged firms to ‘review the client engagement piece with all clients post-merger to make sure that everyone’s expectations are aligned’. 

For consumer firms, that is not an issue. However, for law firms that are serving the SME business market, or larger institutional firms, part of the integration process is looking at how to engage with clients and smooth that change from the client perspective,’ says Bennett. ‘It’s about putting the clients at the heart of everything, so they understand they’re valuable’.

Conversely, culture may be a sticking point for PE investors who are committed to a business model that is predicated on operational efficiency and maximising profit margins. 

When two become one, one size does not fit all.

Joanna Goodman is a freelance journalist