Half of law firms considering outside investment

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More than nine out of ten law firms welcome the introduction of multi-disciplinary practices (MPDs) while more than half are already considering adopting an alternative business structure, according to a survey by Clearwater Corporate Finance.

The survey of commercial law firms found that firms are enthusiastic about the reforms to the structure of law firms as proposed in the Clementi report even though they recognise it will bring sweeping changes, such as the takeover of English and Welsh practices by overseas firms and even the possibility that the traditional concept of partnership may disappear altogether.

85 per cent of firms questioned said they had discussed the issue at board level while 56 per cent said they were considering adopting an alternative business structure and 50 per cent were considering external funding. Motives included financing acquisitions or investment in new service lines (73 per cent), to take money out (36 per cent) or to sell the business (30 per cent).

86 per cent of respondents said they expected to see legal firms to float while 79 per cent said they could foresee overseas firms acquiring or investing in English and Welsh practices.

The vast majority (92 per cent) welcomed the introduction of MDPs. The most frequent comments were that it would allow them to extend their services and meet client demand for a one-stop shop. However a small but significant number commented that it could be ‘fraught with difficulties’ and bring regulatory problems and potential conflict of interest.

The professions considered to be the most suitable partners were accountants (69 per cent), property-related professions (62 per cent), insurance (38 per cent) and banking (19 per cent), although other suggestions included tax planning and IP agents.

Six out of ten respondents said the changes would affect their approach to new partners entering the business. Some commented that, with no need to rely on partners’ equity, the concept of partnership could become a thing of the past and that a ‘share valuation mentality’ may develop instead. Others felt that partners would have to be more business orientated and pay a higher price for entry.

Three out of ten said it would affect retirement decisions, although they disagreed as to how. While a small number felt it could result in partners receiving a greater share of what they had helped to build, the prevailing view was firms would be less inclined to saddle themselves with ongoing annuities. Gary Hyem, director with Clearwater Corporate Finance said: “The opportunity to raise external finance will lead to a consolidation in the legal market. The question for firms is, should you be a leader or a follower? It is a positive sign that half the firms surveyed were considering raising finance, with the majority planning to use it to fund acquisitions, new service lines or offices. “The legislation will not only provide access to funding for expansion, it will also lead to the recognition of goodwill and the true value of equity within the firm. Traditionally equity partners have only realised the capital they invested. Now their ’share’ of the business is potentially worth more.

“This will create issues such as the management of partners’ expectations and incentivisation for rising stars who may have to pay for the goodwill when they do become equity partners. This major change will require leadership at the highest level.” The survey interviewed 30 firms of different sizes throughout the country. Hyem added: “The survey confirms our own experience. We are seeing a real interest from major law firms in flotation or private equity investment, and in hiving off areas such as injury claims. With some of the private equity houses expressing a real interest in this business area, we expect that it will not be long after the legislation is finalised before the first moves happen.”