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4 October 2013
THE OTHER day, Mack Dinshaw, who specialises in advising small-to-medium-sized firms on merging, received a typical phone call from a three-partner practice in search of a marriage.
The firm was reasonably profitable. There was only one snag. During the last recession it had built up an overdraft of between £300,000 and £400,000. 'They were expecting another practice to take on their liabilities,' says Dinshaw incredulously.
His consultancy, Law Mergers & Acquisitions, is receiving a growing number of enquiries from firms seeking mergers, of which about 70 to 80 per cent are categorised by Dinshaw as hopeless cases.
His experience tallies with the results of a survey of firms in the South East conducted by accountants Kingston Smith in association with The Lawyer.
Of the 110 firms of two or more partners surveyed, just over half 53 per cent said they were considering merging within the next two years. .
But a breakdown of the results shows that it is the smallest firms which are the keenest of all to merge, with 64 per cent indicating that they wanted to join with another.
But Kingstons interprets this merger mania among small firms not as a symptom of bullish confidence but as a sign of weakness. For while the larger firms cited such matters as the need for diversification as the reasons for seeking a merger, the smaller firms were preoccupied with the need for an 'injection of management expertise'.
Thirty-three per cent of the small firms considering a merger were seeking management nous. And when asked to identify the main factor preventing their growth, half the small firms cited lack of capital, whereas the medium to large practices were more concerned about a lack of skilled staff.
Kingstons thinks the underlying factors encouraging smaller firms to merge are indicative of a growing 'gulf in fortunes between the small high street practices and the medium and large scale'.
For while most medium and large firms in the survey were achieving levels of growth well above the 10 per cent average, about one in three firms with between two and four partners experienced either no growth at all, or a growth of less than five per cent.
Small firms are on the merger trail, it would appear, to rescue their ailing practices rather than to take advantage of the up-turn in the economy.
This is certainly the hunch of Martin Green, managing partner of Warwickshire firm Lodders, which took over three-partner rival FB Hancock & Co at the beginning of the year.
He describes the takeover as a success, and stresses that his seven-partner firm targeted Hancock & Co because it had a good client base and a strong agricultural department
But, speaking generally, he says: 'If you look at the costs of running a practice and the sort of accounts staff that a small practice has to have, I can't see that small practices can continue unless they have a very special niche. Many people are trying to merge because they haven't got any other ideas on how to grow.'
Meanwhile, the pressures on high street firms are likely to increase rather than diminish.
Peter Timms, head of professional practices at Kingstons, says: 'The poor financial situation of some small firms may well be worsened by the extension of conditional fees arrangements and other measures such as fast-track litigation.'
Then, of course, there is the massive hike in premiums to the Solicitors Indemnity Fund.
All these factors point to a consolidation on the high street. The number of two-partner firms has remained static over the past 10 years hovering just above the 3,650 mark. That figure may soon drop, although any slump in the number of high street firms is more likely to be caused by a string of dissolutions rather than mergers or more realistically takeovers.
The smaller firms may want to merge. Whether they can find anyone to merge with them is another matter.
Copies of the report, Managing Growth in Law Firms, cost £50 from Kingston Smith on 0171 566 4000.