The Legal Services Act, allowing law firms to bring in outside investors, presents a powerful opportunity for the bold and a serious threat to the timid.
Let’s dispel two myths at the outset. It does not mean that partners can sell 25 per cent of their firm and pocket the proceeds. There might be some cash at the outset, but most of the proceeds will need to be invested in developing the business so that the profit increases along with the value of the business.
The second myth is that it will be the end of partnership culture as we know it.
The impact of the act will be widespread and transformational. At the smaller, more high-street end of the market and in the community sector there will be significant consolidation. There will be a number of investors losing or buying up a large number of these practices, moving the business into one large, technology driven operation.
This will reduce the cost of providing these types of services significantly and also will speed up delivery. Small, independent firms will need to improve their competitiveness if they are to survive in this new world, just as corner shops have had to find a way of competing with the major supermarkets.
We expect to see a very sharp reduction in the number of small, independent practices and those that do survive will need to be very client focused, very service focused and able to drive down costs at the same time.
The larger, more corporate and commercial sector of the market will also undergo major change. Firms at this level will be able to raise significant sums, given the size of their business and this will be (mainly) invested in growing the business more aggressively than now.
Many of these firms say that they don’t need the money. The problem is that their existing strategies were drawn up when they didn’t have £20m or £30m to invest.
Using the money to poach partners and teams from rivals, paying significant ‘joining fees’ is one possible use of the money. Doing this in critical strategic areas of the business will be an important competitive attack. The US investment banks employed this method with a great deal of success in the late 1980s and early 1990s and we can expect to see the same thing happen in the legal market.
Instead of law firm mergers, we will see an acquisitions market start in the legal profession. Buying a firm, paying off some partners and enticing others to stay using a mixture of cash and shares, will become more the norm. Managing two partnerships will become less common.
The money invested will also be used to develop international practices. Funds raised in the UK are likely to be used in other countries even where their firms need to remain as partnerships.
What is essential is that the new money is used to grow profits and the value of the business. The partners at the time the money is raised will take a cut in incomes, as the new investors will share in the profits. The partners will, however, also have shares in the business.
Rising profits will also create a more valuable business, thereby increasing the price of the shares held by the partners. Hence they will receive a substantial capital sum later when they are able to sell some or all of their shares.
Being an early mover in this new world will require courage, but it is the early movers who will be in the best position to seize the opportunities.
The timid will face losing some of their best people and losing market share. It is the threat of this that will lead to many becoming bolder as a defensive measure. The shake up is coming and it will be huge.