More than 1 in 4 law firms to raise external capital
One year after the Legal Services Act receives royal assent, independent research reveals law firms' growing interest in the use of external finance.
A survey involving 102 law firms - of which three quarters are part of the UK's legal top 100 - reveals that more than four in five (82%) anticipate that law firms will join forces with other professionals. This is slightly up on previous years, since the equivalent figure in 2007 was 77%, and in 2006 it was 78%. In order to finance this M&A activity, 73 % expect that their peers will need to raise external capital, whereas last year the equivalent figure was 66%.
The survey was carried out by independent researchers on behalf of Smith & Williamson, the accountancy and professional services firm.
The survey also explored individual firms' ambitions in terms of raising finance and more than one in four (28%) of respondents expect to seek external finance within the next two to five years. Similarly, the proportion of respondents who thought it ‘unlikely' that they would raise external capital has fallen since 2007, as shown below.
How likely is it that your firm will look to raise external capital in the next 2-5 years?
| 2007 | 2008 | |
| Likely | 25 | 28 |
| Unlikely | 74 | 63 |
| Don't know | 9 | 1 |
Of those who anticipate raising external finance, more than a third (38%) would consider a public listing and over half (52%) would look at private equity or venture capital.
Giles Murphy, head of Assurance and Business Services at Smith & Williamson, said:
"Our findings suggest that a core element of the top 100 law firms is actively pursuing the option of external equity funding. While we expected there would be initial interest in the opportunities that the Act created - including the potential to list on the stock exchange - this has remained strong over the last 12 months, despite the worsening economic conditions and the decline in equity values."
"It is also seems clear that law firms will be combining with other professionals, transforming forever the nature of the legal profession. From 2009, the first aspects of the Legal Services Act come into force when non-lawyers will be able to become partners in solicitors' practices. We anticipate that it will be increasingly common that financial directors or similar will become equity partners and it will remove one of the potential barriers for non-lawyers to take on managing partner roles."
The survey explored the sums which firms might wish to raise. Of those who would seek external capital, 10% would be looking to secure up to £50m, whereas just 5% were seeking to raise this much in 2007. Further detail is shown below.
If your firm seeks to raise capital in the next two to five years, how much would it look to raise?
| 2007 | 2008 | |
| Up to £5m | 38% | 34% |
| Up to £20m | 43% | 24% |
| Up to £50m | 5% | 10% |
| Don't know | 10% | 31% |
The motives for raising such finance were also considered, and the most common reason was to fund ‘the long-term development of the firm' closely followed by ‘the recruitment or acquisition of teams' and by ‘the opportunity to develop new sectors'.
Giles commented:
"It was once thought that the Act would simply provide a route for partners to sell-out, but our survey confirms this is reducing in importance for firms, quite possibly as potential investors emphasise their lack of interest in such a model."
"While the regulations allowing Alternative Business Structures (ie whereby law firms can merge with non-legal practices) may not be in place until 2011, there are already a number of firms starting to make the necessary changes to their ownership, remuneration and governance procedures to prepare themselves."
"Through various forms of convertible debt from non-banking organisations, firms are changing their business structures so they are well-positioned to take advantage of the regulations the moment they become operational."
"All law firms (and other professional practices which may look to merge with or acquire law firms) should therefore be actively considering how their business model should be adapted to take advantage of the proposed regulations. Alternatively, firms should be assessing the risk that their competitors go down this route and so prepare a defensive strategy accordingly. Whatever the strategic plan, the interest in this area that the survey has demonstrated, requires all firms to be considering the impact the Act will have on their business."
Background
As legal practices have traditionally been organised as partnerships, they have relied on partners for equity funding, with partners borrowing from banks or guaranteeing the firm's loans. This has arguably acted as a constraint to growth. The ability to raise external finance and merge with non-legal firms is therefore a major step to alleviate this constraint.
Details of the survey Senior decision makers (managing partners or financial directors) from 102 law firms were interviewed during September 2008 as part of Smith & Williamson's 14th annual survey into the professions. The survey was carried out by independent research company, Randolph Watson. The size of the law firms which took part:
- 100+ partners - 28 practices
- 50-99 partners - 31 practices
- 26-49 partners - 25 practices
- 11-25 partners - 14 practices
- 1-10 partners - 4 practices
For further information:
Giles Murphy, head of Assurance and Business Services
Tel: 020 7131 4369
Email: giles.murphy@smith.williamson.co.uk
Press queries:
- Kate Harrison 020 7131 4228
- Alison Hayman 020 7131 4138
Disclaimer
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
Note to editors
Smith & Williamson is an independent professional and financial services group employing over 1,500 people. The group is a leading provider of investment management, financial advisory and accountancy services to private clients, professional practices and mid-to-large corporates. The group operates from offices in London, Belfast, Birmingham, Bristol, Dublin, Glasgow, Guildford, Maidstone, Salisbury, Southampton, and Worcester.
Smith & Williamson Limited
Regulated by the Institute of Chartered Accountants in England and Wales for a range of investment business activities. A member of Nexia International, a worldwide network of independent accounting firms. Nexia Smith & Williamson Audit Limited Registered to carry on audit work and regulated by the Institute of Chartered Accountants in England and Wales for a range of investment business activities. A member of Nexia International.
