Services
People
News and Events
Other
Blogs

VIDEO: Law Firm M&A during the Coronavirus crisis

View profile for Andrew Roberts
  • Posted
  • Author

David Gilroy:

This is David Gilroy from Conscious Solutions doing another video interview. And today I'm pleased to be joined by Andrew Roberts who represents Symphony Legal when it comes to mergers and acquisitions and also Ampersand Legal. So Andrew, thanks very much for joining me today. We're going to make this quite a high paced 15 minutes. And first of all I'd just like to ask you, what are your current views on what you're seeing in the M&A world in the midst of the biggest crisis I think most law firms have seen?

Andrew Roberts:

Well, thank you for having me, David. What I can say that I'm seeing in the M&A world at the moment is absolutely no activity whatsoever. So before we came into this, I had 13 active merger discussions going on. I currently have no active merger discussions going on. They haven't gone away, it’s just that no-one's talking to anybody else at the moment. You get to a certain stage with these discussions where you can do all the desk based DD that you might want to, but with a merger because you're often putting two equity groups together, you've got to meet people, you've got to get in their offices, you've got to see what the places are like. And we'll come onto that in a bit. And obviously I'm going round all those transactions, I've got 13 deals, there's 13 buyers and 13 sellers so that's 26 people I'm talking to all the time, and they all assure me that the deals will come back on and they are keen to do it. But at the moment it's just nothing.

David Gilroy:

Well, it's interesting to see that Moore Blatch and Barlow Robbins are still going ahead with their merger, which happens on Friday, doesn't it? That's the deal day.

Andrew Roberts:

Yes, well I think once you get to that stage, once you announce it, broadly you are committed. Of my 13, I've got four at heads of terms stage at the moment and whilst we're knocking around the heads of terms, there's only so much you can do. And the problem is, and again we'll touch on this, you can't start any new deals at the moment. The first stage of a merger is either meeting someone like me, or meeting someone they want to merge with. And you can't do that if you come meet with anyone.

David Gilroy:

The other one that I saw last week was Birketts over in East Anglia merging with an insurance-based specialist boutique firm called EC3/Legal in London.

Andrew Roberts:

Yes I saw that. Well that one is an acquisition. And I think the Barlow Robbins and Moore Blatch thing is a proper merger, and I imagine they are regretting the timing.  Great deal though. I mean it makes loads of sense, that one. The EC3 one, I guess it was just a way of getting a bit of a foothold into London, I know they've been trying to do that for a while now.

David Gilroy:

Okay. So one of the things we were talking about in the prep was firms need to make a decision. Are they the predator or the prey, to use your language. Is it pretty obvious that a firm is on one side or the other based on financial stability, management skill, growth appetite? Or not so much?

Andrew Roberts:

Yes, and the other, actually the biggest factor of all of it is the partners themselves, and where they are in their career cycles, what they want to achieve. But a firm will know whether it's prey or predator by when they're sitting around at the table. Frankly, do they want to get taken over and have all the hassle taken away, or do they want to go on carry on growing? So it's where they are in their growth cycle. And generally, without being ageist, age has a lot to do with it. If the partner group is in their 30s, 40s, 50s, probably predator but if the partner group is in its 50s, 60s, 70s, probably prey.

Andrew Roberts:

And actually, it very much that then leads on to smaller firms. There are 10,400 law firms in the country as I'm sure you know. A third of them are in the south-east, and in the central nine London postcodes, there are around 350 one-to-three partner law firms, of which at least a half are partners in their 60s and late 60s. So those firms are ripe for M&A, or being taken over and so they are natural prey, if you like.

David Gilroy:

Because they've got nowhere to go because there are just so many of them? If they had the appetite for growth they'd have done it by now, past three partners, is that why you're saying they're natural prey?

Andrew Roberts:

Yes, I think that's it. I've done this now for 10 years, and I guess I do about eight or nine deals a year. And often they are a bigger firm like Birketts coming in to take over a smaller firm in London, which tends to have partners of the demographic that I've spoken about. There's no harm in that. I mean, they've had a great business for the last 20 years. They've earned very well, they've had good clients, they've kept the staff doing well. But actually the time to grow a firm is probably when you're in your late 40s, early 50s, it's not in your late 50s, early 60s. I think they have almost missed the boat by accident. They probably started out thinking they are a predator, and then have morphed into becoming prey almost, as I say, they sleep walk into it. But there's no harm in that.

Andrew Roberts:

I mean I've done some great deals where a firm is looking to come into London, for instance I did the Buckles Lyndales merger. Buckles was a £15 million turnover firm in the northern eastern home counties, Peterborough, Cambridge, Nottingham, that kind of area. They really wanted to get into London so they merged with Lyndales, a nice three partner firm just Tavistock Square. And everyone was very happy, it went well whereas if you're a regional firm just coming in to try to open up in London and you take on one or two people, that's a really hard way of growing a London practice. Because one of those people might leave, then you got to replace them, and you just never get going.

David Gilroy:

Yeah. Buckles have been a client of ours for probably nearly 10 years, so we did get a little bit foresight on that a week or two before just to get the website ready. But not too much notice.

David Gilroy:

So the mechanics of a deal for people who've never been through it. Where are the big stumbling blocks?

Andrew Roberts:

Well I think at the moment, I mean if we just look at where we are now and what firms can do. In this current situation, if they are in discussions, and the discussions have to go on hold, they are still able to do the desktop research. You are able to do that. Look at the employment contracts, maybe negotiate the asset purchase agreement, share purchase agreement, merger agreement or whatever it might be. You're able to work out the organograms of the various groups and that kind of thing within the firm. So it doesn't all have to stop. I mean we are still doing this background work on my deals, but it's not ever going to be quite as good as it was. And then I think as long as the rationale for doing a merger is still there, as soon as we come out of the lockdown, whenever that might be, hopefully not too long, then there'll be this pent up demand and wish to go and get on with it again.

Andrew Roberts:

The clients I think are still going to be there, and everyone might be slightly, hurt financially. But then both sides are. So that's fine. It's not like when house prices fall, everyone thinks that the house you're looking to buy should be cheaper but your own house doesn't get affected,  I don't think that's going to be the case.

David Gilroy:

Yeah but that's a dream world that nobody lives in. And also there's a phrase that gets bandied around a lot, which is, and this is not just for law firms, it's the same in my kind of agency world. If you were a bad business at the end of February, you're still a bad business at the end of April or May. The fact that you might be able to furlough a few staff doesn't make a difference if you already have an overdraft, if you're bouncing up against low limits for a business of your size, whatever we say about the viability of the CBIL programme and the bounce back loans that got announced just this week, if you can't afford more debt, you can't afford more debt. That doesn't change it.

David Gilroy:

And I speak as a business who've never had an overdraft. Which when I talk to my law firm clients they're majorly surprised about. I'm like, "Well, why? Because we don't take all the profit in the business, we leave it in. We leave it in for growth. We leave in for financing costs. As in the cost of running the business and cashflow," which I see so many law firms not in that situation.

Andrew Roberts:

Well you're right, I think, about the affordability of debt. It's very tempting to take it on and smooth cash flow, but as you say, if you're still a bad business, you're going to be a bad business at any time. However, leading on from that, when these firms come out, the discussions should then restart, and then the two parties in this situation could be discussing a timeline when they're allowed out again. There's a merger cycle, people tend to merge either on the PII year or the financial year. And the PII renewal is coming up on October the first. Let's say we come out at the end of June, well that's when the Furlough period finishes, so you would imagine that might be a reasonable ... You've got summer, but I don't imagine anyone is going away very much this summer. So actually to aim towards a completed deal in plenty of time for the PII schedule would be fine.

 

 

Andrew Roberts:

Especially because PII is going to be really difficult. I know that you know Howdens well, as do I. And they're saying that PI premiums could well be up 13 to 15% this year. So that's a real concern. And if you are that three partner firm in Holborn why on earth would you want to go and buy PII again to merge a month later? It doesn't make any sense.

David Gilroy:

If I really want to upset a law firm, I just tell them that my entire business insurance policy, PII, everything else, is under £7,000 a year? And that generally makes their eyes water. But then we're not looking after client money and those kinds of things.

 

So for firms who are going through this crisis going, "God, this is just too complicated. I'd rather find a safe pair of hands, a bigger home, because it's just too risky." What are the first steps, do you think?

Andrew Roberts:

Well, I think there'll be quite a few of those. I mean furloughing and the CBIL loans, all those kind of things, mean there won't be any firms who fail during this, but there'll be firms that limp through it. And as partners finally get through it and start looking at the future, then they'll realise that they just don't want to do it anymore. And that can be any age of course, but it will again tend to be slightly older partners who may be held on. They've had some good years and thought, "Well one more year then we'll do something about it," well, now they have to do something about it. So what they can do at this stage, is workout whether they are the prey or the predator. But if we just concentrate on the prey for the moment and what they might do, I think they've got to look long hard at their own business and see actually what is it that is in there which is attractive and what is it they could get out of which isn't going to be attractive?

Andrew Roberts:

So they also need to be doing a bit of homework really. Get a bundle of documents together, get the lease together, six years PII history, current prop form, management accounts, last 3 years filed accounts, employee contracts, list of the top 20 clients that they have. Maybe do that analysis over three years so someone coming in can see that there isn't just the dominant partner who has one client who has been supporting the whole firm for years, because that client will probably go away. So it's that kind of analysis that they need to do.

Andrew Roberts:

And also, one thing which everyone forgets is storage. Check out what's in your storage. If you're storing 20 years worth of files, no firm taking you over is going to want to take responsibility for all those files. So this is a good opportunity to go over your storage of files and get rid of what you really do not need.

David Gilroy:

So it's about cleaning house at one degree, and prepping, knowing the kind of things that people are going to want to look for first of all?

Andrew Roberts:

But also maybe, also deciding what your ideal predator would look like. So if you are in London then you might be really attractive to a regional firm and if you are near Kings Cross, you're going to be more attractive to a large firm around the northern side of London and home counties. So I think that it's kind of doing that. And again, that can be desktop analysis. Look at your areas of practice and see how they might attract a larger firm outside of London. Or indeed, I mean we're talking about non-London into London, there are plenty of London firms who are looking to acquire as well. So a lot of my deals tend to be driven by the lease. When someone's lease has got a year or less to run they're a lot more open about merging with other people.

Andrew Roberts:

The least might not be a relevant in this current situation, you are unlikely to get the lease coming up at the right time as we come out of here. Although I do have a client in the West End who's got three floors of a large building at the moment, and what with everybody working from home and being very happy about that and being quite productive, he's not going to keep taking on three floors when the lease is up at the end of the year. It's going to be maybe one and a half. Sorry, I digress.

David Gilroy:

Yeah. No, somebody asked me that, and I've got two years left on mine, so I'm not getting out of that anytime soon.

Andrew Roberts:

Absolutely. And the other thing is, which you can now assess, actually we're all working remotely, do you need all those support staff? Who is essential and who isn't essential? And if you do a budget which has your current staff costs, and then maybe your new staff costs, any saving there goes straight to the bottom line and makes you more attractive. So that's a very positive thing.

David Gilroy:

And kind of almost final question for me I think, which is the money question. Any changes over the last year or two in what firms are paying? I mean, is it a straightforward five times profits without partner drawings, or is it one times turnover? Is it 0.7? Are there any easy ways of somebody looking at their numbers going, "I might get X, or X plus or minus a percentage"?

Andrew Roberts:

Yeah. Well, that's a question we get asked very often. Before I go on to that, can I just say, that if you were a predator firm this is a brilliant time to actually work out which locations your offices are currently in which you might want to develop by taking on other local small firms, or which new areas you want to get into. Because when we come out of it, there will be lots of firms who are going to be willing to enter discussions, more so than ever.

Andrew Roberts:

Well then, just to come back to your point. I often get asked this, and it's a bit contentious, but really there isn't any value in law firms. I mean, the value is escaping from your liabilities. Storage is a massive cost, PII a huge cost, running off and all these kind of things. So if you think about a normal firm, £1million pound turnover firm with 8% PII, would be paying £80,000 for PII. Plus tax, that's probably £100,000. Then if you have to pay two and a half times that to close the business down, that's a quarter of a million. Then you got to go and buy storage and you got to lay off staff so actually that's going to cost you £400,000 to close that business down. Whereas if someone comes in and pays you net asset value, which obviously as you calculate by looking at your assets and you take away your liabilities and that's your net asset value, it’s the money that's in the practice, that's what they'll purchase off you. If you can get that out and save yourself £400,000, I think that's a good deal.

Andrew Roberts:

I haven't done any deals ... No, I've done one deal where there's been a purchase and a multiple. Everything else has been either net asset value or just a merger of the balance sheets. It's the liabilities that drive these things, not cashing out at the end.

David Gilroy:

Yeah. Which is the business owner I sit here going, "My God." I know it's a strange one. It that's a different world than what I live in with agency stuff.

Andrew Roberts:

The accountants have gross recurring fees, you have retainers.

David Gilroy:

Yeah.

Andrew Roberts:

There's a value in that income stream. Whereas lawyers just do not have gross recurring fees, but they do have recurring liabilities.

David Gilroy:

Yes I get that. Okay. Any final points from your Andrew? Because what I'm going to do, I'll put contact details when we put the video up online, so I can do that on the beginning and end slide, so no need for that. Final two big tips for firms? And let's focus on the prey, because I think we both think there's going to be more in the prey category than there is in the predator for sure.

Andrew Roberts:

Yes, let’s think about the ‘prey category’. The first thing, take this opportunity to do your housekeeping and get it all looking right so when someone comes along you look professional, you look well run. Second point is there are going to be buyers out there, it's a good market and there're well run firms. I mean, we touched on Buckles, 60% of their business is private client. Well that's going through roof so great.

Andrew Roberts:

Residential conveyancing has taken a hit, but other firms are doing very well. So I think there are opportunities out there for the right firms. And as you said before, if you're a bad firm before you went into this, chances are you're running a bad firm when you come out of it. So if anything the options would be less for those.

David Gilroy:

Andrew, I appreciate your time this afternoon. As I say, if anybody wants to get in contact, then they can pick up the contact details from the slide at the end of the video. So thank you for your time.

Andrew Roberts:

Thank you. Hope you enjoyed it. Thanks for your time.