The focus in the legal sector has largely been around organic growth with the traditional marketing levers being pulled when growth is required. The fundamental weaknesses are all too obvious: marketing is expensive and in practice a slow burn.
During these difficult times, I think Peter Drucker, the great management guru, was right when he said: “The greatest danger in times of turbulence is not the turbulence; it is to act with yesterday’s logic”.
Simply spending more cash on marketing will not do the trick.
Each firm has to decide its own strategy but, from my experience, the issue is not whether you pursue an external growth strategy but the manner in which this is undertaken. For example, do you simply look at opportunistic caseload sales or do you have a clear identifiable strategy for acquiring other personal injury and clinical negligence practices?
Why buy in the first place?
This fundamental question can only be answered by your firm but the qualifying question I commonly raise with law firm owners is whether or not it is cheaper to buy than to build over time.
This will of course depend on the level of growth that the firm is aiming to achieve, and the costs associated with traditional marketing versus external growth.
Most partners believe this is for the big firms, when even some of the consolidators have been snapping up smaller practices. This is a quicker route to growth and if done properly, brings about pound for pound a great return on investment.
Even in the personal injury and clinical negligence sector, acquiring caseload assets has become commonplace. It is utterly counterintuitive, but the PI reform agenda has created high demand for caseloads: we now have a bullish sellers’ market!
Also, one of the key nuggets of wisdom I’ve picked up over the years is – don’t make acquisitions because they are available, but rather because they are right for your practice.
What to buy?
This may appear to be a pointless question, but the firm needs to be very clear about whether it enters the market to purchase a firm as a going concern or simply for caseload acquisitions.
The advantage to you acquiring caseloads is of course that it is less risky as you are not taking on the firms’ liabilities. Obviously, from a seller’s point of view they will want to sell the practice as a going concern.
From my experience, it will all depend upon the seller’s liabilities and in the low volume end of the personal injury sector this is a source of real trouble.
However, like all challenges, there are opportunities particularly if the seller simply wants to exit and to clear off any historical debt which they cannot unwind.
How much to pay?
I have been involved in numerous deals and have effectively disregarded any mathematical or accountancy-based valuations for law firms.
Yes, you may use a standard EBITDA, but the reality is that a law firm is only worth what the market will pay. This will in turn depend on market factors e.g., there is a real premium now for niche-based personal injury/clinical negligence work.
This is of course controversial because a seller will want full value on the date of transfer. In practice, this rarely happens unless the consideration is heavily discounted.
Better to buy than build
Law firm owners must challenge the conventional wisdom that growth can only be attained by organic strategies. By embracing an M&A strategy, market opportunities can be quickly realised.
Time to turn a strategy into action for 2021!
Jeff Zindani is the Managing Director of Acquira Professional Services.