While you would be forgiven for thinking that the COVID-19 pandemic might suppress M&A activity, law firm acquisitions are on the rise as firms around the country grapple with the challenge of law firm succession. Sam Coupland, director of advisory firm FMRC, suggests that the appeal of acquiring other firms is ‘higher than ever’, as law firms either reorganise and redesign their systems and processes to thrive in a post-COVID world, or fall behind.
Law firms who were already lagging behind their competitors technologically are now struggling to compete with the law firms who have embraced technology to continue to operate unimpeded by lockdowns and other social distancing requirements. These firms are looking to merge ‘to mitigate future uncertainty and risk,’ as suggested by chief executive of Bartier Perry, Riana Steyn, who argues that COVID-19 has created a burning platform for lower-performing firms to innovate or exit the market.
The Australian Financial Review reported at the end of 2020 that 80% of corporate law firms reported stable or rising profits following the pandemic, with an average profit margin of 7%. These figures largely reflect the profits made by larger firms who have the advantage of multiple teams and revenue streams diversified across different practice areas, as well as a generous technology budget to help them rapidly adjust to remote work.
Law firms looking to acquire a practice also need to consider how to retain clients and employees, in spite of the friction that the merging of two organisational cultures can create. Simply selling to the highest bidder without further consideration of how the transition will affect staff, clients and the firm’s reputation, does not guarantee a successful merger. Similarly, those wishing to sell their practice should be aware that a savvy acquirer will consider more factors than just recurring revenue, EBITDA and other financial metrics when looking to purchase an existing firm: they will also consider the compatibility of the firms’ respective cultures and brands, their IT systems and other operational integration issues.
For more content about succession in the law, see Episode 5 of Hearsay with Craig Osborne, Managing Partner at RMB Lawyers.