The legal sector has seen a surge in interest from private equity (PE) firms, according to Kelvin Balmont, partner and chairman at national law firm Clarke Willmott LLP.
The growing trend of PE-backed consolidations in the UK legal sector is driven by the desire to expand capabilities and market presence, with PE firms applying the same playbook used in other professional services sectors, such as accounting, to what has historically been a more conservative industry.
In recent years Fletchers Group, backed by Sun European Partners, has acquired Scott Rees & Co and Shoosmiths’ serious injury practice; Adeptio (backed by Horizon Capital) acquired FBC Manby Bowdler late last year and Lawfront group, backed by Blixt Group, has acquired both Brachers and Trethowans this year.
This trend presents both opportunities and challenges for the legal sector. Here Kelvin Balmont considers the key factors law firms should be aware of to prepare to engage in these discussions.
Partner Buy-in
The first step is to gauge the appetite of your partners for this type of transaction. It’s essential to ensure that all partners are aware of what they could be entering into and understand their status and rights post-sale.
Reviewing your Partnership or Membership agreement is vital to determine whether it governs this type of transaction, how each member would be treated, and whether any members could block the deal.
Valuation
Understanding how an acquirer would value your firm is critical. The valuation could be based on fee income, EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) or Net Assets. Consider the impact of factors such as:
- Interest on client monies
- Partner remuneration
- Current and Capital accounts
Additionally, it’s important to understand what fees would be payable during the transaction process.
Structure
The structure of the deal is another crucial consideration. The price could be paid in various ways, including:
- Cash
- Loan notes/Deferred Consideration
- Earn Out
- Shares
For each of these options, there are specific terms and conditions to consider:
- Loan Notes/Deferred Consideration: What would the terms be? Would you receive interest? Are they secured? What happens if you leave the firm?
- Earn Out: What would the terms be? How much control would you have? What happens if you leave the firm?
- Shares: What rights would they have? Would you receive an income? Can you dispose of them? How would you benefit from a future exit?
Post-Sale Considerations
Post-sale, several factors will impact your ongoing involvement and the firm’s operations:
- Duration of tie-in: How long would you be required to work for the business post-sale (is it the exit you envisaged?)
- Management Control: How much control would you have over the management of the firm (particularly if you have an earn out to achieve?)
- Staff Protections: What protections would your staff have? What are their future career prospects?
- Restrictive Covenants: What sort of restrictive covenants would you be subject to, and how long would they last?
Tax Consequences
Tax implications are a significant consideration in any transaction. It’s essential to understand the tax consequences of the deal, including how much tax you would have to pay and when.
Professional legal advice
Navigating a sale to a PE-backed business can be complex. Clarke Willmott has extensive experience advising the owners of professional services firms on disposals, including many to PE-backed businesses. Comprehensive advice is needed on:
- Valuation Factors: Identifying what is included in a valuation.
- Firm Structuring: Preparing your firm for sale.
- Membership Agreements: Crafting and reviewing agreements.
- Partner Discussions: Facilitating conversations with members/partners.
- Negotiating Terms: Reviewing and negotiating heads of terms.
- Regulatory Compliance: Ensuring SRA and other regulatory adherence.
- Data Room Facilities: Securely sharing information
- Due Diligence: Comprehensive review of risks and opportunities.
- Transaction Documentation: Advising and drafting all necessary documentation.
- Employment Issues: Addressing employment-related concerns.
Kelvin said: “By considering these factors and seeking expert advice, your firm can be well-prepared to engage in discussions with potential PE acquirers. The journey may be complex, but with the right preparation and support, it can lead to significant opportunities for growth and development.”
Kelvin Balmont is a corporate and commercial law specialist, providing practical advice on all types of corporate and financial transactions including mergers, acquisitions, disposals, investments, finance and shareholder arrangements.
Clarke Willmott is a national law firm with offices in Birmingham, Bristol, Cardiff, London, Manchester, Southampton and Taunton.