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New dawn for law firm mergers and acquisitions

Legal Practice M&A Sector Brief: Q2 2024
Law firm mergers and acquisitions activity has greatly increased in Q2 following a relatively slow start to the year, but in some respects unsurprising due to the nature of the M&A market more broadly in 2023. Appetite is growing from both buying and selling practices in dealmaking, as well as from third-party investment firms.

Active Acquirers
We have seen new entrants to the market and inorganic growth activities by the disruptor/alternative business structure firms. Mezzle, as an example, recently acquired longstanding regional firm Gotelee, which represents a different type of acquisition to that seen in the market to date.

We are now experiencing an increased appetite from practices looking to grow via acquisition. Various factors are driving this; the global economy is recovering with a slowdown in inflation, private practice acquirers have dealt with their own internal financial struggles, and private equity investors have cash reserves amassed from inactivity in previous years.

“An increasing trend, and one we are actively advising on for multiple opportunities, is small-to-medium sized practice owners looking to join larger practices to share resource and enhance their own earning potential.”

Drivers for Sale

Valuation Gap
The increase in active acquirers in turn assists those legal practice owners looking to sell; competition increases demand and demand increases valuation.

A key issue in the previous 18 months for legal market activity generally has been a valuation gap. That is, the gap between what an acquirer is willing to pay and a seller is willing to accept for the purchase/sale of a practice. When interest is harder to find for sellers, the uncomfortable reality of the offers on the table has led many to think twice about selling. Now that the market is more buoyant, fair value is more likely to be realised.

Tax Treatment
Capital Gains Tax (CGT) and Business Asset Disposal Relief (BADR) are pertinent points for consideration by the new government. We won’t know for sure what, if any, changes will be made to CGT and/or BADR until the autumn budget announcement on 30 October. However, with the cited £22bn shortfall in public finances and the Labour party not ruling out changes to CGT in its manifesto, it seems likely that an adjustment to the current structure will be made.
This is leading many to consider the sale of their practice sooner than previously envisaged. With the usual timeframe for achieving a sale being between 9-12 months, waiting until after the autumn budget announcement is untenable for practice owners looking to sell their business. Any change to CGT policy will likely come into effect at the start of the new financial year on 1 April 2025.

“The ever-increasing input of the SRA and attached compliance/regulatory burden is occupying practice owners to the extent they are spending at least half of their time away from fee-earning.”

Maximising Earnings
A sale does not always contemplate the complete exit of the equity partner(s) of the target practice. An increasing trend, and one we are actively advising on for multiple opportunities, is small-to-medium sized practice owners looking to join larger practices to share resource and enhance their own earning potential.

The ever-increasing input of the SRA and attached compliance/regulatory burden is occupying practice owners to the extent they are spending at least half of their time away from fee-earning. Often it is the case that they became equity partners doing what they love, which they are now inhibited from doing. Small practice owners are increasingly wanting to get the passion back for the law and leave the business administration and compliance to others.

The structure for such deals could see sellers join an acquirer as a consultant or full-time fee-earner with their remuneration contingent on billing. With time back on their hands to focus on fee-earning rather than business operations and compliance, sellers can see their remuneration increase despite no longer having an equity stake in the business. This also affords the opportunity to de-risk from the potential liabilities of running a practice.

AJ Chambers work closely with numerous funds, large networks and other independent acquirers who are actively looking for great opportunities in the market. If you are a Legal Practice Owner and would like to discuss any of the above further, including your exit plans, merger, or growth plans via acquisition, please get in touch for a confidential, no obligation conversation. We are well-equipped to advise you of the options open to you, no matter the size of your business, and help ensure you achieve your objectives for the next chapter of your life or business.

Please contact James Gosling for a confidential discussion.

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