Consolidation as a means to succession success
Consolidation is an increasingly popular solution to the well-entrenched succession problems in SME legal – Mike Stevenson, managing director at Iceberg, explores the details of this approach.
The legal profession has an age issue. According to the Solicitors Regulation Authority (SRA), over one in five – or 22% – of partners are aged between 55 and 64, with 13% of those in one-partner firms over the age of 65.
Merger and acquisition (M&A) activity has been a theme in a legal market ripe for consolidation at the top end for a number of years, but it is in smaller end of the market – the one-or-two partner firms in provincial towns – where we see the greater numbers of mergers.
There are hundreds of law firms that operate a ‘monarch system’ in the UK. This is typically where there is one partner, who has usually founded the firm, is the lead generator of business, and has clear seniority over all the others.
This may suit the firm’s other lawyers because they earn more under this system than they would if relying only on the work they bring in themselves. However, the structure presents an issue for the ‘monarch’ in this firm if they wish to retire.
Retiring partners can chose to attempt to find a successor or close the business. Another, increasingly popular option, is merging with a local or complementary firm.
For the firm leading the merger, this presents a number of benefits. It can open up opportunities for new clients and sectors, or simply give the business greater economies of scale and a larger presence in the market. In a sector where recruitment is increasingly difficult, it also provides the firm with fresh blood and new ideas.
M&A addresses a number of issues for the retiring partner too – mainly, any ongoing work they have can be picked up seamlessly, which is particularly important if they have long-standing clients who rely on their expertise. Secondly, it adds a layer of protection for retiring partners against historical claims or personal guarantees.
Under current rules, retiring partners can be subject to negligence claims against them – or their estate – for six years post their retirement date. Most partners will purchase professional indemnity cover for this period. However, the Solicitors Indemnity Fund – dubbed a safety net against claims beyond this period – will close in September next year, leaving partners who choose to close their practice exposed. With the Law Society estimating that 11% of claims are made outside of the SRA’s mandatory run-off period, that leaves the retiring partner facing an element of risk.
Merging with a firm transfers that risk to the firm and not the individual, leaving the partner to enjoy their retirement years without that risk of a claim landing on their doormat. The only caveat to this is that even where there is an indemnity, that protection is only as good as the financial situation of the person providing it.
It is also likely that the partner would be released from any personal guarantees in a merged firm. Again, the caveat in this case is that the party required to release you may need to ensure that they are left with sufficient protection from the remaining partners before agreeing to the release.
The challenge for retiring partners is to find the right firm with which to merge and how the merger can be financed. Typically, we don’t see large sums changing hand for smaller legal practices – the greater issue is securing working capital to ensure a successful merger.
We have seen an increase after the pandemic in enquiries for working capital solutions for merging firms and we have supported a number of clients with funding arrangements. We expect this to accelerate in the coming years as the ‘baby boomer’ generation seeks a way out and to pass the baton onto younger solicitors and legal firms.
