By Legal Futures Associate Recovery First
Recent merger activity
In recent years, the UK legal market has witnessed a notable increase in law firm mergers. In 2022, there were 122 reported mergers, a rise from 99 in 2021, reflecting an almost 23% growth. This trend highlights a growing preference for expansion via acquisition rather than organic growth.
Several factors contribute to this trend. Larger firms are pursuing mergers to strengthen their competitive position, expand their expertise in various practice areas and legal services, and achieve better economies of scale. Additionally, the tight labour market has made it challenging to recruit new talent, making mergers a more attractive strategy for quickly enhancing resources and capabilities.
For smaller and mid-sized firms, economic pressures—such as rising operational costs, higher interest rates, and increased professional indemnity insurance costs—are key motivators. These firms often view mergers as a means to pool resources, reduce costs, and more effectively navigate financial challenges.
High-profile mergers, like the combination of Allen & Overy with Shearman & Sterling, underscore a broader trend among UK firms aiming to expand their global footprint, particularly in the US market.
However, despite the allure of mergers, the complexities involved in integrating firm cultures, operations, and maintaining service standards can present significant challenges, sometimes leading to less disastrous outcomes.
SRA warning on law firm mergers
The Solicitors Regulation Authority (SRA) has issued a new advisory to law firms engaged in mergers and acquisitions, emphasising the importance of prioritising client interests. This advisory reminds managers of both the acquiring and acquired firms to strictly adhere to regulatory standards during the merger process.
This caution follows several high-profile post-merger failures. For example, Metamorph, which rapidly acquired several High Street firms, was eventually closed by the SRA. Additionally, the SRA faced scrutiny following Axiom DWFM’s acquisition of larger firms Ince & Co and Plexus Legal, which led to regulatory intervention due to concerns over a missing £60 million.
Clients of merged firms have sometimes reported financial losses, and such regulatory actions have strained the compensation fund, funded by solicitors and firms.
The new advisory emphasises the need for clear communication with clients about upcoming changes, enabling them to make informed decisions regarding their legal representation.
It also underscores the importance of retaining relevant client documents, prioritising urgent client matters, conducting client account reconciliations, and ensuring thorough due diligence by both parties involved in the merger.
Paul Philip, the SRA’s chief executive, noted that while there are often valid reasons for these mergers, and the SRA supports a competitive legal market, concerns arise when firms engage in multiple rapid acquisitions. Such growth can lead to challenges in business integration, organisational culture, and maintaining service standards for an expanded client base.
He stressed that firm managers must ensure that growth through acquisitions does not lead to poor governance, inadequate systems, or insufficient controls, which could harm clients or erode trust in the legal profession.
How Recovery First can assist in a law firm merger
As part of the long-term strategy for the newly merged entities, there may be a desire to discontinue operating in a particular area of law. In this scenario, the decision may be to exit that area entirely before the merger is finalised.
Selling work in progress (WIP) files to exit a specific market can be a practical solution for merging law firms, allowing them to focus on more profitable legal areas post-merger.
Recovery First works alongside professional advisers, including merger and acquisition specialists, on numerous law firm projects. We discreetly sell a firm’s cases to multiple purchasers from our panel of solicitors.
This approach mitigates risks for the acquiring firms and maximizes the value of the WIP realised by the seller, all whilst ensuring SRA compliance.
As an accountancy service provider, we have developed specialised software and processes to unlock the full value of a law firm’s WIP over time.
We monitor case progression and conclusion in real-time and provide clients with detailed accounting for the value realised, thereby reducing the risks associated with deferred deals for sellers.
Our process is highly flexible, and many firms have benefited from exiting a market during a merger to offload a caseload within a legal area that the merged entity does not intend to continue operating in.
Alternatives to mergers
While mergers are an excellent option for firms looking to change their business model, they are not the only option. One key alternative involves restructuring the firm and exiting specific markets to concentrate on more profitable areas of law.
Recovery First has extensive experience in assisting with these types of projects. In many cases, we can facilitate the immediate release of cash to address exit liabilities during restructuring. Our flexible process allows the market exit to be completed in a manner that best meets the firm’s needs, with many firms opting for a phased exit approach.
How Recovery First helps protect clients’ interests
Recovery First plays a crucial role in safeguarding client interests during law firm mergers, especially when a firm decides to exit a legal market. We ensure that client cases are handled with the utmost care and continuity. Clients are given the opportunity to transfer their cases to firms specialising in the required area of law. Additionally, the process ensures that clients are well-informed about their options and are empowered to choose the firm they wish to move to.
This strategic approach enables the newly merged firm to focus on more profitable areas without compromising client service.
Why Choose Recovery First?
Whether you opt for a law firm merger or an alternative such as restructuring, Recovery First can assist. The unique scheme offered by Recovery First is ideal for law firms and professional advisors, including accountants, merger and acquisition consultants, restructuring and insolvency practitioners, corporate recovery specialists, and private equity firms. Our services are suited to all types of legal work, using a simple, ongoing process with no upfront costs.
We guarantee 100% confidentiality for all clients. To learn more about Recovery First’s process, please feel free to contact us using the details provided below.
Sally Dunscombe:
sally.dunscombe@recoveryfirst.co.uk
David Johnstone:
david.johnstone@recoveryfirst.co.uk
Telephone:
01357 440140
