Biles: significant opportunity
London law firm Gordon Dadds has agreed the reverse takeover that will see it become a listed company and outlined an ambitious acquisition strategy to double its £25m revenue over the next three years by becoming a “major consolidator” of both top 200 law firms and also smaller practices through a back-office platform that it has developed.
Work Group plc – a one-time recruitment business that is now a shell company – announced yesterday that it has reached agreement with Gordon Dadds on the deal first revealed on Tuesday.
The offer values Gordon Dadds at approximately £18.8m, while Work Group has already conditionally raised a further £20m via a placing.
The £17.9m net proceeds of the placing will be used to repay Gordon Dadds’ borrowings and to fund further acquisitions and the working capital requirements.
In all, irrevocable undertakings to accept the offer have been received from Gordon Dadds shareholders representing 87% of the firm’s issued share capital. The deal is expected to complete within the next two months, whereupon Work Group will change its name to Gordon Dadds Group plc.
Simon Howard, the chief executive and only employee of Work Group, said that, “having evaluated a number of proposals”, its directors believed the deal would be “value enhancing for shareholders” and that the enlarged group “will benefit from the significant opportunity presented by the UK legal services market”. He will become a non-executive director.
Adrian Biles, managing director of Gordon Dadds and the future chief executive of the PLC, added: “There is a significant opportunity to create a substantial legal practice in the UK and the proven Gordon Dadds’ business model is uniquely placed to be a major consolidator in this fragmented market.
“Through the Gordon Dadds and Prolegal business units, the group will provide an attractive platform for legal practices to gain the necessary scale to compete in the current market environment.
“The admission to AIM will provide the necessary capital for the group’s next phase of development and will also serve to enhance the group’s profile with clients and potential acquisition targets.
“We have a clear strategy for creating a strong, fast growing business and we look forward to delivering value to our shareholders and partners.”
The group is currently made up of Gordon Dadds LLP – which currently has more than 140 solicitors – and a group of complementary businesses including Prolegal, a vehicle for acquiring and managing smaller law firms; they retain their office and brand but Prolegal provides the management, technology and regulatory platform.
In the year to 31 March 2017, Gordon Dadds turned over around £25m, of which £22.8m came from the LLP’s activities, with adjusted profit before tax of £2m. It expects to enter the top 100 firms in the country by turnover.
Investors were told yesterday that since 2013 – when its turnover was £2.7m – Gordon Dadds has spent £3.2m building the back-office platform.
It has already integrated 10 firms onto it over the past four years, all now trading under the Gordon Dadds brand, while Prolegal has recently made its first acquisition of a £1.6m revenue firm based in south London.
The deal would both enhance Gordon Dadds’ profile and strengthen its balance sheet, helping it to attract lateral hires and potential acquisition targets, the announcement said.
“The directors believe that there is significant opportunity for consolidation within the UK legal services market in both the high-end advisory space through Gordon Dadds and the smaller, independent firms sector through the Prolegal model.”
The plan to double revenue over the next three years would come through:
- “Applying the Gordon Dadds proven acquisition methodology to incorporate ‘risked’ law firms and other professional service firms with re-incentivised key revenue generators able to earn significant profit share;
- “Deploying the Prolegal model to well-established smaller law firms using the technology platform to reduce their office overheads;
- “Organic growth and focus on current London and the South East footprint with ‘nearshore’ back office operations in Cardiff (currently employing 38 staff);
- “Incentivising and retaining key partners and employees via share ownership and the share scheme;
- “Selective lateral hires from legal and complementary disciplines and possibly team hires; and
- “Cross-selling across the enlarged group with significant incentivisation for partners.”
Explaining the acquisition goals in more detail, the announcement said: “There are 101 law firms in the top 200 each with annual revenues of less than £22m and, according to recent market research by Arden Partners, there is a significant band that will be challenged to achieve scale or develop efficiency. Succession planning in such firms is challenging, especially if they have high levels of debt.
“The partner-owners of such firms are typically exposed to significant strategic and business risks and the directors believe this presents an opportunity for the enlarged group to act as a consolidator of firms ranked between 69 and 185 in the UK top 200 market, especially amongst ‘risked’ partnerships.”
For smaller firms, it said, the “increasing drive towards technology-led solutions” has resulted in many of them falling behind larger competitors in terms of technology investment.
“The directors believe there is a significant consolidation opportunity for Prolegal in the £2m-£10m annual revenue space.” There are nearly 1,000 law firms in this category.
Gordon Dadds already offers a range of non-legal services, and said “there are numerous complementary disciplines in the business services sector such as tax advisory services, financial services, compliance and risk management advisory services and legal recruitment. The enlarged group will continue to explore opportunities in such areas”.
Gordon Dadds also has a strategy to develop “new disruptive business methodologies”, such as contract-based lawyers for specific project-based work.
Upon admission, Anthony Edwards, former managing partner of south-east law firm Thomas Eggar (now part of Irwin Mitchell) will be the group’s non-executive chairman, and David Furst, an accountant well known for advising law firms when a partner at Crowe Clark Whitehill, will be a non-executive director.
The market announcement included considerable detail about Gordon Dadds’ operating models:
The Prolegal acquisition model
“A template structure of a Prolegal acquisition is described below, with retention of key personnel and growth of the business the key to the strategy:
- A low upfront percentage of turnover consideration is paid (the target is 10-15%);
- Earn-out based on a factor of turnover, payable in low percentage increments over three to five years;
- Revenue-generating partners will move onto a revenue and referral profit-sharing structure, incentivising them to cross-sell; and
- Partners and staff of acquired firms are free to concentrate on gaining business and servicing clients.”
The Gordon Dadds model
“The Gordon Dadds model offers a number of advantages to prospective partners of target firms.
Partners are not required to borrow to fund capital contributions; capital is built up over time out of profit share with a relatively modest and achievable minimum contribution of £50,000.
In owner-managed law firms, profit-sharing structure is not always related to individual performance, nor is it always transparent. The traditional lock-step structure inevitably over-rewards timeservers and under-performers.
In the Gordon Dadds model, each client is allocated a client care partner (CCP) who receives, as allocated profit share, a percentage of annual revenues billed to those clients for whom he or she acts as CCP.
In addition, each partner receives, as allocated profit share, a percentage of his or her personal billings, whether or not he or she is the CCP. Based on their extensive knowledge of, and soundings in, the legal marketplace the directors believe that a Gordon Dadds LLP partner can achieve a significant uplift to what he or she might achieve in a traditional partnership practice.
The Gordon Dadds model, with its clear division between management and back office on the one hand, and client acquisition and servicing on the other, allows partners to devote time to their respective practice areas so enabling them to maximise their opportunities to give good service to their clients and for personal revenue generation and business development.
Most of the current Gordon Dadds’ partners are already legally and/or beneficially entitled to Gordon Dadds shares.
Part of the rationale for the corporate structure and application for admission is to enable future partners to be rewarded with share options pursuant to the share scheme or direct equity participation thus facilitating buy-in to the Gordon Dadds concept and an enduring investment in the enlarged group.”
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