Advice regarding mergers & acquisitions in a covid world

The coronavirus understandably changed life as we know it, putting many things on hold.

Whilst many people were able to work from home during the pandemic, helping their firm run ‘business as usual’, the strategic direction of the firm, especially those considering merging or acquiring another firm, had to understandably go on ice.

I spent some time talking to Andrew Roberts the Director of Ampersand Legal and the Chairman of the Association of Law Firm Merger Advisers (ALFMA) and Philip Lewis a Professional Services Specialist & Business Matchmaker about the mergers and acquisitions market at the moment.

Both Andrew and Philip agreed that there hasn’t been an increase in mergers and acquisitions over the past few months. They don’t attribute this necessarily down to the Covid-19 pandemic.

Andrew commented:

“Before the lockdown happened in late March we were happily working on 13 different merger and acquisition deals of various sizes and aspects but within a few days every single one of these deals was on ice because a major part of mergers and acquisitions work is on the cultural fit and blending the teams together. This is often difficult to do over a Zoom call.”

The past six months has been a mixture of success and misery for the legal sector, and firms may only be concerned with their succession issues as they have been unable to negotiate any terms they have wanted over recent months.

However, with the upcoming professional indemnity insurance (PII) renewal looming, some firms may find that they struggle with finding an insurer. This is due to the fact that some insurers have exited the market.  Others may find that their premiums have increased. Both of these scenarios may act as a catalyst for a firm looking to merge with another.

Andrew said:

“With the PII renewal date looming, time is of the essence for some firms. Although a general rule of thumb for the mergers and acquisitions timeline can vary from three to six months. This may seem too little to late, however, if both sides are properly motivated the turn around time can be as short as six weeks.

“Whilst this is a difficult time, it is also a great opportunity to complete proper due diligence and business planning so that when the eventual merger happens the merged firm has the best chance of success.”

Advice for firms considering merging or acquiring another firm

  • Research – if you want to expand your firm, conducting research to see which firms are best to acquire, the best locations and the appetite in the market are some of the first steps you should consider
  • Communication – it’s paramount that the firms involved continue to talk to one another. Depending on the stage of the conversations the amount of people involved in these discussions may vary
  • Due diligence – take the time to conduct due diligence on supplier contracts, leases, professional indemnity insurance (PII) quotes, file reviews etc.
  • Business planning – take the time to negotiate the finer aspects of the merger. Create a schedule outlining when different aspects of the merger will be complete by and define any additional agreements, such as partnership and consultancy agreements, employee contracts.
  • Information – create an information bundle including two years’ accounts, management accounts, PII proposal form and six years claims history.

What does the future hold?

Normality is slowly returning to the UK, albeit looks slightly different to the normal of old. I asked both Philip and Andrew about the future of the mergers and acquisitions market.

They both agreed that 2021 will be an interesting year as firms recover from the pandemic with some looking to expand.

Andrew said:

“I think it will accelerate after the Covid-19 shock. It did after the 08/09 crash. Firms hunkered down to get through but then partners looked to diversify their risk and the juniors were even more put off ownership, so the only option is a merger

“In the upcoming months firms will either see themselves as predators, prey or observers with regards to the mergers and acquisitions market.

“Firms who are classed as predators are forward thinking and have good management systems in place. They will have weathered the Covid-19 storm well and are likely to expand. They will consider two avenues, the first bolstering their current office or secondly opening in new locations.

“Firms who are classed as prey are appealing to the predators. In my experience, these firms are run by older partners who have survived a number of downturns and rebuilt, and sadly do not want to face the challenge of rebuilding again. These firms have a good client and staff base, and are just waiting to pass them on to another firm.

“Finally, those firms who fall into the observer group will concentrate solely on rebuilding and ignore the merger and acquisition market in the short to medium term.”

What are acquirers looking for in a law firm at this time?

Acquirers are looking for the following attributes in a firm they are considering acquiring:

  • Good cash-flow
  • Non-onerous leases
  • Staff who can continue to work despite the management change
  • Strong will banks

Andrew wanted to give this final piece of advice for those firms who may be considering acquiring another firm.

He said:

“Tread carefully. There are lots of firms out there so don’t rush into a deal unless you need to for geographical reasons. Complete a comprehensive due diligence check and if you are in any doubt, don’t proceed with the deal and move on.”

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