Better together: Why law firms are so keen to merge

Mergers among law firms are not a new phenomenon. They have always been a feature of the profession.

Law firm owners who contemplate acquisition or merger, share many of the motivations which guide other business owners; the opportunity to secure new clients, to expand market share, to acquire capability.

However, in law firms, where people are fundamental to both the delivery of service and generation of revenue, there are nuances which influence both deal flow and the likely success of any transaction. There are also factors which are changing industry dynamics and which will probably drive more activity in coming years.

Culture in all businesses is important, but the strength and alignment of culture in people businesses is vital to success. Aligning the cultures of merging law firms is probably the most important element in successful firm mergers. In my experience, misalignment of culture always comes to the surface and impacts the performance of the combined firm. It can be reflected in many ways. In different leadership priorities, in the tone and language used with clients and colleagues, and sometimes it can surface in misunderstandings and, more than occasionally, resentments between colleagues.

For that reason, at Stowe Family Law, as we consider the possibility of growth through acquisition or merger, we are putting substantial emphasis on the culture of the firms with whom we talk. Finding other firms that share our values of working together as a team in our delivery of outstanding service to clients, being ambitious, innovative, and growth-minded in our outlook, while still being conscious of the wellbeing of colleagues and clients, is crucial to any lasting, successful partnership. This is why we recently partnered with North London firm Chapman Pieri: they not only share but are built around the same key values we have at Stowe.

Another feature of law firm mergers, particularly in consumer legal services, is they can solve the challenge of succession. The legal industry is highly fragmented. Aside from a relatively small number of very large firms, many law firms are small businesses. While this can be a great way for lawyers to serve clients and be a professional in their community, it can also bring a challenge when the principal wants to move on. Smaller firms, built by talented founders, aren’t always the easiest entities to pass to someone else within the firm.

In many ways, barriers to establishing small, dynamic law firms have reduced substantially. The web and other digital tools have enabled ambitious professionals to create and sustain great firms, with relatively little upfront investment. There is a generation of law firm entrepreneurs who have successfully built many of these types of firms. But many of those same entrepreneurs are reaching a point in their career where the joys of firm leadership are less appealing; time naturally changes personal and professional priorities. Unfortunately, it seems the barriers to exit (like client and regulatory hurdles, among other things) don’t seem as low as the barriers of entry.

This is where merger or acquisition, by a like-minded firm, can provide a win-win solution.

There is another industry change which has supported law firm entrepreneurship and could also be a catalyst for sector consolidation. That is the change to how law firms are structured and funded.

In 2012, regulation in England and Wales allowed law firms for the first time to move beyond the partnership structure and permitted them to welcome non-lawyer owners. Since the introduction of this regulation, unsurprisingly, alternative business structures have been very common in new law firms. They provide more flexibility and have been a factor in the growth of law firm entrepreneurs. They also make it easier to complete an ownership transition.

However, it is the other aspect of these decade-old reforms which I think may be the greater driver of consolidation in law, particularly in consumer legal services. That is the presence of investors in law firms.

Over the past decade we have seen substantial investment in law firms by different financial sponsors. Law firms have entered public markets. The presence of financial sponsorship brings flexibility and financial horsepower to merger discussions. It widens the scope of what can be done.

We are fortunate at Stowe Family Law to have the private equity firm Livingbridge as a very supportive, majority owner. This brings a new dimension to how we think about our growth, including the role of mergers and acquisitions. We have more agility to find mutually beneficial solutions for us, for clients, and for other law firm principals and their teams. This is space that the Stowe team are looking forward to exploring further during 2022 in our quest to create a firm that delivers value, innovation and outstanding support to clients and colleagues.