The legal press has been full of articles on the consolidation of the legal market recently, particularly in mid-market firms. We have seen the merger of Lovells and Hogan & Hartson and stories of a tie-up between Clyde & Co and Shadbolt & Co. This merger activity is not exclusive to the legal sector, other professional sectors are experiencing it too. For instance, accountancy firms Tenon Group and RSM Bentley Jennison announced their merger just before Christmas.
Further consolidation is expected in the legal sector as some firms decide that a merged firm would be better placed to face the challenges and opportunities of the anticipated economic recovery. You may be thinking about it but don’t know where to start.
Identifying a merger target
The obvious and main preliminary step is to identify a suitable merger target. Unless the choice is clear cut because of common practice areas or similar geographical scope, it is more likely that an external consultant will have to be retained to research the market and identify a potential target. It would be prudent to undertake a due diligence exercise on the potential target which should focus on:
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Business fit – will the merger enable the firm to create greater, better quality, more profitable work? Or might the merger lead to more conflicts?
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People fit – are the respective cultures at the firms compatible? If not, then can any differences between the firms be reconciled and how?
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Financial integration – do the firms adopt similar remuneration structures? If not, the manner of calculating and showing profits will have to be addressed carefully.
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Does the firm own any freehold properties? If so, will partners be looking to realise any value in such properties at the same time as the merger is completed?
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Integration of IT systems.
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Staff employment contracts (together with details of all contractual benefits including bonus schemes).
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Any pension schemes operated by the firm and, in the event of a final salary scheme, to clarify whether this scheme is in deficit.
Negotiating the merger
Having finalised the due diligence, and assuming the firms are still keen to do a deal, a number of issues will need to be addressed and negotiated which will form part of the merger agreement. Including:
Structure – will the assets of one firm be transferred to another or will both firms transfer the assets to a new vehicle? Indeed, if both firms are general partnerships, it may be a good opportunity to convert to an LLP. Are all partners joining the merged entity?
Form of partnership agreement – can the existing partnership or membership deed be easily reconciled? This should not be too complex assuming early analysis concludes that both entities show a common cultural ethos.
Liabilities – are all liabilities to be assumed by the new merged entity or will some be ring fenced? This may not be such a critical issue if the merging firms are LLPs. Careful thought will also have to be given to any outstanding annuities payable to former partners. The terms upon which such annuities are paid will have to be reviewed to ascertain whether such obligations can be assumed by the merged entity.
Management – how will the new firm be managed and which partners will take responsibility?
Completion balance sheets – the basis of any completion accounts will have to be finalised. If one firm is significantly more profitable and/or valuable than the other, then remuneration structures will have to address such differences.
Common pitfalls
In any negotiations there are likely to be some problems that the two firms will encounter. Potential pitfalls tend to centre on profit shares, staffing and partner requirements, property liabilities, management roles, areas of non-core business and professional indemnity insurance (including successor practice issues). Assuming none of these prove insurmountable and can be addressed in an constructive manner, a successful merger may beckon.
For more information on these issues please contact
Miguel Pereira
or your usual Lewis Silkin contact