Legal sector gaining in strength despite uncertainty
By Martin Ramsey, partner at MHA MacIntyre Hudson
At this time of year the Legal 500 is released and that is a natural time for us to take stock of the legal market. It is fair to say that the legal profession is experiencing a buoyant market and results are typically very positive at present with profits and fee income both growing well.
One of the most interesting developments is the number of firms considering new options to structure their business either through a float or other third-party investment. In the Midlands we have Gateley Plc who successfully floated three years ago and have traded strongly since. In more recent times Knights Solicitors in Stoke also took the plunge in order to exit their private equity investors and fund a growth strategy. We have also seen DWF make public their intent to float in the future.
This funding change demonstrates a high degree of confidence in the legal sector by investors, with an expectation of a steady and growing return. It also represents a change in thinking in terms of partner reward and the value placed on ‘goodwill’ in a legal practice. Selling a share of the business to external investors will result in a significant ‘pay day’ for equity partners, and particularly those at the top of equity, but this then raises the question about future generations of partners and the equity between generations.
The real positive of this trend is it demonstrates that businesses are adopting wider thinking and looking at business models away from the traditional norm.
We have seen continued M&A activity this year in the legal sector and the market remains congested. We expect the merger trend to continue in the coming years in order to drive growth, efficiency and profitability. A real challenge for firms now is being able to source good quality merger partners, as those with a strong desire to merge have typically already done so, with many of the remaining candidates being fiercely independent.
In addition to merger candidates, firms are finding the market for good people a challenge. In certain work types, such as commercial property, partners and associates are in high demand and this is having an impact on salary inflation. What a contrast this is to just a few years ago.
Finally, we are seeing a significant trend, particularly in the larger firms, towards investment in their technology strategy. We are on the cusp of a meaningful change in the way certain work types are undertaken with technology playing a greater part. This needs to alter the recruitment strategy of firms and will also require significant cash investments.
We all know that professional practices are not good at retaining profits for long term investments, with partner demand for drawings being as strong as ever, therefore these IT investments remain a challenge for finance teams to cope with. This may be an area where external investment can bring cash to the table.
Overall, the legal sector is in a very good place at the moment, both locally and nationally, but there are continued challenges ahead which make it important for firms to be agile, dynamic and distinctive.