2022: Could it be a year of drama for the legal sector?

As we come to the end of 2021, which for many of us has felt like one long slog since the first lockdown of 2020, here I provide a quick state of the market review and look forward to what 2022 might bring.

With over 10,000 English and Welsh law firms (plus a few thousand more in Scotland) there are clearly plenty of firms in Great Britain. A huge amount of these are very good, very profitable firms that are, in pure business terms, small entities (note the definition is usually taken to be fees <£10m so the bottom of the top 200 firms only just make it past the hurdle to class as not small. So there are roughly 9,800 ‘small’ ones then…) that might at face value be ripe for acquisition or worse failing; given that (by definition and due to their size) their cash reserves must be fairly small – so one small(ish) bump can be enough to throw them off course. Given the upheaval of 2020 & 2021 some firms are struggling and now have significant (and possibly untenable) debts to the government. Even where that isn’t the case there is a whole cohort of law firm owners who are tired and cannot face the thought of another long slog (they probably had one back in 2008 too) to get their firms back to where they were in 2019, never mind the fact that many of them are also coming into retirement ages and do not necessarily see another generation coming in behind them.

I realise that many people sat in my chair over the years (including myself!) have repeatedly suggested the legal sector is on the brink of mass merger, consolidation and a general shake up of the business model. However, it really does feel like 2022 might be the year it happens, although that might depend which character you intend to play in the upcoming drama:

The steady ships – i.e. High street firms
Somehow this term has become derogatory. However, I know some fantastic “generalist but mainly private client firms based in market towns” (a much better definition but too long for a sub title). If you are one of those who are performing strongly and have the ability to continue to invest in people and technology, then I would enjoy the potential fireworks of 2022 safe in the knowledge that you are strong and secure. Perhaps take the opportunity to hoover up one or two of your local competitors? Certainly you should be able to take staff/clients/market share from them as they struggle with minimal (if any?) cost or effort?

The distressed sellers – i.e. Firms with “issues”
If you are one of the firms with significant debts, or no second generation of partners coming through or large partners capital accounts with no clear repayment terms. Then – please seek help now! There are options available to you and if you delay to the point where you become genuinely distressed then any value that you might be able to achieve is much more likely to be eroded.

The opportunistic buyers – i.e. Consolidators
Firstly and primarily they exist! There are plenty of firms who have a clear business strategy to acquire others and to grow via acquisition. Since that has always been their strategy one might argue that 2022 will be no different. However, in a scenario where it becomes something of a buyers market being an established buyer would be a great advantage. Other firms are more likely to approach you, you are more likely to be able to set your own terms and more likely to be able to react quickly to good opportunities; good luck I suspect there will be several coming your way!

The outsiders – i.e. PE/External investors/Stock market
The approach of some floated law firms is a well documented “buy and build” strategy. The same is also true of certain Private Equity backers who are actively looking at targeted acquisitions into the legal sector. However for these characters the ongoing drama in the sector might not be helpful. They are (and always have been!) looking for very specific Firms that hit their exact criteria, with so much other movement and associated “noise” in the market I wonder if we might seem them take a back seat for a little while until things calm down? However, overall and in the longer term, I think many of them might represent the future of the law business model as they invest in consolidation, building scale and centralising back office functions.

The cool kids – i.e. Niche or new firms
One of the reason that there continues to be circa 12,000 firms in Great Britain is that for every one that merges (or worse goes into administration), another one gets formed. I suspect this stratification of the market will continue but only where there is a genuine rationale for the new firm to exist. So, if you are small and agile boutique firm with a clear purpose then there may be no need to step on the “merger stage” that I’m hinting at. With that said though, are you sure you are a true niche player? If not this might be the year to fold into somewhere bigger and brighter and ease some of burden of running your own firm. Many of the consolidators are looking to build niche firms as spokes into the regional hubs that they have built/acquired.

The lone guns – i.e. various consultant led firms
This model seems to have been the success story of 2021 as many fee earners realise they can strike out by themselves without having to go fully alone (albeit that often comes at a cost in giving up a chunk of your fees). I suspect we will continue to see that theme into early 2022 as the home working revolution quietly reverses which in turn could see some of the characters above have further issues or considerations in how they play their role especially as some consultant led firms can also suit pods or groups of people and so provide an exist route for firms as a whole.

The new guys – i.e. ABS and MDP firms
Whilst I accept these are yet to fully come of age (and definitely not yet in Scotland) they continue to be the future (in my humble opinion). So I’ll maybe leave them for my 2023 predictions blog.

I realise I’ve tortured the metaphor a little but my point is this – I think 2022 might be very dramatic and now might be the time to think about your strategy for it and which role you want your firm to play…?

The author of this article is Tom Blandford of Armstrong Watson. Tom can be contacted at Tom.Blandford@armstrongwatson.co.uk or 07793 621 951. Other members of ALFMA can be contacted here.

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