Mini Series: Business of Law Firms​

Distressed Law Firm Assets​

By Jake Rickman​

What do you need to know this week?

Welcome to the 15th article in our series on the Business of Law Firms.

Last week, we looked at the importance of leverage in assessing how leanly a law firm staffs its fee-earners on deals.

This week, we will look at asset sales in the context of law firms with reference to a recent article published by The Lawyer, on 27 September entitled, “As the storm gathers, expect law firm asset sales”.

The article’s central premise is fairly straightforward: as the economy slows, certain law firms will react by selling off portions of their practice. The article treats as a case study the decision of Liverpool-based law firm Hill Dickinson in 2018 to sell its insurance practice to Keoghs, which is an insurance business with a dedicated insurance law practice.

Following the move, as the article reports, from 2018 to the present the firm’s revenue increased by more than 25%, which is attributed to the sale because the firm was able to apply the sale proceeds to boost its “three core [practice] areas” comprising health, marine, and insurance.

Law firms and M&A transactions

While law firms are principal advisers to parties in an M&A transaction, law firms are less likely to be the parties themselves. This is for three primary reasons:
  1. Most law firms exist as limited liability partnerships (LLPs), the legal structure of which makes it harder to buy and sell as one would a limited company;
  2. As law firms rely heavily on client relationships and brand standing (“goodwill”) and the skill of their fee-earners, valuing the business is more difficult; and
  3. Similarly to (2), what is actually being purchased is the bundle of client obligations arising from any ongoing client work, as well as the fee-earners in place.
That said, as The Lawyer’s article demonstrates, M&A deals do happen between law firms. Such deals tend to take one of two forms:
  • as in the case of Hill Dickinson, asset sales where a particular practice group is sold; or
  • mergers, where two independent law firms combine their businesses in some capacity.
Examples of mergers include the two high-profile UK/Australian marriages involving Ashurst’s merger with Blake Dawson and Herbert Smith’s merger with Freehills.

How is this topic relevant to law firms?

Regardless of the sector or type of business, all M&A deals are strategic decisions. For law firms, buying the practice group of another law firm may shore up the buyer’s dominance in a particular market, such as insurance in the case above.

Likewise, selling off one or more practice groups can provide law firms that are otherwise struggling to stay afloat with substantial cash while also extinguishing cumbersome expenses and liabilities associated with the sold division.

Separately, a full-on merger between two law firms can create powerful synergies for both parties, as both Ashurst and Herbert Smith Freehills can attest.