Time to Take Your Law Firm to Market?

(thanks to greentech media)

Is it worth floating a law firm on the stock market? Peel Hunt, a broking house, thinks it can work. In a briefing note, it lays out the attractions and possible drawbacks.

Some of the key points are a continuing need for legal services with a growing regulatory state--ie. more red tape, more need for lawyers and other professionals. Good steady income streams (if partners bill properly, I assume). One of the most important reason given is

Flotation simplifies many of the problems associated with partner transition – equity is transparently valued and incoming partners need not provide capital. This can ease the recruitment of young partners, who rarely have built up their own personal wealth to be able to afford to buy in from their own cash resources. Equally, rewards above normal remuneration and after loan interest and loan capital repayments are, in some cases, only achieved by partners in their late forties. The best young partners, particularly those with a marketing mindset, are likely to want a visible reward and, in particular, the possibility of capital reward in their thirties.

 On the downside is a crucial factor. I've written about managing cultural risk in firms and Peel Hunt identify "the risk of culture change" as a clear risk of flotation

The biggest risk, but the most difficult to analyse objectively, is the extent to which
a public flotation may cause partners to change their behaviour in a way that damages their “trusted advisor” status. The intrinsic pressure of meeting market expectations may change the behaviour of partner/directors. If this causes them to market more aggressively the firm’s specialist services then this may be positive. If however it leads to a more “churn and burn” mentality then, even though this may take years to feed through, this would severely undermine goodwill.

  This is one area where I would say the vast majority of professional service firms, frankly, don't have a clue. If they mess it up then this is where they will do it. Without cultural mediators they are lost. The example Peel Hunt cites is Slater & Gordon in Australia which seems to be a financial and cultural success.

Lawyers would do well to read pages 13 to 15 of the briefing which detail how salaries and dividends would need to be handled. Some middle-range partners might not be entirely pleased with what's on offer: the senior partners will be laughing, however.

The biggest question is how do you value a law firm? I'm not going into detail here but most lawyers will have to learn something called financial reality. It's rather different from Wonderland. (See page 18 for more.)

Using Allen & Overy as a case study, the value of the equity comes out "at £1.48bn, equal to £4.0m each per full equity partner...Those closest to retirement are the most likely immediate beneficiaries of a listing."

Standby for internecine warfare...?

PS. I should mention a fascinating post by Mark Brandon at Motive Legal on "Would you buy shares in a law firm?" which delves into some of the dangers of law firm flotations.