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Whether by Merger

10.11.2010

Last week’s Law Society Gazette highlighted an issue that has been on the horizon for some time – the pressure to consolidate in the mid-tier section of the market – and this is a trend that is only going to become more apparent over the next year.

Banking on Success

Levels of bank funding have seemingly hit new highs, with over 40% of capital in many mid-sized firms coming from external sources rather than partner-subscribed capital, significantly more than in previous years.

This supports our assertion that banks are still willing to support viable lending propositions, but it also suggests that some firms are on increasingly uncertain ground. Relying on bank funding in itself is, to an extent, no bad thing. Indeed, businesses that are looking to grow and to seize opportunities to cement their position in a market and to improve their market share most often do so with a healthy mix of lender-subscribed funding behind them.

However, as the collapse of Halliwells suggests, firms must be especially careful not to let their debt situation get out of hand. Lax financial management and uncertainty about sources of future income do not reassure lenders, and the firm’s management must be confident that the business is healthy enough to meet its repayment obligations.

Knowing the Business

This brings us neatly back to our old mantras of strong financial management and proactive business development. There is more to this than knowing how to keep the bank manager on side to secure funding (see our recent post on this). This is fundamentally about knowing the business inside out – knowing with certainty the financial situation, and knowing how the firm is going to develop.

Many firms seem to see the law firm merger as a way to safeguard their financial position. For some, this will be the only way of securing a strong position in a more competitive marketplace, and banks and insurers may see larger firms as a safer bet. However, mergers and acquisitions must be given the careful consideration they deserve.

According Due Diligence

We have observed a number of mergers over the past year, and in some cases they have been resoundingly successful. These cases are those in which the firms treated the question of commercial due diligence with great care, and ensured that they knew exactly what the process would entail. Merger is not a panacea for all law firms in challenging conditions, and it must be clear that the new entity will benefit its constituents.

This means that accounting standards, marketing budgets and the approach of the new management must be appropriate. Without a carefully coordinated strategy, merger can result in internal chaos – and ultimately business failure.

Merger is one route to financial stability for medium sized firms, but it is not the only route – and it is certainly not without its dangers. As ever, financial management and business development are the keys to success, irrespective of whether merger is the preferred option.

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