Wednesday, 17 March 2010

Investment from the Owners' Perspective

In my last post, I suggested that it might not be wise (or successful) for a law firm to float. Over the last few days I've had a couple of interesting conversations based on that posting and so feel that I should comment further.

Law firms are unusual in terms of their structure in that they tend to be small (ish) partnerships - the business is owned by a comparatively small number of people. It is not unusual for a top 40 firm, turning over £70-100 million os so, to be owned by 100 or so lawyers. Few other businesses that size are owned in this way. It is not only the governance structure that is odd - the financing of a law firm is often done entirely through funds from the owners and from cash flow. I know a number of £100million turnover law firms with no debt other than an overdraft.

I suggest that the shock from floating to both of those structures will be enormous. Not only would the partners have to get used to other people wanting information and wanting to be involved in decision making, they would have to justify themselves, their actions and their pay to these other owners, who might not even be lawyers... How would it work too? Would each partner be given an equal number of shares? What would be the basis for the initial offer? Would there be an internal market in shares amongst the partners? That might mean, surely, that a junior partner might be able to own a larger proportion of the firm than a more senior partner. It can all get messy very quickly.

An analogy would be Cadburys. There is a lot of fuss in the press at the moment about, and a committee of the House of Commons has, this week, been discussing, the "selling to a foreign buyer of a great british institution". Personally I think that the press is whipping up this story - after all this is a commercial enterprise. The point, however, is that the problems did not start with the bid from Kraft - the problems started when the family first decided to float the company and to offer the shares on the open market. I'm sure that they made lots of money and found new sources of finance for the firm. They also, however, lost control of the organisation since the new owners of the business were free to do what they liked with their ownership share (unlike a departing member of an LLP).

The time may come when a mid-sized firm is ready to be floated - but I don't think that time is now. The cultural change would be too great, too disruptive and is likely to lead to many unintended consequences.

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