I have received a few comments about it too - most have been supportive, but a few have been critical - saying that I had underestimated the success of mergers and that I didn't quite understand the motivation behind firms merging. In particular, it was suggested that I didn't understand the financial pressure to merge faced by smaller firms with no access to loan capital. So I have been reading around the subject today to see if I have been missing something.
I read a very interesting article from Syscap (see the article here), who are a 'provider of smart, cost-effective finance solutions' according to their web site. The article from Philip White, their CEO, suggests that since access to finance has become so difficult for smaller law firms, their only solution is a merger.
Even firms that can get offers of conventional bank loans are finding that those loans are too expensive. Bank of England data shows that lending margins for small businesses loans across all sectors are still on the rise. Small businesses, such as sole practitioner law firms, are now paying the highest interest margins in three years on loans of less than £1 million.
The law firms that Syscap speaks to about funding for tax payments, IT investment etc, leave us in little doubt that they are finding it almost impossible to get sensibly priced funding elsewhere in the market.
Further evidence of how tough things are can be seen in the 17% jump, since the start of the year, in the number of funding requests that we have received from law firms to help pay their big semi-annual tax payments to HMRC.
The above quote form the article does demonstrate the difficulty of financing a firm - but I'm still not convinced that merging is the solution. Two smaller firms who can't finance a capital programme merge - and become a larger firm with the same problem.
Partnerships have always had some difficulty to get bank loans - there is almost no collateral for banks to lend against. The traditional answer to that problem has been the equity call - or rather the practice of retaining sufficient profit each year to fund capital projects, rather than returning as much as possible to the partners in order to boost that favourite measurement of Profit per Equity Partner (PEP). Recently, however the drive to show more profits being given to partners has meant that a smaller and smaller percentage has been retained within the firm.
I appreciate that the profits in small law firms are proportionately small - however their access to affordable finance is unlikely to improve in the near future (and I don't plan to get into the argument about non-partner equity here) and so partners will need to look at improving the profitability of the work that they do. Not so that they can take more out of the firm - but rather so that the partners can use the cash in the firm to fund efficiency projects and some real growth.
So - before you consider a merger consider this: look at the way that your firm works and the cases and matters it takes on. Increase the profitability of the work - don't just look for turnover. Talk with the partners about the large/capital projects required - whether that is investment in technology or a marketing push. Look to invest internally. Look to flatten out the peaks and troughs that normally categorise partner drawings by developing a long-term financing strategy based on internal investment and a longer equity return model.
It's not likely to be a particularly popular strategy (particularly with those senior partners about to retire and withdrawn their equity) - but it will provide some stability to the firm and a platform for growth.