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Mergers and acquisitions (M&As) have become increasingly attractive to small law firms, according to the ½Û×ÓÊÓƵ Bellwether 2022 report. We explore the findings and discuss how M&As might define the future of small law.

The post-lockdown boom has restored confidence to small law. Over the past year, the majority of firms claim to have met financial expectations, with many exceeding expectations. Small firms are looking ahead, with ambitious growth plans targeting stability and long-term commercial viability.

One of the most interesting trends on the horizon is the increasing appeal of mergers and acquisitions (M&As). In the ½Û×ÓÊÓƵ Bellwether 2022 report, based on a survey of more than 300 small law firms, one fifth of representatives from small firms claim that M&As have become more attractive since the pandemic arrived, compared to just 14% in 2021.

On top of that, 16% of respondents suggested that M&As would form part of their current growth strategy. That raises several interesting questions about the future of small law firms. Is the timing ripe for firms to consider M&As? Or should small law reject the trend and focus on organic growth?

In this article, we examine some of the findings from the recent Bellwether report, look at the benefits and drawbacks of M&As, and explore the appeal of organic growth.

Grow to survive

A startling from 2021 predicted that, of the 10,000 law firms in the UK, approximately a third will shut down or merge in the next five years. The legal sector is fast and fierce and small law firms will need to adapt quickly just to keep up.

The threats to small firms stem from myriad angles. The Big Four are disrupting the sector with wide-ranging expertise and the seamless adoption of tech, US firms are proving attractive to emerging legal talent, platform firms are undermining old working models and driving change in the sector, and alternative legal service providers are finding agile and tech-driven solutions.

Small law firms need to find a way to compete, through improving processes, adapting to meet customer demands, and providing forward-thinking and tech-driven services. The key to the above changes may depend on mergers or organic growth, depending on the nature of the firm.

The appeal of mergers

As mentioned, 16% of respondents to the Bellwether report suggest that M&As are part of their current growth strategy and 21% said the pandemic made mergers appear more attractive. We have seen a comparable response from larger firms, with attitudes broadly similar across the legal sector.

Consider, for example, the on law firm strategy. The survey found that the majority of large firms are planning to grow on a national or international scale through M&As. On top of that, a found that almost half of UK firms are considering M&As.

Simply put, M&As are increasingly attractive to law firms of all sizes. The attractiveness of M&As is unsurprising, as M&As provide myriad benefits, many of which will seem particularly enticing to small firms post-lockdown.

Arguably the most obvious benefit of M&As is the almost automatic increase in market share. The increase in market share allows firms to overcome competition, which could prove important in the coming years, with the suggesting firm closures are likely.

Mergers also help to reduce costs by streamlining operations of both firms, pooling knowledge, increasing skills and expertise, harnessing economies of scale, and so on. The merger allows firms to better utilise tech, giving merged firms the chance to pick the most effective tech solutions while simultaneously ditching tech that does not serve an effective purpose.

Mergers also allow firms to diversify products and services, which may translate into expanding practice areas, increasing demand through generalisation, and ultimately increasing profits.

The appeal of organic growth

The alternative to M&As is organic growth. According to the Bellwether report, 65% of respondents suggest that their firms are planning to grow through organic means in the next five years, which is similar to the 66% we saw in the 2021 Bellwether report.

Organic growth is always ideal, particularly considering the problems that can arise from M&As. Consider, for example, that M&As can lead to internal disputes, job losses, long and costly negotiations, and myriad other administrative and bureaucratic issues that take time to resolve.

New ½Û×ÓÊÓƵ report: The Laws of Organic Growth

M&As also require regulatory compliance that can prove complex. And while economies of scale may prove beneficial, – firms struggling to co-ordinate as a merged firm – can prove frustrating and ultimately existential, particularly when the firms practice niche areas of law.

Ultimately, as the Bellwether report shows, organic growth remains the most popular options largely because it allows firms to avoid risk and forge their own success. Organic growth gives stakeholders greater control, without reducing autonomy, losing responsibility, or jeopardising vision.

In the end, firms will need to evaluate their future based on individual circumstances. The question of is one that depends on resources and finances, long-term vision, commercial viability, and myriad other variables. Firms should take stock and not make any decision lightly.