Should law firms go public?
18th May 2018 by Fiona Hotston Moore
Rosenblatt Solicitors floated this month on the Alternative Investment Market (AIM), raising £31.8m, and becoming the fourth UK law firm to go public.
Rosenblatt’s is a single office practice with a formidable reputation in litigation and contentious restructuring. The other three firms to float are Gateley, Gordon Dadds and Keystone.
Aside from the substantial pay outs to the equity partners including the senior partner who owned 59% prior to the float (and has retained 21%) what are the benefits and risks of going public?
The opportunities of going public include the ability to raise risk equity capital rather than rely on further investment by partners or bank funding. Rosenblatt’s shares rose sharply after listing after it was announced some of the monies raised would be used to fund litigation cases. Listed status can assist in acquisitions for paper as well as locking in key employees by giving share incentives.
However there are also certain pitfalls to listing a professional services firm. Examples of high profile failures can be found in the accountancy sector, including Tenon Plc and Vantis Plc. At their heyday these firms were the 15th and 13th largest accountancy firms in the country respectively, but both failed (within 13 and 8 years of listing) leaving substantial unpaid debts.
Investors in small public companies are looking for capital growth which generally means further acquisitions. However acquisitions in professional firms are notoriously challenging. The key assets are people, and they can walk if they don’t like the new firm.
Furthermore, the listed entity now needs to make a return to investors. Using Gately plc as an example, 30% of its share capital is now held by investors. Thus 30% of the profits that once went to partners now goes to investors.
As Tenon and Vantis discovered the financial scrutiny faced by a listed company is extremely challenging, especially for professional firms who have historically avoided publishing their results. This requires a very different level of financial management and leadership.
I do not expect to see a rush of law firms seeking a flotation on the AIM. A listing is only really attractive to ambitious larger firms with a strong track record in achieving growth, and where the equity ownership of the firm has been tightly held.
In the accountancy sector we have seen only limited interest in the model beyond the catastrophic failures of Tenon and Vantis. Begbies Traynor Group listed in 1989 and is still trading. Cogital Group launched in 2016 and has made limited acquisitions including Baldwins.
For the time being I suspect the LLP structure will be the preferred structure for law firms, albeit I would expect to see increasing numbers of mergers involving both small and medium sized firms.
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