UK law firms are seemingly prioritising organic growth opportunities over M&A during 2025, despite high levels of fragmentation in the industry, according to a new poll of 64 mid-sized firms.
The report, conducted by MHA in association with the Law Society, found that 13 per cent of respondents engaged in M&A over the past year, while 17.2 per cent are targeting a merger or acquisition over the coming year and approximately 3 per cent are considering exiting their business.
M&A activity in the UK legal sector has seemingly been on an upward trajectory over the past couple of years, following a consistent decline in activity during the 2010s, which was then exacerbated during and immediately after the COVID-19 pandemic.
Dealmaking has since been driven by increased private equity involvement in the sector, the emergence of several key consolidators, high levels of fragmentation, succession planning issues and the impact of rising costs and rapid digitalisation.
However, the MHA and Law Society report indicates that there remains an ongoing hesitation among many firms to either target growth through M&A or to sell up to a larger counterpart.
Karen Hain, partner in MHA’s professional practices team, commented: "The low percentage of firms looking to grow through M&A is interesting, bearing in mind the legal market is still highly fragmented compared to other professions and because a merger provides a short-cut to growth.”
Hain says that MHA “[a]necdotally” feel that this may result from mid-sized firms "not knowing where to start with a merger or how to identify targets, as well as a reluctance to dilute control,” which she says is a “stark contrast” to the high levels of activity in a sector such as accountancy.
Hain continued: "Organic growth has emerged as a central theme. Firms are focusing on expanding their internal talent pool and enhancing productivity through targeted investments in people and technology. This also includes looking at pricing of services provided.”
"The firms that are exploring mergers and acquisitions to accelerate growth have identified specific service lines to prioritise over the next 12 months with a strong emphasis on tapping into niche markets, for example private client work is a common sector firms have highlighted in their plans."
According to the report, organic growth is a major theme in the sector, with firms seeking to either sustain or increase the momentum they have gained since the COVID-19 pandemic.
Growth strategies that companies are targeting include expanding their internal talent pool, improving productivity and, increasingly, geographical expansion – with 80 per cent of respondents seeking to either open a new office or expand in a new or existing location.
However, the report showed that there are a number of barriers to growth, with the biggest threat cited being issues with recruitment and staff development, which was identified as the key challenge by 41 per cent of respondents. 23 per cent, meanwhile, cited rising costs as the greatest threat to growth.
Elsewhere, the study showed that the majority of firms (84 per cent) said they had seen increased or comparable levels of productivity after moving to hybrid working models. A growing focus on ESG was another key trend, with many providing equality, diversity and inclusion training, unconscious bias training and “a surprisingly large minority” reporting progress on environmental issues.
The report noted that, despite the high cost and time involved, ESG is now considered highly important in the recruitment process, with MHA suggesting that “over time, there is a risk to the reputation of firms that get left behind”.
Finally, half of respondents stated they planned a “significant update” to IT systems over the next year, but there was prevailing caution over the role of AI. Just 25 per cent of firms are using AI and a third of the remainder say they have no intention of using it over the coming year, with most saying further guidance was needed.
The report, however, warned that firms could be left behind if they did not consider the potential implications of AI in operational processes.
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