A recent increase in M&A activity in the UK’s legal sector appears set to continue, with law firms turning to acquisitions in order develop their services, maintain earnings and build scale in the face of mounting challenges across the industry.
According to a new report from accounting and advisory firm Saffery, there was a 60 per cent increase in legal sector M&A in the year to June 2023, with 69 transactions, compared to 43 deals in the year ending June 2022.
This strong activity shows little sign of slowing down, either, with ongoing high levels of fragmentation in the legal industry (according to Saffery, close to 93 per cent of UK law firms have fewer than 20 employees) and growing interest in the sector from private equity investors.
Saffery partner Jamie Lane commented: "Private equity interest in professional services looks to be increasing, while interestingly, but perhaps not surprisingly, the majority of acquisitions are of smaller firms with 20 or less employees.”
"Cost pressures, particularly professional indemnity (PI) insurance renewals, are becoming increasingly painful and therefore merging with another firm is helping to mitigate the impact on profits."
Saffery’s report said that law firms have come under growing pressure over recent years due to post-COVID-19 uncertainty and ongoing inflation. As a result, M&A has become a strategic priority for many companies seeking to maintain strong earnings or target growth.
According to Saffery, UK legal firms have largely adopted one of two strategies in the face of challenges affecting the industry: either investing in IT solutions, such as AI, to minimise human error and increase efficiency; or using M&A to broaden their service offerings and grow economies of scale.
The report stated that there has been an increase in mid-size law firms seeking to acquire smaller businesses, as well as smaller businesses seeking to merge with larger counterparts. It also cited the impact of acquisition sprees by listed consolidators Knights Group Holdings plc and Gately (Holdings) plc.
Saffery partner Sheryl Davis said that the uptick in M&A will likely continue, “especially with the potential for further PI insurance pricing challenges".
She continued: "Succession, and lack of planning for this, is another driver for merger activity, and we may be seeing a generational shift in attitudes to risk. Plus with a continual change in economic conditions across the UK and globally, we may see further consolidation in the market.”
Find out more about the growth of legal sector M&A with this in-depth analysis
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