Rarely a truer word. The decision to IPO your business is a very significant decision. In recent years buyers (investors) and sellers (law firm partners) have been getting used to each other. Flotation of law firms have started to happen. Remarkable to think that only 9 years ago the SRA created the ABS structure to implement the Legal Services Act 2000 and allow non-lawyers to own law firms.
So a handful have floated, but why not more? A good question and if only I knew the answer! But seriously, some thoughts do spring to mind.
Law is a people business. Yes technology is a vital tool, but clients still buy people and expertise first. Valuing people is a challenge. A challenge, because unlike computers and AI people can get up and walk out. So what multiple of their performance can you lock into a share price valuation? With what certainty? Then there’s averaging of course. The average performance across a population helps to create a metric for a share price. That average performance can be assured with stakeholder participation or employee ownership. We have seen that work very well in people businesses like St James’s Place.
The partnership / capital account model is a challenging one for investors. There’s a view that the markets represent the opportunity to find a new source of capital in entities with limited real profit margins. A new source is needed for these entities. This is because we have seen 20 years of industry news headlines that law firm associates are cooling on the idea of buying equity in firms with Partner Loans from banks. That means the capital cycle of firms becomes challenging. Retirement becomes a challenge if there’s no new money coming in to replace the money needing to go out! In some cases retiring Partners can expect it to take up to 10 years to have their capital (loan) returned to them.
One can see how just these two topics present challenges for potential investors assessing traditional practices. In my view there are areas that bear scrutiny. Practices with predictable revenues and profits margins. These tend to be based on volume legal services with high technology adoption. There are also the new breed of platform businesses. These remove the historical structures of the partnership/capital/liability model and replace them with the opportunity to achieve averaging across communities of lawyers. These closely mimic the approach of St James’s Place in the financial services arena. The best of them will appreciate that platforms flourish with loyal and committed users - their lawyers. Mechanisms to achieve these aims ought to make the markets a better place for lawyers and a more appetising prospect for investors.
The decision to IPO your business is a profound and important one. Every company will have its own particular reasons for taking this step.