Overview of the Market
Solicitors, barristers, patent agents, notaries and bailiffs carry out legal activities on behalf of private and corporate clients. Over the five years through 2018-19, industry revenue is expected to decline at a compound annual rate of 0.3%, being hampered by the number of residential property transactions falling from 2016-17 and a significant decline in M&A activity in 2017-18. The industry is expected to be negatively affected by the uncertainty brought about by the EU referendum, with industry revenue expected to fall by 4.4% in 2018-19 to £32.3 billion.
Over the past five years, the introduction of legislation allowing non-legal firms to own legal firms through alternative business structures (ABSs) has opened up the industry to a vast amount of price-driven competition. This pressure on fees has encouraged firms to increase efficiency and cut costs. Operators have begun to invest in technology that reduces human error and speeds up routine work, allowing added time for employees to engage in more valuable activities. As a result, industry profitability is expected to have expanded over the five years through 2018-19.
Over the next five years, the pace of technological advancement in the industry is expected to quicken, and more firms will attempt to enhance the efficiency of their services by using technology such as artificial intelligence. However, profitability is expected to stagnate, constrained by rising competition. Over the five years through 2023-24, demand for legal services is anticipated to increase as the United Kingdom continues the process of exiting the European Union. This is expected to support growth over the latter half of the period, and industry revenue is forecast to rise at a compound annual rate of 1.9% to £35.5 billion over the five years through 2023-24.
A profitability analysis on the sector from a pool of 500 leading UK-based Solicitors revealed the following points:
- 209 companies in the industry increased in value over the last year, 75 of these increased by more than 25%
- 204 companies decreased in value, 69 of these decreased by more than 25%
- The most profitable 223 companies made an average profit margin of 32.4%
- The least profitable 227 companies made an average profit margin of 1.8%; the industry average was 21.9%
Based on analysis, companies were rated on their likelihood of continued performance or ‘Strength’; a total of 268 companies were given the highest available rating, ‘Strong’. 86 received the lowest rating, ‘Danger’. Stemming from the large number of ‘Strong’ performers, there were 47 companies that were highlighted as ‘highly attractive’ takeover prospects with a further 368 companies that are ‘worth considering’.
M&A Activity in the Sector
Market IQ data indicates a total of 366 significant deals in the industry from January 2011 to September 2018, with UK targets. Deals are only reported over a certain value threshold (c.£500k), therefore, it is likely that not all deals have been captured. Data consists solely of Acquisitions, Management Buy-outs and Mergers.
Upon breaking down the deal type, M&A activity within the sector is mainly categorised by acquisitions, with 199 since January 2011. There were also 161 mergers, a large number when compared to other industries. 6 MBOs were also completed. A geographical breakdown of the deal shows a broad spread of M&A activity. The North West contributing a sizable chunk, with 69 deals, significantly high when compared to the population size. This is likely firms looking to expand market share in a region with impressive economic growth.
Deal flow has been significant in each year, with a somewhat volatile downwards trend through 2011-2017, this is likely characteristic of the uncertainty effect of the UK’s exit from the EU. With 22 deals through September 2018, forecasting the same rate to the end of the year gives 29 deals. A significant drop versus 2017. If the 2018 trend continues, the data will likely illustrate a stagnation in confidence on the part of acquisitive businesses.
Industry Benchmarking Information – September 2018
Hallidays’ client base consists of small to lower mid-market enterprises. Our benchmarking analysis reflects businesses with turnover below £20m, in line with the majority of our clients in this sector.
|Solicitors Benchmarking Data||Mean||Median||Lower Quartile||Upper Quartile|
|Turnover Growth/Decline (%)||6.50||3.57||(7.18)||12.84|
|EBIT Margin (%)||16.12||16.35||3.06||28.26|
|EBIT Growth/Decline (%)||5.52||7.62||(33.09)||42.81|
|EBITDA Margin (%)||18.33||18.89||5.04||29.11|
|EBITDA Growth/Decline (%)||3.97||3.76||(23.80)||34.69|
|Total Net Assets Growth/Decline (%)||12.90||11.00||(4.18)||29.23|
Using full company accounts filed in the last two years under the SIC-Code “69102 – Solicitors”. Excluding companies with nil turnover in either period, we have summarised key benchmarking information for businesses under £20m turnover in the table above. September 2018.
M&A Activity Source
Experian Market IQ (September 2018)
Search Criteria: SIC-Code “69102 – Solicitors”.