Monthly Archives: April 2016

Helen Clayton On Mergers & Acquisitions In The Legal Profession

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Some of the latest challenges facing the UK legal profession in recent years include succession, exit planning, gaining market share and competitive advantage through merger or acquisition and dealing with the financial and other related impacts of regulatory changes. This applies from the largest firms to sole practitoners.

As law firms continue to develop into businesses with much more of a corporate feel, more advance thought is being given to the future, the threats and opportunities available and therefore how a firm’s strategy is developed.

Acquisitions often form part of a firm’s medium or longer term strategy, whether through acquisition of an entire firm, in part or simply through the acquisition of assets such as work-in-progress. Being part of a firm’s strategy is one thing but making them work and be successful in the short and longer term is a real test. Being the only strategy therefore is a sure fire way to standing still, resulting in the financial and personnel challenges that then inevitably brings. It cannot just be about the numbers and aiming for the two plus two equals five.

Culture and People

Research shows that almost a half of all transactions fail to meet expectations for cultural reasons. So, perhaps it is not about the firm but about the people. A law firm is a people business, whether through the ownership and the people employed or whether through the end user of its services. You cannot ignore the people element of a transaction and what they need in order to be able to contribute to making an acquisition successful – on both sides of the deal.

Communication at every stage will be critical. Whispers and rumours will be afoot and heading these off in advance can only help smooth the transition. A key risk will be loss of people, including leadership and management; this can create great uncertainty for employees and they could follow. Whispers in the profession can lead to competitors seeing an opportunity to sweet talk clients.

The combined culture of the firm will be important to understand for all involved. Do the cultures currently align? If not, which firm is the dominant and will it be this culture that wins through? Is that the right answer and who and how will they make this work?

Change can be a barrier for people especially if they feel vulnerable. Getting them on side early enough will be important; however depending on the persons involved, the stage at which they are made aware of the proposed or impending transaction will matter.

There will be a need to address upfront who will form the future leadership and management team. Do shared roles really work? For example, two managing partners. The partners need to like and respect each other, understanding each other, reporting responsibilities and lead by example. Will there be a board and how many from each side will it comprise? When it comes down to it, people have pride in their titles and this can be a sticking point. Further, the name of the combined firm will be high on people’s agendas. Dealing with these politics at an early stage will avoid unnecessary time and cost at a later date, which can inevitably lead to a breakdown in negotiations totally.

If there are multi sites post transaction, how will the reporting work? How will the culture alignment across various offices work?

Due Diligence

Therefore, and not just for financial reasons, detailed due diligence is critical to achieving a successful transaction – on both sides. Getting underneath the reasons for the transaction will drive each side’s focus for diligence. These might include competitive advantage through market share or wider service offering, geography, client relationships amongst other reasons. Financial reasons will always be up there, driven by the on-going desire for increased PEP, though these should not be the focus. Understanding the financial impact will still be important however.

Going back to why a firm wants to enter into such a transaction – if the firm is struggling in some way, then it is also likely going to struggle to have a significant voice at the boardroom table moving forwards. If there are internal issues to be resolved, then these should be dealt with before diligence commences as they will be highlighted and used as a mechanism for driving down ‘price’; for example, old debt or work-in-progress that holds no value, internal disputes, poor claims history etc. When I refer to price, often in law firm transactions there is no price unless it is a clear exit mechanism; however, resulting equity points, for example, could be reduced compared to others.

A consideration, which may depend on the size of the transaction, will be to who actually performs the diligence. There should be financial and non-financial diligence performed, with experts carrying out the work. It may be that an element of this can be performed in-house; however I suspect that a great deal of diligence for two law firms to a transaction is performed by professional advisors. In a scenario where both firms have the same advisors, there will need to be a discussion as to how this conflict is resolved.

Project Management

Throughout, from initial conversations through to diligence, transaction day and beyond, project management should never be underestimated. There are so many stakeholders, which generally results in an increasing amount of internal politics, that a formal project management team with a respected leader is essential.

Initial conversations will need to be confidential and managing that process will always prove difficult. Meetings will need to be held off site but not in a local hotel or coffee shop where other professionals and clients may meet. Risks will need to be considered at every stage of the project.

Agreeing on timelines, deliverables, accessibility and availability will be vital to being able to progress as both sides wish. Ensuring there is commitment to delivering will be key however it should not detract from the day job of leading or managing the existing firms nor delivering to clients.

The project management team will require a variety of skills other than project management! Areas such as IT, infrastructure, property matters, finance for example. These roles need to be assigned early in the process, skill gaps identified and resources sought to fill them. Undertaking such a project in the right way is not inexpensive.

Funding

Whilst I believe that financial reasons should not be the driver for a transaction, understanding the financial impact will be very important.

There is the risk, through management being distracted, of not focusing on each individual firm on the lead up to completion, which could result in a loss of clients, income, profit and key talent. Such impacts will undoubtedly change the structure of the deal on the table. This validates the need for a focused project management team who can oversee and deliver the transaction aside or over and above the day job.

Funding will be an issue at some stage and will need to be addressed. Do the combined financial forecasts indicate the requirement for additional funding in the short to medium term and where is this going to come from? If the same bank is involved on both sides, understanding their appetite for the combined firm going forward will be vital, together with potential additional funding.

Referring back to partners working together, understanding each other’s personal financial position will also be important for a transaction to be successful. Whether partners have savings or equity to inject could become an issue.

What if the transaction doesn’t materialise?
Simply, it’s back to the drawing board on strategy. Understanding why this transaction didn’t work will be important to be able to draw experience, make changes and establish guidelines for future potential transactions. Reverting back to the drivers for entering into such a transaction should not be overlooked.

What if it does happen?
Hopefully, this is fantastic news and everyone is on board, including clients, as to what the combined firm is able to deliver, matching the initial reasons for each respective firm to enter into this deal, which no doubt will have taken months, if not years, to get over the line.

The hard work now begins in ensuring it does deliver. The project management team will still be vital to provide focus on this, enabling the leadership and fee earners to focus on quality service delivery and financial results in what may be a new office with new infrastructure. Settling in time can be minimised through an effective project management team.

In conclusion, there are so many aspects to consider in striving to get a deal over the line and for it to be successful, delivering all that was hoped for. Communication is the one word I would use to facilitate all of this; communication at all levels, internally and externally but this needs to be managed and, yet again, validates the undoubted need of a skilled project management team.

Helen Clayton – Head of Corporate Services

The PM+M Team Go The Extra Mile In Support Of Tommy’s Charity & New Start

Helen Clayton & Faye Hughes

Helen Clayton & Faye Hughes

On the 10th April, Helen Clayton (Corporate Services Partner), Faye Hughes (Marketing & Business Development Manager), Katherine Sime (Paraplanner) and Dan Hill (Marketing Assistant) took on the MLP Law Greater Manchester Marathon Half and Half Corporate Challenge in aid of Tommy’s charity and New Start.

Tommy’s fund research into pregnancy problems and provides information to parents. New Start is a charity set up to provide financial assistance to Wythenshawe Hospital Transplant Fund. Both charities are very worthy causes and have special meaning to the PM+M team.

Everyone achieved a fantastic time and raised a total of £901.20 to be split 50/50 between the two charities. Donations to both charities can still be made until 31st May by clicking here. Thank you to everyone who has contributed to our fundraising efforts so far. Your donations are greatly appreciated.

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Pension ISAs

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In advance of the Chancellor’s 2016 Budget statement there was widespread expectation that tax relief on pension contributions would be reduced. However, with the EU debate raging, the Government decided against making any controversial changes – at least for the time being!

What did happen was that the Chancellor announced a new variant of the Individual Savings Account (‘ISA’) which some are suggesting could in the long term supplant pensions as the principal means of saving for retirement.

The Lifetime ISA (LISA) will be available from 6 April 2017 to people aged between 18 and 40 and will include a savings incentive which is not provided by standard ISAs. In contrast to pensions, where contributions can be made regardless of age, investment in LISAs can only be made to LISAs up to age 50.

The maximum permitted contribution will be £4,000 a year. The Government will add a 25% bonus meaning those investing the full £4,000 will receive a top-up of £1,000. Spouses could each contribute to their own LISA and qualify for the bonus.

Apart from providing a source of retirement income after age 60, the LISA is designed to assist first time buyers to purchase a home with a value of up to £450,000.

Penalty-free withdrawals will be permitted from age 60 onwards or at any time if used for a deposit to purchase a house. In any other circumstance, the Government bonus and any growth in its value will be lost and a 5% penalty imposed.

Concerns are already being expressed that the LISA may discourage the lower paid from contributing to workplace pensions.  There is also an apparent conflict with the ‘Right to Buy’ ISAs which were announced only a few months ago. ‘Right to buy’ ISAs do appear less attractive but transfers to LISAs will be permitted.

Standard ISAs 

The annual ISA savings limit will rise to £20,000 for all adults from April 2017 but in 2016/17 will remain at £15,240 in 2016/17.

Antony Keen – Wealth Management 

PM+M Wealth Management Ltd is authorised and regulated by the Financial Conduct Authority.

SME Values On The Rise

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Recent data indicates that multiples being paid for SME businesses is increasing. Clearly this includes a large range of deal sizes and different industry sectors, but this is excellent news for business owners considering their exit options. The Small and Medium Enterprises Valuation Index issued by the UK200 Group indicates the mean P/E (Price / Earnings) multiple was 9.6 at November 2015 compared to 7.3 at November 2014.

Achieving a successful disposal requires planning to ensure the business is well positioned to achieve its full value. In general the longer the length of time available to plan for a sale, the better the outcome. There are however a number of areas within a business which may only require a few simple changes, that in turn lead to a significant increase in the value achieved on a sale.

Expert advice should be obtained on the areas to consider when there is a relatively short amount of time available before selling. These simple changes can increase the overall value of the business without impacting on the day to day operations. When you consider that many businesses sell on the basis of a profitable multiple, a £1 increase in after tax profit equates to an increase in potential value of £9.60 based upon the above P/E average.

There are currently many trade buyers with cash resources, who are looking to make acquisitions. Furthermore there are debt and equity providers with funds that require lending and investing. The combination of these are leading to more potential buyers and so if you are thinking about your exit strategy, my advice is…

Get on with it.

Tim Mills – Corporate Finance Partner

Family businesses often give rise to issues and opportunities not found in other companies. The PM+M Corporate Finance team are hosting a seminar to provide you with valuable information and simple, adaptable methods to increase the value of your business, whilst overcoming family and non-family issues.

Date: Wednesday 20 April 2016
Time: 8am – 9am (breakfast will be included)
Venue: PM+M, Greenbank Technology Park, Challenge Way, Blackburn, BB1 5QB

To book a place on this seminar, please email seminars@pmm.co.uk or call the Marketing team on 01254 679131.

New Legislation Affecting All UK Private Companies & LLPs – Effective 6 April 2016

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Companies have always had to maintain statutory Registers of Directors and Registers of Shareholders, but now there is a new register that has to be created and maintained for every UK private company and LLP – and in some cases it will be lot more difficult to identify who should be included on the new register.

A new “Register of People with Significant Control” (or PSC for short) has to be created and maintained and the information from the register delivered to Companies House annually. The information available to the public is also more detailed than previously required for shareholders – eg Age, Nationality, Service address, region in the UK they usually live.

For most single companies owned by individuals the people to include on the register will be readily identifiable.  If you own more than 25% of the voting shares of the company your details will need to be included.

However there are many cases where identification of the PSC may be more difficult, including

  • Companies within groups
  • Shares held by Nominees on behalf of others
  • Companies owned by overseas companies
  • Shares held by Trusts
  • Shareholder agreement provisions can change who needs to be included
  • Joint shareholdings or where shareholders have a joint arrangement between themselves
  • Consideration of impact of unexercised share options
  • If an individual has “significant influence” – even if they own no shares at all

For example if a UK company is owned by an overseas company, the UK company directors now have a legal obligation to take reasonable steps to identify who controls the overseas parent.  This includes serving notices on anybody they believe may know who controls the overseas parent and, in extreme cases of no response, potentially the directors can impose restrictions on the shares – for example cease paying dividends on those shares.  It’s a criminal offence not to respond to notices issued within 1 month or not to confirm your details, if you are a PSC.

The PSC register is one of a number of changes to the Companies Act 2006 brought about by the Small Business, Enterprise and Employment Act 2015.  The aim of the Act is to create greater transparency in the ownership and control of UK companies to help in the fight against money laundering whilst increasing trust in UK companies.

Companies without any PSC

The PSC requirements apply whether your company has any PSC or not.  If the company has taken all reasonable steps and is confident that there are no individuals or legal entities which meet any of the relevant conditions in relation to your company, the company must enter that fact on the PSC register.  The register should never remain blank.

Changes to the Annual Return from 6 April 2016

You may or may not be aware of the changes to the filing of Annual Returns at Companies House going forward.

From 30 June 2016 the Annual Return is to be replaced by a Confirmation Statement which will detail similar information as the Annual Return.

UK companies and limited liability partnerships will also need to provide the information from their new PSC register to be filed with the central public register at Companies House from 30 June 2016 as part of the annual Confirmation Statement (which is replacing the Annual Return).

For more information on the PSC guidelines and requirements, please contact Andrew Cowking at andrew.cowking@pmm.co.uk or Anne Ramsden at anne.ramsden@pmm.co.uk or call 01254 679131.

FRS105 – Should You Be An Early Adopter?

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In December 2015, we blogged about the new optional accounting standard, called FRS105, which is for micro entities and how their company’s accounts are prepared and filed at Companies House.  For those companies that qualify to use this new accounting standard, we consider here whether it’s worth adopting this new set of accounting principles early.  As a reminder,  while it comes into force for accounting periods commencing in 2016, it can be adopted for the 2015 year end.

A decision for directors and owners of many small companies will be whether to stick with the current accounting standards and methodologies of preparing the company’s accounts for one last year, or whether to adopt the new methodologies early?

One benefit of early adoption is the reduced amount of information in the accounts that will be on public record. For example, the format of a balance sheet will be condensed to just display the main headings such as Current Assets and it may mean that accounts filed at Companies House will fit onto one single page.

Unlike Companies House, at the moment, HM Revenue and Customs does not offer the option of filing the CT600 (Corporation Tax Return) in a paper format. HMRC are preparing to upgrade its electronic system in April 2016, at which point the new format FRS105 accounts can be attached to the CT600 submissions.

If you prefer lower disclosure requirements that FRS105 can provide,  then early adoption could be better for you.

For more information or advice on FRS105, please email Helen Clayton on helen.clayton@pmm.co.uk or call 01254 679131.