20 March 2023
If you’re the leader of a law firm, you’ll know that for all your ambitious growth strategies, the ones that keep you up at night, those grand plans aren’t worth much without cash investment. And like in any sector, money talks. Yet when it comes to raising Capital – there are certain hurdles afforded to law firms that don’t always apply to other professional services.
Banks and other lenders can be perturbed from investing in law firms by well-publicized failures that happen in the legal sector from time to time, as well as any volatility in the economic climate. And such factors aren’t helped by the fact that in recent years the UK legal sector has been so susceptible to reform, making it doubly difficult for lenders to get comfortable with the stability of legal models.
As the leader of the Spirant Group – I know firsthand the challenges that come with seeking investment for legal companies. Back in 2019, I set out on my own journey to acquire capital for the Group which would allow us to continue to build our international alliance of companies in the legal and legal tech space.
To be frank, I was absolutely clueless. I approached banks, investors and private equity firms in the UK, USA, Australia and the Middle East. I had no luck whatsoever. My sales patter wasn’t hitting the mark despite the fact that my Group had a strong financial track record, an exciting business plan and a capable leadership team.
One meeting during this frustrating couple of years sticks in mind. It was with a bank in Sydney, which I was visiting on business. The discussion went as follows,
Banker – “We’ve reviewed your numbers and we like the business however we can’t lend to you at this stage”
Me – “Ok, why is that?”
Banker – “You don’t have enough cash reserves”
Me – “That’s why I am seeking to raise capital”
Banker – “I understand but until you have those cash reserves you fall outside of our risk profile”
Me – “Right. So when I have those cash reserves, do I come back to you then?”
Me – “But I won’t need capital then because I’ll have enough cash”
Banker – “We can discuss that more when you fit the risk profile”
And on it went.
What I can see with hindsight is that the deck which I was presenting to investors just wasn’t ticking their boxes. This combined with my inexperience in terms of the elevator pitch meant that they were looking for ways out of lending to us.
Thankfully for me, it was during this time that my path crossed with Mark Farlow. A seasoned pro when it comes to raising investment for law firms, Mark is a Partner at FRP Advisory based in London’s West End. As a corporate finance specialist, FRP advises law firms aiming to raise funds to fuel their business plans.
With access to all financial markets, Mark and his team are fully independent of banks, private equity companies, and other lenders. And once clients arrive at their door looking for support, Mark is charged with leading the fundraising, bringing interested lenders to the law firm, and assisting in the negotiation of terms.
Three years ago, that’s exactly what Mark did for me. Helping Spirant Group to secure the investment we needed to achieve the before-mentioned goals. Having enjoyed working with Mark enormously, it was a great pleasure to invite him onto Episode 3 of my podcast From the Courtroom to the Boardroom, recorded in early February of this year.
I wanted to hear from Mark on whether there is any kind of secret formula when it comes to firms seeking investment. A set of laws for attractive investment, that if followed – could be the ticket to a cash injection and a skyrocket growth plan. Turns out – maybe there is…
First things first though, there is some scene setting to be done. If you’re reading this as a leader of a business, then like me – you’ll have a sonic hearing when it comes to the semantics of recession. And like me, you’ll know that’s been a pretty noisy place in the last few months. So as a Corporate Finance Advisor with more than 30 years under his belt, I wanted to know what Mark thought of the current economic climate in Britain. Probing whether things really are as bad as politicians would have us believe.
“A friend of mine taught me a new word two weeks ago: Bifurcation,” Mark began in response. “And when I looked it up in the dictionary what it tells me is that for good opportunities there’s lots of money out there. And for the average and the less well-thought-through opportunities, they will struggle to raise money.”
But don’t hold your breath just yet. Because as our conversation continued, it transpired that for all the bifurcation in the world – a good idea is only the start. Securing law firm investment means following a set of five fundamentals that Mark has himself finetuned over his years of practice.
As you’ve already been reading, there is no shortage of money when it comes to a good investment. However, investors are time-poor – even when it comes to the brightest of ideas. “Investors are generous with money,” explains Mark, “but they’re mean with their time. So, you must hook them in early.”
If a law firm fails to explain what they do, why they exist, and what makes them special within two minutes, we have it on good authority from Mark that lenders will almost certainly lose interest. Think of it as your elevator pitch, keeping it simple, to begin with, and hooking in the audience. “It’s a story to catch their attention,” Mark told me, “It’s not a disclosure letter at this stage!”
2. The Growth Plan: How can scale be achieved?
Lenders want to be able to see what the law firm will do with the investment money to grow and scale. As the leader of a legal business, you need to be able to articulate what are you going to do to grow value over time.
My recommendation here would be to look carefully at your business and ask “If money were no object, what service lines would I grow and at what rate?” For sure you’ll have to come back to reality when the funding proposal is constructed however it’s a great starting position.
“A private equity investor is looking for significant growth,” says Mark. “They need to see exactly how the business will look bigger and more profitable in four years’ time.”
3. The Leadership Leverage: What is your senior management structure?
“The number one turn-off is when we have to put decisions to a vote,” explains Mark. “So, unless you’ve got devolved authority to a CEO or leader, it’s going to make life very difficult for equity investment and significant growth.” Private equity investors are all about making quick decisions and so if those decisions must pass through the corporate bureaucracy of several sign-off processes and board meetings before being approved, that’s going to create a stasis that isn’t investable.
That’s not all either. Ultimately investors are putting their money behind those leading the business, so surely the stronger the leader, or the stronger their mandate, then the more attractive the proposition is to investors? I put that question to Mark, “There used to be a saying: there are four important things in a management buyout: Management. Management. Management. Management.”
“And that’s still true. We can have the best business in the world but if the management doesn’t inspire then it’s a difficult fundraise or a difficult sale.”
4. The Performance Record: How seriously have you invested in technology and data?
What I learned from working with Mark three years ago raising investment for Spirant Group, was that before you hit the capital trail, you must make sure that your technology and data can stand up to scrutiny when probed by due diligence.
Often businesses are reluctant to invest in tech, but that resistance can have a detrimental impact when you then look to grow. Any kind of stakeholder whom you are inviting to participle in your business will always have a great interest in:
“That’s probably the second thing we check,” said Mark confirming my theory. “These days you’ve got to have the data, not just for that given period but also data that shows growth over time. Make sure everything stands up as it should, otherwise it will undermine any value you’ll later add.”
5. The Stability Factor: How consistent are your revenue streams?
This is a tricky one as you can’t always change how your business generates revenue. Law firms with ‘event-based’ income, could have more difficulty raising capital than those with proven recurring revenue from longer-term contracts.
But whilst your revenue setup is something to bear in mind as you approach investment rounds, internal factors aren’t everything. “The first private equity deals I was involved with in the law sector were in the claims management space,” Mark recalled during our conversation.
“You could see good working practices, good visibility of cases, a steady pipeline, and consistent accident rates. What you’d then have would be a regulator coming in and changing the goalposts every few years. So, the challenges in that instance weren’t internally generated but externally.” And therefore, out of your control.
There’s no doubt in mind that your ability to demonstrate an ability to mitigate disruption which will/may be caused by external factors could be pivotal to whether you are able to raise capital for your business. It is important to acknowledge these risks transparently and tackle them head on. Any investor worth their salts will know about the risk and will want to hear how you plan to deal with it.
Even equipped with those five fundamentals from Mark Farlow, Partner at FRP Advisory, law firms will need guidance to raise investment funding. “You wouldn’t go climbing the Himalayas or entering the Amazon jungle without a guide. And I wouldn’t go into the financial markets without a guide either.” Sound advice indeed, Mark.
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