Law Firm Mergers and Predictions for the Year 2020

2019 went down as another record year for law firm mergers.

According to law firm consultants, Altman Weil, Inc., 115 law firm mergers were announced last year. This number exceeds the record-breaking figure of 106 for 2018. But what do the numbers teach us? Did the tendency to merge apply to law firms across the board? Is the merger mania likely to continue in 2020? What was the impetus for record number of mergers? This article breaks down the available data to answer these questions and attempts to give us a glimpse into the future.

Geographic Expansion

The desire for geographic expansion appears to have been a predominant driving factor for merger and acquisition activity in 2019. Last year the South was the most popular destination for law firms seeking practices to acquire. Approximately 27% of the mergers involved a law firm in a Southern state. In 2018 the Middle Atlantic region attracted the most acquirers. The state with the largest number of firms announcing mergers was California, with nine, followed by New York at eight, and Florida with seven.

A surprising number of firms — six — were acquired from the State of Minnesota last year; four more than were acquired the previous year.

Mergers By Size

Smaller law firms tended to be a party to most large firm mergers in 2019. Last year a whopping 57% of mergers involved a law firm of two to five lawyers. The second most popular target for mergers had between six to 20 lawyers. The fewest number of mergers involved law firms with more than 100 partners. Five percent of mergers featured a merger partner with over 100 lawyers.

The large number of small firms' acquisitions is likely attributable in part to the tight labor market. According to Kent Zimmermann of the Zeughauser Group, law firms are competing hard for talent and merging can help them deepen their bench.

The Economy

The U.S. economy is going on a record 11-year expansion and appears to be poised for continued growth. This trend comes as a surprise to some economists who had projected a slowdown starting in 2019 as a side effect of the recent US-China trade war.

Federal Reserve Chairman Jerome Powell commented in his December 2019 Federal Open Market Committee (FOMC) statement that the labor market remains strong and that economic activity has been rising at a moderate rate. In addition, the Chairman decided to leave the benchmark federal funds rate unchanged. He said the Central Bank will not move on interest rates unless it sees a significant and persistent move in inflation.

Trending with the broader economy, the U.S. law firm industry had another year of strong revenues in 20191. A report by Citi Private Bank's Law Firm Group and Hildebrandt Consulting predicts law firm revenues to continue to grow at a steady rate, between 5.5% and 6.5%, over the course of this year.

Conclusion

Economic indicators seem to suggest large firms will continue to merge at record pace in 2020. Interest rates should remain unchanged for the foreseeable future. The labor market is expected to remain tight, fueling incentives for firms to merge to compete for talent in the labor market. The economy remains strong and law firm revenues are predicted to continue growing. If you have questions about how a law firm merger or acquisition can enhance your practice, please reach out to your local Withum Advisor.

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Marcus Dyer is a Manager at Withum, an advisory, tax and accounting firm. A CPA, he has over 10 years of experience in providing tax advisory and compliance services to law firms. He has years of experience in drafting and negotiating the terms of a wide array of transactions including, but not limited to, buy/sell agreements, reorganizations, swap agreements and indentures. He has his MPA degree with a concentration in public finance from University of Texas at Austin, his JD degree from University of Pennsylvania, and is admitted to practice law in the Federal District Court and the United States Tax Court.