All flash but no cash

On my list of headlines I wish I had written, but didn't... all flash but no cash... 🙂

It's a good read from Taha & Watmough, based on an analysis of law firm accounts filed at Companies House over the past decade

Whilst firms have pursued top line revenue growth, in the round, it hasn't amounted to all that much when it comes to profitability and PEP, after accounting for inflation

The analysis here is similar to a back of a napkin one I did a year ago looking at PwC's 2024 report and PEP since 2020

Given that very few people seem to be talking about the uneven impact of inflation on firms, it's music to my ears to see a more robust analysis (i.e. it's undoubtedly better than my napkin!)

Beneath that headline, a key reason for the revenue up, but RPL, PPL and PEP flat narrative is the increase in NQ salaries over the period - probably the only group to have actually benefited from that inflationary environment, given the pay compression for more senior roles. And the report is absolutely right to call out the behind the scenes managing of the equity structure as a short term fix (at best) 

Far better to tackle the numerator than the denominator when it comes to PEP

Some aim is taken at law firm management and leadership, perhaps not unfairly, but the high-fliers on table 9 (shown here) demonstrate that not all partnerships are the same, with some firms punching well above the averages for the Top 100 as a whole. 

I appreciate their sentiment that what is the 'right' strategy for any given firm is subjective. Put differently, it's not obvious what Keoghs, TLT LLP, Hogan Lovells and Shoosmiths have in common, beyond an exceptional financial performance and a well executed (but different) strategy

Of the three options presented to improve performance; turnaround, merger and sale, I'll be open with my bias that I tend towards turnaround

It is within firms' gift to address performance and there is a risk that M&A activity is an equivalent folly to the pursuit of revenue growth that this report so aptly calls out

One underperforming firm, plus another underperforming firm often results in a larger underperforming firm that still needs the turnaround

In the zero-sum game articulated in this analysis, I can't help but feel that investors want in on the top half of the league table, but all the sellers are in the bottom half. I query how wide the valuation gap is for investment to work for each party

My own bias to one side - the key considerations for both buyers and sellers on pp29-31 are worth skipping to if you're already familiar with the broader financial landscape painted earlier in the report

In any case, there's something for everyone and well worth a read

Get in touch with Adil or Jonathan if you'd like a copy

Table from page 9 of Taha & Watmough: All flash but no cash.