IS IT THAT TIME OF YEAR AGAIN? Christmas is upon us and solicitors must renew their insurance. As a consequence there is increased interest in the prospect of many law firms which, if we believe all that we read in the papers, are forming an orderly queue to file for administration.
The fuel to this fire comes from recent law firm collapses including Follet Stock, Hilliers HRW and Manches in the latter quarter of this year.
Many solicitor practices are under financial pressure and there will inevitably be more casualties along the way. With the benefit of hindsight some of the notable failures could have been avoided if more caution had been shown during the period of growth. But, are the financial struggles facing solicitor LLPs unique to that industry or are all LLPs destined for hardship?
Both businesses have the same structural model, in simple terms, they purchase the time of their employees at one rate and sell it on to their clients at another. They both suffer the same day-to-day pressures, increasing costs and reduced income. The clients are not willing or able to pay increasing fees in this economic climate and the firm needs to be aware of increased competition.
However, while there are obvious similarities, there are also fundamental differences.
Historically the core of most accountancy practices' income will be the fees generated from the provision of services for annual audits, preparation of accounts and tax returns for the clients. This, if managed correctly should repeat and hopefully grow year on year.
These fees can be augmented by more transactional matters such as providing valuations, corporate recovery, business advisory, corporate finance, etc. Solicitors in general are much more reliant on transaction services be it litigation, mergers and acquisitions, conveyancing, divorce or probate for example.
An accountant may lose clients in a recession unless they price themselves out of the market or provide a consistently poor service they should retain their gross recurring fees year-on-year.
Solicitors will, in general, be much more vulnerable to a downturn in the economy. As the recession takes hold the number of corporate transactions will decrease and there is an obvious and well rehearsed effect on the property market with a resulting decrease in the level of transactions. While probate and divorce may be a constant, larger firms are dependent on the commercial business as its mainstay and many developed large teams to deal with these areas.
Of course there are exceptions: those firms in niche markets such as trusts and private client may well have developed some immunity.
Historically in both professions practiced via partnerships and more latterly LLP's, new partners would be expected to invest capital into the business when entering the partnership and you would build the level of capital dependant on your partnership status. Capital can either be invested personally, borrowed or built up from a retention of profit shares over the years. In most cases the firm itself will have borrowings and this may well be secured over the assets of the business.
The stresses come when retiring partners wish to withdraw their capital which, in a mature practice that has gone through merger and or acquisitions, could be substantive. The pressure therefore bites on the firm and the remaining partners, which, in a falling market, could be the straw that breaks the camel's back.
In such times, many firms look to acquisition and or merger to resolve these problems. However, it comes with its own issues: it is difficult to put two bad firms together and make one good one. In addition there are concerns when acquiring legal firms, not least of which will be the duty to retain insurance cover, deal with employee liabilities and a responsibility to clients in respect of old files. All of which could be substantial.
These problems which add difficulty in selling or merging professional practices will probably result in a number of high street firms of both lawyers and accountants essentially collapsing or, given the costs associated with succession and increasing costs of insurance, it may well lead to a number of partners abandoning their practices.
The professional sector is under continued pressure and there will be more failures in both sectors. Merger and acquisition may well be a solution to the problems but there needs to be a realisation on the part of the incumbent partners as to the value of their business and what they can reasonably expect to realise in respect of their capital.
John Dickinson is a partner and insolvency practitioner at CBW
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