Fox Hayes fall offers hard lesson in capital management
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When Leeds firm Fox Hayes went into administration two weeks ago, the rate of its business decline was in direct contrast to its prior mercurial growth.
When Leeds firm Fox Hayes went into administration two weeks ago (TheLawyer.com, 19 January) the rate of its business decline was in direct contrast to its prior mercurial growth.
A little over a decade ago Fox Hayes was a traditional Yorkshire firm with 21 employees and a commercial and private client practice. By last year, as a result of its investment in a volume conveyancing business, it had grown to 200 employees.
By embracing new technology and a commoditised business model, the firm reflected the transformation that its home city had undergone, as it changed from a deteriorating manufacturing centre into a bold financial and legal hub.
Fox Hayes’s expansion saw it take on new offices in Leeds city centre befitting an upwardly mobile business – 22,500sq ft of custom-made space. The partnership, which doubled in size between 2006 and 2008, was enjoying unparalleled prosperity, and in 2007 the highest paid partner took home £310,181.
Now, just six months after Fox Hayes announced a turnover of £10.1m for the 2007-08 financial year, the firm, which is more than a century old, has gone into administration. Following up to 43 redundancies before Christmas, a further 115 people have lost their jobs.
All former client matters have been sent elsewhere. The firm’s commercial and private client business went to Lupton Fawcett in early January prior to the administration. A conveyancing business called Advantage Property Lawyers, which was established by former employees on 17 November 2008, has picked up the remaining conveyancing work and is temporarily renting part of Fox Hayes’s former offices.
Comments have flooded in to TheLawyer.com from former employees. The focus has been on how managing partner Philip Drazen, together with a team of almost 40, including most of the partners, “abandoned ship” for Lupton Fawcett just days before the firm went under. The sense of dismay is understandable, the resentment palpable.
One reader posted: “I’m 12 weeks pregnant and I am terrified about how I will cope without a job. I haven’t been paid since 22nd December, most of which went on bills/mortgage and Xmas. I have only £7 in my bank account. I lay awake at night worrying about what I am going to do.”
Whether Drazen would have been able to find jobs for around 115 residential conveyancers is questionable, and he did not return calls or emails for comment on the matter.
From a business perspective, the most striking management errors seem to have been the failure to diversify out from a narrow business model while operating a highly geared business.
Fox Hayes was a panel firm for Legal Market Services (LMS). A glut of suppliers and lower-tier work meant that the volume business was working with margins of under 10 per cent. And Fox Hayes had not invested in counter-cyclical volume business lines such as litigation and repossession work, leaving it particularly exposed.
Fox Hayes’s borrowings and cost base were comparatively high. In 2007, when the firm had a turnover of £8.9m, its total debt and overdrafts came to £2m. Employee costs were £5.2m and the firm paid an annual rent of £260,000.
According to one former employee who posted on TheLawyer.com, management’s enjoyment of working lunches could have added to the cost base.
“Whilst the fat cats sat in their offices, or lunched on the company, it was those who are now left with nothing that kept the firm going and making its massive annual turnover,” the ex-employee wrote.
Indeed, in a November 2003 interview with The Lawyer, Drazen said he took “three members of staff out for lunch once a week”, adding: “There’s no room for the big firm mentality of slogging in the office forever to get brownie points.”
It is unlikely that the cost of a few lunches every month would have influenced the decision to put the firm into administration, with the sudden drop-off in bulk conveyancing work a far greater contributing factor. But for those who have lost their jobs, that thought will provide little comfort.