Partners check the fire exits

The heat is on for small firms without succession plans

The recession after the global financial crisis of 2007 brought widespread malaise to the business community, and the legal profession has not been immune to infection. Greatly reduced demand for conveyancing services as the property market stagnated was just one pressure faced by law firms. Other factors included tighter Legal Aid purse strings, a fixed-fee culture and new legal services providers with alternative business structures.

How much pain is the profession feeling and is it evenly spread? For evidence of financial suffering, we need not look beyond the summary of the Law Society paper Private Practice Solicitors’ Salaries 2012. The figures derived from a wide sample of interviewees did not fully accord with data compiled by the Office for National Statistics, but the downbeat message on pay was clear enough.

Between 2008 and 2012, average median earnings across all private practice grades decreased by 3.6 per cent, or 14.7 per cent if the effect of inflation is counted in. The earnings hit was greatest of all, however, for equity partners, whose inflation-adjusted drop in drawings was a massive 27.2 per cent. The figures also confirmed median earnings at sole practices of around half those at practices with 80-plus partners.

Equity partners’ pips squeak

One conclusion to draw: equity partners in sole practices and other small firms have been squeezed, to quote former Chancellor Denis Healey, “until the pips squeak”. Other evidence of distress is mounting, including a public warning from the Solicitors Regulation Authority (SRA) on 7 January to firms that still did not have their new professional indemnity insurance in place. Such firms “should now have closed”, the SRA declared.

So, how can the small legal firm survive? Anecdotal advice from my professional contacts: develop a niche or be part of something bigger. Otherwise it looks like curtains. For some small firms with viable succession plans, there may be new blood waiting, but taking on the cost, responsibility and shackles of equity partnership is looking less and less attractive to ambitious young lawyers. Fleet footedness is now key to success in other careers, so why step onto a legal treadmill?

Sadly, there are no easy options for ageing partners without successors to take the practice forward. With professional indemnity insurance (PII) already putting some firms under pressure, shutting-up shop may look tempting – until the question of run-off insurance rears its head. PII cover is based upon the timing of a claim, not of the legal service that led to it. Any claim arising after cessation of business requires costly (though decreasing) run-off cover for up to 15 years, assuming this can be had.

Against this background, the plethora of small law firm mergers and acquisitions is unsurprising. Such exit strategies can allow retiring partners to make a clean financial break, though some opt for continued involvement as consultants. Anyway, it is decision time for thousands of older partners and their potential successors, before their firms’ remaining value is eroded by hostile forces. Their decisions will influence the future shape of the legal profession and how its services are delivered.

Andrew Flannagan is managing partner at Attwaters Jameson Hill