In a blog for The Cashroom (Specialist Accounting for Law Firms), Andrew looks at current challenges facing the legal sector
The Natwest Legal Report has just been published – an eighth deep dive into the sector – painting a 12 month picture of struggle and challenge for practice owners, but its mood is one of cautious optimism.
Reflecting in detail on the experiences of 40 law firms, its headline findings revealed a 50% take up of CBILs and Bounce Back loans and almost all firms taking advantage of the Government’s furlough scheme.
It touched on difficulties faced by high street firms and sectoral pressures – the explosion in the domestic property market and impact on the corporate M&A sector – but it concluded that most law firms are in reasonably good shape.
Government support, of course, can mask wider funding issues that have been exacerbated by Covid and the general trend of larger banks moving away from the sector could make life difficult for law firms in the longer term – especially those in financial distress.
Practice owners are now looking at the secondary lending market and while there are a number of vibrant emerging funders in the alternative space, they do tend to be more expensive and asset-based and, more often than not, require the security of a personal guarantee.
There are two other very important factors which will impact the longer-term health of the sector, one is wage inflation and the other is the cost of professional indemnity insurance.
Wage inflation is a challenge
The pandemic has certainly made people think hard about their careers in the sector. We are seeing senior professionals in firms saying no to offers of partnership, demands coming in round flexible working and others just wanting a lot more money as the well-skilled become rarer to find.
There is a real push on getting more people into the profession, but good candidates are scarce. This is prompting surprising offers – especially from US firms – for newly-qualified lawyers of up to £150k, which is giving even the London-based Magic Circle firms a run for their money. We are seeing this trend in Manchester too, which adds pressure to delivering profit.
Serious hardening of the PI insurance market
The increasing cost of professional indemnity insurance premiums (PI) is also keeping practice owners awake at night. Most law firms renew this annually in either March or October. Last October there was an average 30% increase in premiums, which is a serious hardening of the market that could take weak firms down.
A lot are now scratching around to get their PI in place. There must be minimum cover of £3million for the majority of firms. The PI market has also seen a significant reduction on those insurers who are offering ‘top up’ cover to cover claims in excess of £3m.
So while law firms have tackled the specific challenges of Covid, there is plenty to keep practice owners focused on in the future and they need to keep their accountant advisers close as they navigate the immediate post-Covid landscape and look further ahead.
Value of help at an early stage
Here at Leonard Curtis Legal, we place real focus on rescue and recovery rather than insolvency, so we’d like to think that these sort of challenges won’t take beleaguered firms down.
Fortunately, more and more partners in law firms are now starting to ask their professional advisers for help and at an early stage. And if they’re not yet, we hope they soon will be.
Accountants tend to be their first port of call, but often the assistance required in these unprecedented times is specialist and non-core, requiring a wider multi-disciplinary approach that’s best able to support all areas of the business.
By approaching us, law firm partners and their accountants gain invaluable access to a much wider range of specialist solutions including; corporate restructuring, personal debt advice, equity and debt finance raising for SMEs, cashflow optimisation, property solutions and legal services. This puts all clients in the very safest of hands.
Our legal sector specialist expertise
We’re specialists in the legal services sector which, in the past 20 years, has seen significant growth. However, it’s also seen change and for some, many challenges have presented risks for the business. In some cases, these risks have also extended to the individuals behind these firms.
But we understand the fast-paced changes to the regulatory environment. As an owner-managed business ourselves – Leonard Curtis Business Solutions Group employs over 240 people across 18 regional offices – we have the same challenges. But we also have the expertise to navigate – and support our clients – through what can sometimes be tough times, and out the other side.
Having directors who have previously held senior management positions within large law firms is a real attraction for our clients, as it means we have a thorough understanding of how companies – whatever their scale and scope – operate and the pressures they face. As a result, our client portfolio includes law firms, solicitors, barristers, advisors to the sector, banks, specialist funders to and investors in the sector.
How we work
Upon appointment and case review, we provide Group-wide advice on the financial overview, WIP, debtors and client engagements. We also undertake reviews on the structure of the firm – LLP, company, sole practitioner and ABS, for example – all require a tailored approach.
We also enjoy strong relationships with key stakeholders, banks, litigation funders and other lenders, which means we have access to the most appropriate solutions for each firm. We most certainly don’t adopt a ‘one size fits all’ approach here.
And we don’t just work with established firms experiencing any level of financial distress. We also provide consultancy advice for start-ups, through to medium to large law firms. We have strong credentials in securing investment for new entrants into the market, as well as researching – and then integrating – law firm mergers and acquisitions.
For further information, contact Andrew Gregory on Andrew.Gregory@leonardcurtislegal.co.uk or visit https://www.leonardcurtislegal.co.uk/.