Viv Williams explores the opportunities available and pitfalls to avoid for firms that see their future as a multi-disciplinary practice, and predicts what lies ahead
The initial wave of over 100 applications for alternative business structure (ABS) approval has been received by the SRA. Part one of the application process seemed relatively painless; then part two arrived with its 160 pages of forms which, incidentally, do not include the relevant notes to each section!
Becoming an ABS is looking daunting for many smaller firms that already have enough on their plates. Many may be
put off the process – but what then will be the perceived benefits for those who persevere?
One of the big challenges for the future will be access to capital, with banks now regarding the legal profession as a high-risk sector. As we all know, we have too many solicitors in too many practices reliant on time recording and generally giving a below-par service to their clients. Harsh, I hear you shout. Controversial? Maybe. But the many ‘secret shopper’ reviews I see demonstrate the profession as a whole still does not provide good client care and is extremely poor in converting leads into real business. Phone calls not returned and lunch time closures still plague our high streets and it is these firms that will have the greatest difficulty in surviving the new order. In fact we expect to see, for the first time in years, a gradual decline in the UK’s 10,961 legal firms.
However, with deregulation of the legal sector the market will expand, although perhaps not in line with the optimistic US view that the sector could double in size. The big question is: who will be eating your dinner? Will this expanded legal market remain the ownership of the traditional practice or are we seeing a move instead to the brands and other affinity groups?
And, if banks are no longer interested
in providing additional capital and increasing borrowings, then how will a law firm gain access to the additional capital required to expand and develop? Herein lies the key to what a multi-disciplinary practice or ABS can crucially offer a legal practice – the capital so badly needed by most firms.
Since March 2009 we have seen 300 firms convert to legal disciplinary practice (LDP) status, generally when a financial director or similar has been given equity status within the partnership. These will automatically become ABSs by October 2012 with the necessary COLP and COFA responsibility clearly defined.
So far ABS applications have ranged from sole practitioners seeking external investment to Irwin Mitchell and the Co-op. At the same time, we have also seen the introduction of significant sums of private equity into the legal sector: QualitySolicitors, Quindell purchasing Silverbeck Rymer, Mobile Doctors and a claims management company providing an umbrella organisation that will avoid the pitfalls of the Jackson review. Progressive Russell Jones & Walker is meanwhile
being acquired by Australian giant Slater
What does this mean for the rest of the legal sector – and to other practices that are considering a multi-discipline approach to a brighter future?
In short, ABS firms are likely to be better financed, better run as a proper business and not treated as a hobby by ‘part time’ managing partners. The low interest rates and the inertia of the banks has allowed many legal firms to continue to trade when, in other industries and circumstances, they would arguably have been closed down by now. This new breed of legal firm will place a greater competitive challenge on those practices that do not adapt to change.
The private equity sector is certainly interested in legal businesses opportunities – the question is what type of business will they be interested in?
The traditional high street practice that runs on a partnership model with profits withdrawn annually is unlikely to attract third-party investment
Anyone who is deemed to be a ‘fit and proper person’ could become part-owner of a law firm. They may come from all sorts of backgrounds although accountants, financial advisers and property-related specialists are the most likely.
Those who choose to invest in a law firm will have to be cleared by the SRA and a business model would have to be agreed which allows for profits to be retained by the new business. This model is certainly not for everyone and many practices that enjoy high profit per equity partner (PEP) may wish to continue exactly as they are.
Others, while earning considerably less than they pay their fee earners with all the additional responsibility of being a partner, will choose to remain a traditional partnership perhaps seeing this as a ‘safe option’. Good luck – you’ll need it! There are significant challenges ahead for those firms that will simply not embrace change: I estimate that as many as 75 per cent of our current legal practices still don’t understand this and think the issue will simply go away. Change is here to stay: ignore this at your peril.
We are already seeing a huge variety of interest in a multi-disciplinary model from sole practitioners who are looking for investment from estate agents and have applied for ABS status. Meanwhile, we know a two-partner practice that has applied for ABS status in conjunction with an independent financial adviser.
What both these practices have in common is a sound working relationship with an existing cross referrer of work. Sharing the vision of investment in their business model means a share in likely increased profitability.
The pitfalls will doubtlessly be ensuring you have the right corporate structure to encourage outside investment – the partnership model simply does not work. More important will be finding the right corporate partner who is willing to invest in your practice – are they fit and proper people and do they see the opportunity that an ABS structure will give them?
Creating a sound foundation
If a traditional practice is looking for investment it is imperative that they build their business model on sound foundations: ensuring that underperforming partners and staff are removed and creating a cash management machine which reduces ‘lock-up’ (the amalgam of work in progress and debtors) to the barest minimum are two essential ingredients in creating a sound base for potential investment. Attempting to secure a cash injection without this foundation will likely result in distrust from your investor.
Samantha Barrass from the SRA has stated that sole practitioners should be looking at the ABS structure to ensure their future development. However, the same incorporation issues are still applicable.
Your corporate structure is also vital in both attracting outside investment and creating your succession plan as younger potential owners are likely to be keen to become directors and shareholders but not wildly interested in becoming equity partners.
Recognising who your clients are should also be part of your strategic thinking: there is no point in providing services to an audience that does not exist and the firms serving a geographical area which is traditionally legal aid should not assume that their clients are all becoming high-net-worth clients overnight! They should instead devise bundled products and services that meet their clients’ needs at a price they can afford.
Once the initial wave of applications and subsequent approvals has been completed I envisage a large number of applications from interested parties who see this as an opportunity rather than a threat. Once we have an understanding from the SRA, once the first approvals have been granted, this could open the door for a flood of applications from numerous quarters.
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