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Strongest quarter for new law firm start-ups in nearly three years announced

Smaller boutique practices perform well as SME firms see slow improvement

28 July 2014

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The last financial quarter saw an increase in the number of new 'start-up' law firms suggesting that the legal sector is in recovery mode, according to one of the UK's leading commercial finance groups.

Research from LDF, a funder and credit broker to UK businesses, shows that the net gain of 82 new firms in the last quarter of 2014 was the highest number in over two years compared to the net growth of 83 law firms in the last quarter of 2011.

This follows three challenging years which saw the total number of law firms in the UK fall by 95 in 2013.

The high profile failures of large commercial firms such as Davenport Lyons, Semple Fraser and Cobbetts demonstrate how the low volumes of initial public offerings and mergers and acquisitions activity, has put some firms under financial pressure.

LDF's research suggests that the improving economic outlook has given partners at large corporate firms the confidence to set up their own boutique practices.

Managing director of LDF, Peter Alderson, says: "A lot of big firms have struggled due to the drought in corporate finance and M&A activity so the recent pick up in capital markets activity has been very welcome for corporate law firms.

"We've noticed a big increase in the number of small law firm 'start-ups' recently as senior corporate lawyers, buoyed by the booming economy and high client demand, decide to set up their own boutique firms in areas like competition law and litigation."

High street dynamic

However, there is a different dynamic at work for high street firms. LDF state that many smaller firms have closed over the last year because their profits have been hit by a combination of swingeing cuts to legal aid, changes to the legal costs regime, with fewer cases run on a "no-win-no-fee" basis, and increased competition as a result of the Legal Services Act.

"High street law firms have been going through some very difficult trading conditions over the last year, but there are some signs of improvement," says Alderson. "For example, the resurgent house market has provided a lifeline to lots of firms with conveyancing practices, with the high number of housing transactions creating a steady stream of income even though the work itself is not that profitable for most firms."

Alderson continues: "Huge cuts to legal aid have devastated many firms who were dependent on legal aid work. Law firms have been diversifying away from legal aid funded work for a number of years thanks to slow payment and the threat of cuts to the rates they could charge. When the cuts were finally brought in, many firms that had not managed to build up other income streams have been forced to close.

"Many viable law firms have also had to contend with big payment gaps from clients who may themselves be struggling financially. The bills are paid eventually, but in the short term this means the law firms need to use finance to pay for any short-term spending requirements, like tax bills or rent," he concludes.

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