How corporate governance could be the only solution

One of my clients is a traditional partnership consisting of eight very nice people who do not have a clue about managing a business. They are, by the way, exceptionally talented solicitors. The practice is run in a collegiate, committee-led way but with four of the partners due to retire in 2017, it has now reached the point of no return.

They have experienced a night of the long knives in the past and a culling of older partners happened just a few years ago. It has left a bitter taste when planning the future. The business is financially secure but the crisis lies in no exit strategy or any succession planning. Just how many firms fall into this category across the UK?

In the past, when partners looked to retire from their firms, there were always a number of younger partners willing to take their place – arranging a partner capital loan to purchase the equity of the retiring partners was the natural route to succession planning. However, having ‘interviewed’ the younger predominantly female staff it was apparent that that without exception, none of them were prepared to invest into this traditional partnership model.

However, if we were to change the partnership into a corporate structure they would consider investing as a director and shareholder in the new business model.

The aspirations of younger lawyers has changed considerably; they now do not all wish to be partners or owners in the practice. I cannot understand why young lawyers desired to become a salaried partner, just to tell their family and friends they were a partner in a solicitors’ practice. Being a salaried partner gives you all the risks of being a partner - bank borrowings and professional indemnity issues- without the rewards of a profit sharing equity partner.

By incorporating the practice into a limited company structure you could deal with a number of issues in one go. The partnership model is arguably no longer fit for purpose; the partners in the firm become shareholders of the limited company, an operational board of directors runs the company on a day-to-day basis and regularly report to the shareholders. The shareholders have previously agreed with the operational board the parameters within they can operate i.e. expenditure levels, staff etc. The operational board then operates as a board of directors reporting back to the shareholders on their progress.

Firms have to realise that whatever can be processed is being processed with private equity backers, and that conveyancing and probate, for example, will never return to the halcyon days that many solicitors dream. De-skilling and de-risking any process of legal services will happen with the use of technology. Many of the functions currently performed by solicitors could easily be replaced, but what can’t technology deliver?

Back to the corporate structure, we have successfully converted this business into a limited company and the exiting partners will receive their capital back, yet three now wish to remain as shareholders and although they will have no voting rights, they still wish to be part of the future.

As inflation is anticipated to rise significantly, the Brexit vote has had an interesting effect on some solicitors’ practices. There has been a surge of activity in firms I saw five years ago who, having previously decided to retain their independence and continue trading, have now decided the time is right to be acquired or merge with another firm. This could well be a combination of the partners being five years older, but more likely a recognition that the market for independent firms has changed forever. The consolidators and strong regional practices will have a plethora of firms to choose from. If this trend continues it will certainly become a buyers’ market.

There may be no choice for some firms other than to go it alone and apply the incorporation route if a suitable purchaser cannot be found. Finding the right staff who are interested in investing their time and cash into a law firm will depend on how progressive the firm is regarding technology and embracing the current irreversible trends in the way legal services are being delivered to clients.

Viv Williams is legal services director of SIFA

@360legal www.sifa.co.uk