Lay all your cards on the table and avert risk

Many firms have faced financial risk since 2008/09 in varying degrees, with some continuing to struggle, some that have come out fighting and stronger, and, of course, a number that are no longer here. We have new entrants with deep pockets, consolidators, and niche firms. Cash and funding will always be at the heart of every business.

Two areas where law firms are currently facing financial risks are succession and technology.

In situ partners

Many firms are experiencing succession issues: a certain generation of partner has ?been in situ for many years and, due to a lack of progression, talented people have moved ?on and there is no visible succession, or the talent has been retained but there is a financial viability issue in becoming a partner. Moreover, many firms have succession issues but are not facing them. This is a disaster waiting ?to happen.

Many within the younger generations of partners and future partners do not have the equity or savings to be able to invest in the firm. University debt, minimal equity in property, a lifestyle of spending to the maximum, and a lack of savings limit their ability to invest on day one. Further, banks are significantly more cautious in lending partner capital to individuals, such that the days of asking for a £250,000 partner capital loan and simply paying interest, which was tax deductible, are gone. 

Banks are acutely aware of ?the various lending routes into ?a law firm and rightly so: private lending on homes and buy-to-lets, working capital lending into the firm, and funding liabilities in the short term, such as partners’ tax payments, which, together with longer-term debt funding, has arisen through the bank wishing to reduce the working capital lend and push more into an amortising debt.

Retirement payday 

The majority of partnership agreements entitle a retiring partner to full pay-out of capital and current accounts on the retirement date. It makes it ?very difficult for a partner to retire on this basis if the cash flow inwards from new partners is not available and/or the working capital and lock-up of the firm is not managed well.

Trends in financial performance will also have ?an impact. The Law Society’s annual survey, published in January 2016, stated that less than half of firms showed an increase in gross fee income; this was analysed further to show that 81 per cent of large firms’ fee income increased compared to 44 per cent of small firms. Financial viability and sustainability will also be a significant factor, both of which can be upset by succession ?not being managed well, particularly with clients and teams internally.

Cash flow planning for succession is critical, as is a review of agreements to ensure that significant outflow of cash can be managed, whether staged over a longer period ?or through further advance planning of what the succession of the firm looks like. Is it simply new partners coming through or is it hiring of new talent that fits with the culture of your firm?

All firms will face succession at some point. Addressing it early and laying all cards on ?the table is surely the easier, ?less stressful way of delivering successful succession plans for all concerned.

Tech requires cash

There have been significant changes in the worlds of legal aid, criminal work, and personal injury, with further changes this year for clinical negligence. Where firms have been ahead ?of the game, each of these has enforced an internal review of processes, people, technology, and infrastructure, asking how work can be performed differently so that it remains ?a viable legal service without being loss-making and a drain on cash; whether this service should no longer be provided; what’s the true value of the work-in-progress; and whether there are funds ready to acquire in a fast-paced environment. 

The recent consideration as ?to whether a robot can replace a solicitor – what does this actually mean? Referring again to the Law Society survey, notably ?14 per cent of firms surveyed ?had used technology to replace non-fee earning people.

When used well, technology will provide enhanced information for the running ?of a firm, not to mention the efficiency and quality of services delivered to clients. In a world where efficiency is critical ?to financial performance, investment in technology and a review of fitness for purpose on a regular basis is a no brainer.

Simply, investment in technology requires cash. Of course there are various funding options but, whichever is taken, it will require cash outflow. It is hoped that the efficiencies gained will flow into improved lockup; however, this will take time and the investment will be upfront. Further, technology evolves quickly, resulting in ongoing reviews being imperative to stay competitive and acquisitive.

Forward-planning, ?reviews, and excellent financial forecasting is imperative for ?all firms, for succession and investment in technology, as well as the ongoing and future challenges and opportunities within the profession.

Helen Clayton is a corporate services partner at PM M www.pmm.co.uk @pmm_acc