Looking to the mid-market future

Mid-market firms appear in comparatively good health despite ongoing uncertainty in the wider economy, according to a recently published report by accountancy association MHA. We caught up with Karen Hain, partner at Moore & Smalley and head of professional practices at MHA, for a quick chat about sound management and succession planning.

What should be the priority for mid-market firms?

Some medium-sized firms have not had the same growth rates enjoyed by some of the larger firms. Because of their size they suffer from not having a big management team, including finance professionals. Often it’s why even where there has been a growth in fee income, some of these mid-tier firms are struggling to turn that into cash: lock-up – the time it takes from opening a matter to collecting the fee – is growing, which is the most worrying factor. This has to be funded until the money is in the bank.

How have banks responded?

Most banks continue to be supportive but they are putting pressure on owners to put more of their money into their firms. The banks are looking to remove some of the risks they’re taking. It’s not that they are removing facilities but it’s getting more difficult to extend them without solid security.

What has been the main driver for this change in approach?

Banks have responded to the wider economic circumstances and how they manage risk. We’ve had a big recession, we’ve seen law firms failing, there have been changes in how firms are managed, the competition is fiercer; all this has had an impact on risk assessment.

In terms of law firm management, where is this coming from?

If you look at compliance and governance, there has been a big drive at the SRA towards outcomes-focused regulation, and COLPs and COFAs have been brought in – these changes have highlighted that compliance has to be on every single firm’s agenda. It’s got to be part of every firm’s routine. Cybercrime has become an increasingly serious issue and law firms are at risk – there must be more control about how firms operate. Cybercriminals know law firms are holding millions of pounds of client money – conveyancing and probate especially. Friday afternoon fraud has become a major concern. So banks are, in large part, following the push from the SRA and what’s going on in everyday life.

To what extent has increased competition played a part?

Small regional market towns used to have multiple high-street law firms where you walked in to make an appointment. Now the amount of work generated online has had a huge impact in increased competition for mid-size firms. Smarter ones have wised up and adjusted their models. There is still a demand for traditional high-street firms, but the model is changing. It’s not just alternative business structures that are competing with the high street; more business is done online, and it follows how the younger generation is working.

How does size influence efficient financial management these days?

In five-to-ten partner firms, it’s still manageable for partners to be directly involved. You could still have a finance partner and a managing partner controlling things closely. The bigger the firm, though – and certainly when you get to, say, 20 partners who are still fee earning – I wouldn’t expect them to still be running the business. At this size, it’s difficult to do both at the same time. But what you can do in bigger businesses is generate enough income to cover additional overhead costs and fund specific financial and management staff positions.

So, there is still life in ten-partner firms serving their regions. They can be healthy businesses, where finances are under control, and generate good earnings.

Back to funding growth and the future of law firms, what can we expect from the next generation?

There’s less appetite from junior lawyers to become equity partners, which can be an issue for succession planning. Lots of firms grow their own lawyers and future partners. The difficulty is retaining them – which includes paying them what they want to be paid!

Younger newly qualifieds are risk averse compared with previous generations. A significant difference is also that they may not have access to practice loan funding because they have limited security to offer banks by way of equity in property – if they own property at all.

That’s why we’re going to see more merger activity. A lot of the mergers we’re seeing regionally are driven by retirement plans. Firms may not be that much bigger, but the equity partners can secure a future for their firms that way.

Karen Hain is a partner and head of professional practices at Moore and Smalley LLP

www.mooreandsmalley.co.uk @MooreandSmalley