Mid-size firms pulling ahead of small practices
Sole practitioners' income and profitability suffer as mid-market consolidates
Medium-sized firms have accelerated their growth in terms of revenue and profit, pulling ahead of smaller practices, according to a recent sector survey.
Income at firms with between five and 24 partners has grown by between 8 and 20 per cent, compared with smaller practices, where it had grown by only 5 to 8 per cent in 2016.
But the gap is also widening between mid-size firms and larger ones, the MHA Legal Benchmarking Report 2017 suggests, with 25-plus partner practices seeing revenue levels grow by an average of 22 per cent in the past three years.
Over this period, large practices have shot ahead in revenue terms. In 2013, their combined fee income was just under twice that of 11 to 25 partner firms. Last year, it was nearly two and a half times as much.
This 'significant growth', said Seamus Gates, of Broomfield & Alexander, 'has come partly from mergers but also the strength of the economy during that period'.
When it came to profit per equity partner, the report indicates the five to ten partner bracket has continued to do well, outperforming the next echelon up.
Previous research has shown that PEP in this group has been consistently better than in the 11 to 25 partner group, and Gates suggested this segment was 'consolidating and increasing the efficiency within their business, rather than bringing on new equity partners for future growth'.
By contrast, firms with between 11 and 25 partners experienced a drop of 12 per cent in income per equity partner, which Gates said was likely due to significant investment in IT, marketing, and recruitment, suggesting that segment is preparing for growth.
As a whole, income per equity partner in larger firms has jumped to £1.4m, almost double the average in the previous two years.
Gates commented this was due mainly to the fall in the number of equity partners in that bracket. 'Last year we saw a lot of merger activity and some of this is now resulting in equity partner retirement without replacement,' he said. 'The profitable firms are choosing to share the improved results across a smaller group of people.'
The report suggested that two to four partner firms should aim for an average income per equity partner of £500,000 and firms with more than five partners should have a target of £750,000. At either end of the sector, firms with more than 25 partners should aim for an income per equity partner of at least £1m, while sole traders should aim for £350,000.
The overall recommendation for growth was to increase the ratio of fee earners to equity partners.
The mid-segment also fared well on profitability. While sole practitioners suffered from a rise in overheads, professional indemnity in particular, which led to a 30 per cent decrease in PEP, two to ten partner firms experienced a 5 per cent increase.
That increase, however, reflected unevenly in PEP levels. Firms with two to four partners saw a nearly 10 per cent decrease in PEP, which the report said was due to more equity partners being appointed in that segment.
PEP at five to ten partner firms increased 21 per cent, 16 per cent in 11 to 25 partner firms, and 36 per cent in 25-plus partner firms.
The overall decline in profitability at the lower end of the market would probably lead to larger firms continuing to dominate, the report concluded. It also warned that new costs in the coming years, such as the apprenticeship levy, auto-enrolment, and minimum living wage, will present new challenges to maintaining profitability.
MHA is an association of accountancy firms and business advisers with 50 offices in the UK. Its report canvassed 117 law firm clients around the country.
Jean-Yves Gilg is editor-in-chief of Solicitors Journal