Predicted collapses an opportunity for well-managed firms

The predicted collapse of hundreds - some says thousands - of law firms could be an opportunity for well-managed practices to pick up valuable business, a leading legal business consultant has said.

Last week just over 223 firms had notified the Solicitors Regulation Authority that they had been unable to secure indemnity insurance, though 47 later secured it. The total number of firms without insurance could double by the end of the year, in large part because of funding problems.

Speaking at CLT's financial stability conference last week, Mark Feeney said he expected perhaps another 200 firms or so, which managed to secure cover this time around, would not survive into the next insurance year as they failed to meet higher professional indemnity payments.

"Until 2008 law firms didn't fail, but there could be as many as 5,000 fewer firms in the next five to ten years through a process of consolidation partly driven by financial pressure," Feeney said. "Failures are distressing but if you're a well-managed firm there will be opportunities to pick up good pieces of business."

Firms without cover enter the new so-called 'extended indemnity period', where they can continue to trade for one month; thereafter, they are no longer allowed to take on new clients and must start an orderly wind down within the next two months.

Feeney warned that the legal profession wrongly thought of itself as solid, with banks still prepared to lend as before, but that the profession was actually "built on debt".

The financial rescue specialist said firms facing financial trouble suffered from a series of problems, ranging from an inability to repay secondary lenders to bad merger history or bad culture.

"You know it when you go into some firms at 5.30 in the evening and it feels like the Marie Celeste; or it looks as though somebody has emptied the paper bins all over the floor," Feeney said.

In many cases, he added, it's not a matter of finding a solution; firms should just be put out of their misery. "It is hard to turn around a culture where people take 20 days' sick leave every year with demoralised staff and partners".

But Feeney urged caution over mergers, saying many studies indicated only a minority had delivered significant value.

On the other hand buying work in progress from a firm in a distress situation could be a better investment, because of the discount applied, with profitability and cash-flow returning to positive much earlier than compared with a conventional acquisition.

Most WIP being sold and bought currently centres on personal injury, which Feeney says is still "surprisingly popular given the changes in that sector".

"Trust and probate work is much sought after and is often more profitable, plus it normally comes with a wills bank and there is cash in the background - the client account deposits," he says.