Solos average higher PEP than small firms

The squeeze on small firms was evidenced once again last month when a survey found that profitper-equity partner (PEP) is on the rise for sole practitioners, and had exceeded that of two-to-four-partner firms for the first time. The data showed average PEP at two-to-four-partner firms was £80,000 in 2018, while sole practitioners averaged £87,000 in the same year. Profitability at small firms was revealed to be under considerable pressure, as firms with five to ten partners averaged £139,000 – some £60,000 more than the smallest firms.

Furthermore, 11-25 partner firms averaged double that of two-to-four-partner firms. However, the Legal Benchmarking report, which was compiled by accountancy and business consultancy MHA, argued: “There is still room in the marketplace for small boutique specialists, who are driving up the profit margins in smaller firms”. Despite smaller firm’s faring comparatively badly, the report found that PEP for each of the firm categories had increased year-on-year in excess of £15,000 per partner. “Profitability has improved across all sizes of practice mainly as a result of pricing, staffing, and efficiencies, rather than overhead reduction”, it confirmed. “It is disappointing that few firms have embraced change in working practices, such as location independent working, and the use of IT, such as artificial intelligence.

Perhaps getting the staff mix sorted is the first step before making other changes that are more radical”, said MHA head of the professional practices group Karen Hain (pictured). Sole practitioners also fared best in lock up, reporting just 65 days on average in 2018, while two-to-four-partner firms reported 130 days and five-to-tenpartner firms averaged 132. On average lock up fell by three days across the board from 132 in 2017 to 120 in 2018. Kate Arnott from MHA MacIntyre Hudson urged firms not to be complacent about the importance of lowering their lock up figures. “Although the majority of firms have seen a decrease in the amount of cash tied up in lock up since last year, there are still vast improvements which could be made. All bar the smallest firms have lock up days in excess of 100 days”, she said. “This equates to lock up per equity partner ranging from £67,000 to £385,000. For the largest firms, simply reducing lock up by one day could generate nearly £46,000.”