Medium-sized firms lead way on fee income, profits and PEP

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3 June 2014

Karen Hain

Hain: many firms reporting upturn in new work

Law firms with 11 to 25 partners are leading the way out of recession, with rising fee incomes, net profits and a 21% surge in profit per equity partner (PEP), research has found.

The annual benchmarking report for 2013 by MHA, a UK-wide association of nine accountancy and business advisory firms, drew a very different picture for firms with fewer than 10 partners, where net profits fell.

Karen Hain, head of professional practices at MHA, said the Jackson reforms had “radically changed” the sector, leading to firms closing down, merging or being bought by alternative business structures.

At the same time, she said legal aid funds had been shrinking, damaging the incomes particularly of family and criminal law firms.

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Net profits fell most sharply at two-to-four-partner firms, from 28% to 23%, by 2% for firms with five to ten partners and only 1% for sole practices.

While net profits remained stable, at 23%, for firms with more than 25 partners, 11-25 partner firms increased theirs from 24% to 27%.

Profits per equity partner at two-to-four-partner firms tumbled from £145,000 (the highest in the table), to £114,000. In contrast, they grew from £107,000 to £129,000 for firms with 11-25 partners.

There was a slight fall at the largest firms, from £137,000 to £134,000, while sole practices saw a 2% increase in PEP, to £78,000.

Lock-up, a combination of unbilled work in progress and debtors, increased most sharply at big firms, from an average of 137 days to 148. It fell the most at sole practices, from 62 to only 53 days.

“We are now well into 2014 and on a more positive note, many practices are reporting an upturn in new matters,” Ms Hain said.

“The economy is picking up with conveyancing departments busy, and corporate and commercial departments also seeing a surge in work. Firms need to keep control of finances to ensure that profits are generated and cash keeps coming in.”

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