Competition from alternative business structures (ABSs) has increased pressure on law firms to the point that 2,500 are at risk of financial failure in the coming year, according to business recovery specialists.
Upcoming tax bills are set only to exacerbate the situation, according to the Association of Business Recovery Professionals, better known as R3.
Using data from company information firm Bureau van Dijk, R3 estimated that 31% of all law firms (2,556 practices) are at risk, with the situation worst in London, and best in Wales and Yorkshire.
The news comes at a time when the Solicitors Regulation Authority has highlighted financial instability as the main current threat to the profession.
“By opening up the legal market, the Legal Services Act has increased competition at a time when there is already pressure on client budgets and over supply in the sector, and this combination of factors poses a real threat particularly for small high street firms,” explained Robert Adamson, chair of R3 in Yorkshire.
“Already, we have seen a great deal of consolidation in the regional legal market with a number of mergers such as that of Keeble Hawson and hlw Commercial Lawyers LLP; DWF’s acquisition of Cobbetts; and the recent merger of Dickinson Dees with Bond Pearce.
“This is a trend that we expect to see continuing with small practices unable to afford the level of branding and marketing or the technology to compete with alternative business structures.”
He said partners in law firms will this month have to make their second tax payment of the year, “which can be a real squeeze on cash flow if it hasn’t been carefully planned for”.
“Ideally, a tax reserve fund will have been maintained for this purpose and this should be monitored and steps taken to apply for a reduction of payments on account if earnings are expected to reduce over the coming year.”