The most profitable small and medium-sized legal practices generate almost £1m in fee income per equity partner, nearly three times that of the least profitable, new research has revealed.
The annual financial benchmarking survey by the Law Society’s law management section – which polled 181 firms, mainly of between two and 25 partners, on their 2011 results – also highlighted the significant impact that gearing has on profitability.
Fee income per equity partner on average was £980,000 at the most profitable firms – ranging from £513,000 for sole practitioners to £1.08m for firms of five to ten partners – compared to £350,000 at the least profitable, with the range going from £122,000 for solos to £429,000 for firms with over 25 partners.
Whereas on average the most profitable firms had 6.4 fee-earners per partner, the least profitable have 3.6. This was reflected in salary costs (including notional partner salaries), which at the most profitable firms was kept to 53.6% of turnover, compared to 67.8% at the other end of the scale. Non-salary overheads were 27.8% and 39.9% respectively.
Across the whole sample, around 21% of a practice’s total income was equity partner profit, slightly up on 2010. After deducting a realistic notional partner salary and notional interest from each practice’s results, however, the median 2011 net profit percentage fell from 4.9% of income to 4.5%.
The survey said the results overall indicated a “second year of consolidation” across smaller firms, with practice fee income and net profit per equity partner both up marginally. However, the larger practices in the survey saw reductions in profitability, it said. A quarter were operating near their overdraft limit, down from a third in 2010.
It reported that while net profits are back to the level of the pre-crash 2008 survey, profitability per equity partner among all sizes of practice, except those in the middle with five to 10 partners, have fallen.
The survey suggested that this may reflect the reliance of smaller firms on residential conveyancers, and also succession problems, while “larger practices may now have more in the way of infrastructure than their current size really needs”.
Redundancies continued, particularly at smaller practices, and while 76% of the firms recruited new staff during 2011, “no definite trend exists”, the survey said.
Accountants Hazelwoods worked with the section in compiling the survey, which was sponsored by Lloyds TSB Commercial. Chris Marston, head of professional practices at Lloyds, said: “This year’s survey shows admirable resilience on the part of solicitors. Fee income rose slightly in difficult economic conditions and I was pleased to see that median net profit increased by 2% – modest, but nevertheless building on last year’s improvement.
“I was also struck by the accuracy of last year’s predictions – respondents suggested that income growth might be around 1% and they were spot on. This year, they are forecasting 3% growth, so hopefully there are better times ahead.”