The number of small and medium-sized law firms in financial distress has soared to nearly a quarter of the profession, while one in eight has gone out of business in the last year, according to new figures.
It means that the change in professional indemnity insurance (PII) arrangements from this year has come too late for many smaller firms, the business recovery practice said.
A special review of Begbies Traynor’s ‘Red Flag Alert’ research, which monitors the financial health of UK corporates, found that levels of financial distress among SMEs in the legal sector have increased by 26% over the past three months, with 2,314 smaller firms now classified as high-risk, compared to 1,834 during the second quarter of this year.
In stark contrast, large firms have seen levels of financial distress fall 7% over the period from 121 businesses in Q2 2013 to 112 in Q3.
Over the same period, the number of smaller law firms still trading has decreased by 3% to 7,295 (Q2 2013: 7484). When reviewed on an annualised basis, the results reveal a 12% drop in legal SMEs still trading, from a total of 8,300 in the same period last year.
Julie Palmer, a partner at Begbies Traynor, said: “Law firms across the country will be breathing a sigh of relief today as the last 1 October PII renewal date comes to pass, bringing much needed relief to a large number of firms who have struggled to obtain affordable cover in an increasingly competitive market. But unfortunately it may be a case of ‘too little, too late’ as the volume of small firms in the industry continues to plummet.”
“Following a series of high-profile insolvencies, insurers are demanding more detailed information about firms’ financial stability before considering renewals, which is bad news for the sector’s struggling SMEs, who have been forced to consider expensive premiums from the unrated insurance market instead.
“With pricing pressures squeezing margins, larger players increasingly targeting smaller clients and consolidation only proving to be an option for the lucky few, we are likely to see many SMEs fall at this final hurdle before ever benefiting from these latest reforms.”
With the economy looking to have turned a corner, Ms Palmer said her experience has shown “time and time again that many SMEs run out of cash during the recovery phase, as there is a real temptation to overtrade in order to acquire new business”.
Smaller firms should use this “positive trading environment” to fortify their business, she said, with a focus on reducing their cost base and dependency on bank finance while taking a more proactive stance to risk management.
“Firms without a regional footprint should be sure to avoid costly expansion plans and instead embrace social media, which for many firms is proving to be a far more effective and free resource by which to expand your client base outside of the immediate locality.”