A lack of growth is one of the factors behind the increasing trend towards mergers and acquisitions amongst small and medium-sized law firms, new research has suggested.
A benchmarking study has found that some law firms have struggled to maintain or improve income levels since the onset of the recession as a result of reduced corporate and property transactions.
The research by MHA – a UK-wide association of nine accountancy and business advisory firms – also warned that law firms continue to ignore lock-up and the impact on their cash flow.
It said the changes to the structure of legal aid and personal injury, coupled with the ongoing impact of the recession, have resulted in “marginal growth rates for a majority of the practices benchmarked” – on average 1-2% between 2011 and 2012.
Fee income per equity partner among more than 100 MHA law firm clients ranged from £300,000 to £590,000, with an average of £400,000.
Karen Hain, head of professional practices at MHA, said: “We are seeing an increasing move towards mergers and acquisitions amongst law firms. This is perhaps due to an ongoing lack of growth in recent years.”
Lock-up continues to be a real concern for many firms; practices with 11-25 equity partners were the worst performing, with an average of 148 days lock-up against national average of 127 days. “Targeting a reduction of lockup to 110 days can have a significant positive impact on the cash flow of a legal practice,” the study said.
For a firm with a £2m turnover and lock-up of £696,000, taking 17 days off the average lock-up would improve cash flow by £93,000.
Though for some slow income growth impacted profit per equity partner (PEP), there were exceptions. Firms with two to four partners saw PEP increase 27% between 2011 and 2012 to £145,351 per partner, “outstripping sole practitioners who face an increasing burden of regulation and professional indemnity insurance (PII) costs and the larger practices who, with more rigid overheads, may have been less able to adapt to the market”.
Nonetheless, firms with more than 25 partners saw PEP increase 14% to £136,678, but sole practitioners’ profit plummeted 12% to £76,456.
Net profit rose from 24% to 28% for the two-to-four partner firms, and for other categories of firms ranged from 21% to 25%.
The study said: “Whilst trying to achieve improved profitability in a ‘flat’ economic climate will remain a challenge for all professional practices, we at MHA believe the legal sector will continue to remain at a distinct disadvantage due to the increase competition resulting from deregulation, added compliance burdens and sector specific issues (relating to legal aid, personal injury referral fees and a reduction in PII providers amongst others).
“Therefore, looking for continued improvement in the management of lock-up, employment costs and fee income growth at per partner level must remain the focus for law firms. The consideration of mergers as a means to an end will likely become more pronounced.”