Legal Insight – Sara Hutton on the biggest hurdles for law firms in the coming years

Welcome to the latest issue of Legal Insight, the PM+M legal newsletter. In this edition, the spotlight is firmly on Sara Hutton, an adviser with significant experience in the legal profession, working predominantly with professional practices.

This article continues Helen Clayton’s discussion with Sara, exploring the biggest hurdles law firms may face as we look to the future post-pandemic. 

Helen: Considering there are 10,000 law firms in England and Wales, there cannot be one solution for all. However, all have and will face their own challenges.

Sara: In these uncertain times and against the backdrop of an increasingly competitive legal services market, firms will need financial resilience like never before. There will be a cumulative effect on cash due to the catch-up payments and pent-up pressures because of the pandemic, including deferral of tax liabilities, end of capital repayment holidays and the start of repayment on BBL and CBILS alongside employee pressure for salaries, reward and flexible working and, inevitably, the increasing cost of PII premiums.

I do hope if firms have only learnt one thing from the last two years, it is to forecast short-term cash and manage their firms accordingly, so there are no surprises.

Given we’re all living through a global pandemic having a good cash buffer is very wise risk management. There are challenges to obtaining additional funding so why not retain what you already have in place. I am finding that:

  • some banks are not ‘open for new business’ and others are reluctant to extend additional funds to existing customers
  • there are questions over the “portability” of BBL/CBILS and there can be challenges over availability of assets and security to pledge to a new lender
  • credit assessments are being impacted by the levels of term debt on a firm’s balance sheet particularly if multiple CBILS have been taken
  • debt pricing is increasing by between 0.5% to 1.5%
  • an increase in firms using secondary lenders including smaller banks, but requirements are tightening including for personal guarantees or tangible asset cover and pricing is rising – watch for hidden fees!  Remember your primary lender will include the debt servicing costs of these facilities in assessing your ability to repay your debt.
  • legal specialist lenders can have onerous terms and often the use of such facilities is viewed as a warning sign by your bank lender
  • there are fewer lenders in the market offering Professional Practice Loans and pricing is significantly higher than a decade ago.  There are also specific challenges funding “buy ins” to limited companies.

Depending on how firms have and continue to invest in the future of their firm, other hurdles are:

  • poor pipeline of work impacting future income as a resulting of lack of business development and cutting marketing spend in 2020/21
  • use of technology – this is now essential to improve efficiency, enable more flexible working, attract new clients and employees plus retain existing ones. Those that have not made or don’t start to make the step change will be uncompetitive and gradually decline/fail.
  • lack of succession has been on all advisers and many law firms list of challenges for a decade or more and it’s still there!  Unfortunately, there are still too many small firm owners with unrealistic expectations of their firm’s value and the terms they can get but holding on for a better deal is more likely to result in them being forced to close on someone else’s terms.
  • lack of financial and/or commercial literacy of all those working in a firm. This one is very close to my heart and I’m still staggered by the number of people, including partners, who have little or no understanding of how their firm functions.  More people, at all levels of a business, need to understand the importance of their role in generating cash and how this is vital to keep the business running.
  • Personal Injury continues to have its own challenges with the recent implementation of the Civil Liability Act and the need for firms to pivot their business to remain viable.

Helen: These are indeed wise words and it’s refreshing to hear a pragmatic view. Cash will always be king, and we should be ever conscious that it is a lack of cash and not lack of profits that will lead to a firm’s demise. A lack of profits can of course create its own issues but it’s cash that pays people and suppliers which enable the firm to provide legal advice to paying clients.

Sara: Absolutely!

Helen:  I agree with your point too around unrealistic expectations of their firm’s worth and the level at which people don’t understand how their firm functions, financially and otherwise.  How is it possible to plan strategically, determine the impact of decisions around people, operations, technology, if the underlying understanding is not there. Advisers can have a valuable role to play here in building this awareness and supporting firms and their people to get behind the actual delivery of legal advice and understand what makes their business tick, or perhaps not tick!

To read the next article in our series of interviews with Sara, where we ask ‘What do you see as the biggest opportunities for law firms’, click here.

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Helen Clayton
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