Law Firm Viability Concerns

Plenty of current research suggests it is going to be a very challenging time for hundreds, if not thousands of law firms in the UK which will lead to the collapse of many while others struggle to exist while the anticipated recession/depression grinds on.  As reported in the Law Gazette this week, a survey where 774 small firms responded indicated that approximately two thirds of all firms with four partners or fewer are genuinely worried about being able to trade beyond the autumn. Allied to this, several insolvency practitioners have already made enquiries with Ortus Group about firms that are coming onto their radars.

It is no exaggeration to say that this economic disaster could be the event that ultimately results in the mass market consolidation that has been predicted for many years now. 

Those firms at risk are not just the high street firms though; we must recollect that plenty of established names disappeared during the last recession and depending on how conservatively cash has been managed, it would be no surprise to see a number of large names disappear this time too. There are already rumours in the market about how highly leveraged some top 100 firms are and without the backing of lenders, at a significant cost no doubt, there will be causalities.

However, the most at risk firms are indeed those with multiple offices and turnover below £5m.  These firms typically operate at lower profit margins and a significant downturn in turnover for three months will, in most cases, wipe out all profits for the year.  There are not many firms that carry enough working capital to survive this long and anecdotally, these firms have been struggling to gain access to CBILs, presumably because the banks do not feel the business is sustainable enough to repay the loans.  This leave the owners of such firms in an invidious position of self-funding, personal guarantees, no income and redundancies along with other major cost cutting exercises. 

These circumstances will lead to a marked increase in the volume of firms seeking exit by merger or acquisition and there will be urgency on the part of the current owners wanting a sale driven in no small way by the October PII deadline for renewal, refusal or runoff.  An inability to close a law firm in an orderly fashion will of course involve the SRA which in turn will increase the costs of closure hugely.

Another consideration is that there are currently many merger discussions on hold.  Deals dreamt up prior to Covid-19 have been stalled and may not survive the stagnation because both businesses will need reassessing in absolute terms once we approach normality once more.  While there is no harm in continuing basic due diligence while things are on hold ‘just in case’, it would be madness to invest significant time and effort into an idea that made sense in February based on assumptions that have since gone down the toilet. This is particularly important as owners should be focused absolutely on the health of their own business for the time being and merger ideas will need revisiting afresh in due course.  

However, it is not all doom and gloom. History shows us that many fortunes are made by people speculating during economic downturns and it will be no different here.  Ortus Group is working with a small number of firms that are motivated to do deals with firms where there is a strong underlying business, even if it has unsustainable cashflow problems today.  If you feel you may benefit from a confidential conversation, please get in touch and we can share what we know to see if your position is one we can assist with.

Ortus Group has written a whitepaper on M&A within the legal sector which you can access here.  It was written pre-Covid-19 but remains absolutely relevant.

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