The Changing Legal Landscape

13 Sep 2018 0 Comments 0 Trackbacks TX Admin

We will see more changes to the legal profession over the next few years than we have in the previous 300.

Only 15 per cent of the profession are now operating via the traditional partnership model, which is no longer fit for purpose. A further 17 per cent are LLPs, but generally run as Partnerships. That means 32 per cent of the profession are vulnerable to failure for a variety of reasons. This represents approximately 3,000 law firms that are not prepared to change how they practice.

External change in certain sectors, for example personal injury and criminal legal aid, are pointing towards difficult times post-April 2019, with many firms predicted to find it difficult to survive. The huge inroads into the private client market that new entrants into the sector such as IFA's and accountants' are making compounds this issue.

Bucking the trend

It was predicted ten years ago that the numbers of law firms would drop. In fact, we have seen minor changes to the number of practices, predominately because we have such a growth in new law firms. Many are Sole Practitioners with a specialisation operating in a niche sector in a Limited Company format.

Consolidation is inevitable for these 3,000 firms if they can find a suitable purchaser - and there will be failures as a number of practices become 'unmergable'. We are therefore, facing a crisis in succession and exit strategies for a large number of firms.

Firms will have to carefully consider their structures, and in some instances incorporating a practice can work well. Whilst it's difficult to sell a law firm to another practice, as goodwill tends not to exist in a purchaser's eyes, goodwill can be incorporated by selling the practice to the existing owners. This can be very lucrative. For example, HMRC will recognise goodwill and will place a value on a law practice anywhere between 3.5 and 4.5 per cent of profits before drawings. For example, a £4 million turnover practice making circa £1 million profit, shared between the five equity partners, has been able to incorporate a goodwill value of £3.8 million pounds. Whilst this is not real money, it can be converted into directors' loan accounts, giving the new directors the opportunity to draw down this money without paying tax.

A stable part of many firms has been conveyancing, yet it's difficult to find conveyancers to do the work. Investing in technology to process this work is absolutely essential.

This enables firms to de-risk their process and de-skill their workforce, and in some cases we are seeing this process being operated from India or via a cloud-based solution. All client contact is UK based, as well as exchange and completion, but the process can be outsourced. This could even be operated from within a separate business and a different regulator.

Invading the market

Innovative artificial intelligence is being incorporated into the world of road traffic accident portal work, which can predict how a case might proceed and in what time scale -who can compete in this market?

Accountants and financial services firms are invading the legal space, purchasing law firms and providing inheritance tax planning and probate solutions. If the Solicitors Regulatory Authority (SRA) get their way, it's likely we will create a two-tier legal system, with these firms employing solicitors to do non-reserved activities without the burden of full firm regulation.

Creating a clear strategy for the future is essential for law firms. Whilst profitability is holding up well in many practices, it's doubtless challenges lay ahead. Clear decisions about the type of work you intend to deliver are essential and how it's delivered cannot be left to chance.

For firms that wish to provide complex solutions, they will need to charge premium prices, which is the death knell for hourly billing. Clients want certainty of outcome and will pay a premium for this type of service.

The SRA have to reconsider some of their ideas and listen to the profession. We need a level playing field and not a two tier system, and professionals need to be regulated proportionally.

There has never been a more important time for law firms to have a clear vision of their future, their corporate structure, who will be the future owners and what services they will deliver.

There is no doubt we will have a healthy, fitter independent legal community servicing a local market, but the present crisis will clear many old processes away.

Article courtesy Trusted Xperts Limited Legal Marketing Directo: Viv Williams


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