26th July 2012
Law firms merging as number of sole practitioners tumbles
It's no secret that banks have been gradually withdrawing their
funding for small law firms. That lack of funding, for a key part
of the legal profession, has taken its toll.
It's one of the reasons for the 17% fall in the number of sole
practitioner law firms in the last five years. Data from The
Solicitors Regulation Authority shows that trend continuing - there
are now just 3,574 sole practitioner law firms compared to 3,692 a
Consolidation amongst law firms was another feature of the
recession, with many firms merging to win the continuing support of
their lender. According to statistics from the Solicitor's
Regulation Authority, the number of law firm mergers in the UK
jumped 31% in 2011 to 220 from 168 in 2010.
The increase took mergers between law firms to their highest
point since 2007 (238 mergers), and represent a 51% increase on
2009's 146 mergers.
In the main, mergers are happening for 'defensive' reasons, a
need to survive, as opposed to firms pursuing expansion
In some cases, larger firms are looking to cut costs so that
they stick to the loan covenants they have agreed with their banks.
Smaller firms are pre-emptively consolidating as a result of Tesco
Law, and the decline in Legal Aid work. Some commentators
predict a bleak future for high street law firms due to these new
competitors like the Co-op.
The unfortunate thing is that many high street law firms could
deal perfectly adequately with this new competition if they were
able to invest more in their IT systems, marketing and training.
But, of course, they will struggle to get approval for loans from
their traditional banks.
Even firms that can get offers of conventional bank loans are
finding that those loans are too expensive. Bank of England data
shows that lending margins for small businesses loans across all
sectors are still on the rise. Small
businesses, such as sole practitioner law firms, are now paying the
highest interest margins in three years on loans of less
than £1 million.
The law firms that Syscap speaks to about funding for tax
payments, IT investment etc, leave us in little doubt that they are
finding it almost impossible to get sensibly priced funding
elsewhere in the market.
Further evidence of how tough things are can be seen in the 17%
jump, since the start of the year, in the number of funding
requests that we have received from law firms to help pay their big
semi-annual tax payments to HMRC.
If traditional lending to small law firms remains so difficult
to obtain, then those law firms that don't want to merge into
larger entities, will need to start considering how they can use
leasing or other types of alternative finance to replace bank
Philip White CEO