Law firms merging as number of sole practitioners tumbles

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26th July 2012

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 year ago.

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 strategies.

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 debt.

Philip White CEO