No clear way to “head calmly for the exit” as crisis looms
By Rob Aberdein for The Scotsman newspaper April 14th 2021
LAWYERS are just like anyone else when it comes to daydreaming about how they will fill their days when the grind of the working week is a thing of the past.
It might be endless golf, family time, charity commitments, travelling the world or non-executive director positions. Whatever your personal dream is it first requires some sort of structured exit from the legal world.
That’s where those pleasant daydreams meet the unfortunate and often disagreeable forces of harsh reality. Put simply, there’s probably never been a more difficult time to sell a legal practice.
Over the last couple of years, I have spoken to more than 50 law firms where the partners are struggling with how/when/if they exit. For added context, the number of law firms with a turnover under £2m and with three or fewer partners (most of whom will be in their 50s or 60s) makes up over 90% of legal practices in 2021.
So, just what are the challenges and headwinds that are facing those lawyers who have invested decades of blood, sweat and tears to build up their practices?
Firstly, after the last recession, most banks went cool on the legal sector, which often meant smaller firms were asked to repay loans and were not seen as attractive in terms of new lending. That position broadly remains the same today.
At the same time, global, national and larger Scottish firms have become more attractive for career-minded trainee solicitors and younger lawyers. They offer bigger salaries, a greater variety of work and enhanced benefits packages.
Yet there are further barriers. Scotland does not have the Alternative Business Structures, ABS, that are in play in England and Wales. This means the number of prospective purchasers is severely limited.
For those hoping that acquisitive larger firms may be the answer to their prayers, disappointment is still most likely. It’s probable that such firms already have coverage in the geographic area where the selling firm is active. Or they simply may not find the typical ‘Chambers-based’ business model attractive.
Generally, there will not be a queue of would-be suitors when a legal firm wants to make a deal happen. On those occasions where there is match between buyer and seller on the desirability of the practice, there is often a mis-match in terms of value. I understand the viewpoint of sellers who invested their best years into building a practice and want to get the best price for it.
However, potential buyers have to factor in the risk associated with the retirement of the principals (and a high degree of personal loyalty from clients in a local area) and the costs and risk of integrating the smaller firm in to a larger business.
The only other natural exit path for most partners, is the disposal of equity to younger salaried partners who want to step up. The number of Millennial and Gen Z lawyers in the profession has steadily increased, but research tells us they tend to value a work/life balance more than a high salary or the status of becoming an Equity Partner.
They are also more risk averse than the lawyers who went before them and many simply don’t have the appetite to become business owners and shoulder the ever-increasing regulatory burden. Those who may be keen to take over a practice will likely struggle to access funding or professional practice loans.
Perhaps worst of all is that simply “closing down” a law firm carries significant costs, which can be well in to six figures, in terms of run-off cover, redundancies, file storage costs, running down leases, disposing of properties, etc – so there is often simply no financially viable exit route.
This perfect storm of issues leaves the legal profession in Scotland at a precarious and challenging juncture – and I have no idea what the solution is.
However, I do have an unwavering belief that Scotland’s brilliant lawyers will find a solution and that the profession will figure out a way to evolve.