WHEN law firms feel the pinch, clients better watch out … as the Association of Business Recovery Professionals (R3) warns some TWO THOUSAND law firms are at risk of financial failure. The news may bring a tear to some & joy to others as mergers, manipulation & major spats between firms take care of the stragglers & financially weakened law firms deserted by their client base for those all too unfathomable reasons best left unexplained.
Over 2,000 law firms at risk of failure in the next 12 months
By the end of this month, partners in law firms will have to make their second tax payment for the year. Unlike many other businesses, Limited Liability Partnership (LLPs), Partnerships and Sole Practitioners are not directly assessed for tax on the business’ profits but will commonly arrange to settle individual Partners’ liabilities. Ideally, a tax reserve fund will have been maintained for this purpose but this is not always the case.
Lee Manning, R3 President, comments: “This requires very careful planning and steps should be taken to apply for a reduction of payments on account if earnings are expected to reduce over the coming year. This time of year is known to put real cash flow pressure on firms and more often than not we see a spike in banks being asked to fund taxation liabilities. The legal services sector is a very crowded market and so firms that are not competitive are unlikely to thrive. Careful planning and management of taxes can help give businesses an edge and make this time of year less daunting.”
Furthermore, research by R3 using data from Bureau van Dijk’s ‘Fame’ database, finds that over 2,000 law firms are at risk of failure in the next 12 months – this equates to 29.1% of firms in the UK and Ireland, higher than the cross sector average of 21.8%. One of the main challenges they are being faced with is The Legal Services Act – which has earned the moniker ‘Tesco Law’. It legislates for Alternative Business Structures (ABS), the point of which is to make legal services easier to access by allowing non-lawyers to invest in and own legal businesses. However it poses a threat to the legal services market as we know it, particularly for small high street firms.
Lee Manning continues: “Traditionally a firm would practice a range of different areas of law. With the introduction of ‘Tesco law’, new specialist firms will begin to emerge and they will be difficult for the high street to compete with, partly because small practices cannot afford the level of branding and marketing that these new firms will be able to take advantage of. It is also unlikely that they will have the resources or the technology to compete with these Alternative Business Structures. Law firms are operating in a challenging environment and the marketplace seems to be getting tougher and tougher. We would urge any firms that are worried about their financial future, to seek professional restructuring advice before it is too late.”