SME legal sector continues to prosper but increasing levels of debt a worry

The sector enjoyed turnover growth for a third successive year, with the latest figures showing an average rate of around 4 per cent. However within the ‘small practice’ division, larger firms (those with turnover between £20-£35m) fared better than their smaller rivals, with those at the top end seeing average growth exceeding 10 per cent. Operating profits also increased, with an average rise of more than 11.5 per cent per partner.

Closer examination of the breakdown of the type of work being undertaken revealed that the biggest increase for legal SMEs came from the property sector. In the 2012 survey, an average 23 per cent of work undertaken was property based. By 2013 this had fallen away to a worrying 14 per cent, however, latest figures show that it has rebounded to 26 per cent this year.

By contrast, levels of litigation work have decreased, falling from 36 per cent of the total last year to around 26 per cent this year. While this may seem like a substantial fall in figures it was perhaps not unexpected, as litigation work tends to increase in times of recession and the reverse is true as economies improve.

Elsewhere, firms indicated the impact of the Legal Services Act 2007 is now finally being felt in earnest. Figures from 2013 indicated that 93 per cent of firms had experienced no effect on their business, but this year that figure had dropped to 73 per cent. Encouragingly, of the 27 per cent that had noticed an effect, the experience was universally positive, with all having gained business as a result. Additionally, 45 per cent of firms now reported they expect to gain business in the year ahead as a result of the Act.

Another sector feeling the impact of new legislation was the personal injury/negligence arena. As a result of the Jackson reforms, which banned referral fees, 28 per cent of businesses had, unsurprisingly, lost work and that figure could continue to rise in the coming 12 months.

The overall conclusion of the survey was a sense of optimism with an element of caution. While the sector has continued to grow since the last survey, and the overwhelming majority of firms bullish about recruitment, with nine out of ten firms planning to recruit more fee earners in the next 12 months, overheads have also continued to rise: staff levels, rent and insurance are all up, whilst around a third of firms reported a downward pressure on fees.

Paul Beber, partner at HW Fisher, comments: “While larger firms thrive, smaller firms could begin to feel the pinch as a divide opens up between those firms doing well and those that are struggling. Short-term lending to legal businesses is on the increase with a debt on the books of almost nine out of ten firms. With the threat of interest rate rises looming, any firm that becomes dependent on such borrowings could find themselves in a downward spiral that is difficult to recover from.”

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