Invest in a Law Firm

The upcoming adoption of the Legal Services Act will open the door to the possibility of external investment in law firms, but who wants it?

The traditional way of funding a law firm is from partners’ own funds supplemented by bank finance to cover working capital requirements. In this scenario the investment capital is therefore the monies provided by the partners, is it this element that will be replaced or added to by external investment? For providing the capital base for the firm a partner may be rewarded in part by a small amount of interest and mainly by their profit share.

If external capital is introduced to add to or replace part of the partners funding what rate of return should an investor expect? This is difficult to predict but a typical venture capital investor would be looking for 30-40% pa return either by way of dividend or a sale in three to five years.

I do not think that the partners of a law firm would find the sale route too palatable, this therefore leaves dividends as the reward for investment. What benefit is there to the partners in diluting their earnings to such an extent, I suspect very little.

The only public announcement of intent is from Irwin Mitchell who have appointed advisors to consider their funding needs. They have not said, publicly at least, how much investment they want to raise or the purpose they would use the funds for, however some reports suggest up to £50m is to be raised. Should they look to make an IPO then I am sure this will make interesting reading to the entire profession.

The popular view seems to be that external investment will only be sought to expand or establish volume legal “factories” dealing with conveyancing, PI or debt recovery. This sort of operation is heavily reliant on technology to support large numbers of deskilled operators using heavily process driven automated systems to achieve the cost effective results. This is perhaps the type of investment in infrastructure that ABS’s will look for additional funding to provide. Many people already operate in this way using medium term borrowings or equipment leasing to fund their operations.

So, where is the space for the VC in this environment? Regrettably I think we will have to wait for the early birds to try to find the worm.

John Burrill is Chairman of Linetime Limited, legal software suppliers.
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