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3 ways to future-proof your firm
Justin Rourke outlines three ways in which you can future-proof your firm for the future.
This last decade has seen competition increase in the legal sector, applying downward pressure on prices in many practice areas. The costs of running a firm are also increasing, as a result of a number of factors such as wages, business rates and tax. So, what can firms do to ensure their long-term future? Here, I explain three specific routes by which you can ‘future-proof’ your firm.
1. Change your company structure
Historically, many law firms have operated as partnerships. The search for future financial security and prosperity has lead many firms to consider changing their structure, including to a limited liability partnership or limited company. There can be many benefits of incorporation, for example in relation to succession, remuneration and tax planning.
Once it has been established that a change in structure would be beneficial to your specific business needs, it is vital that the ‘new’ company undertakes a review of its protection needs.
Protection usually means insurance in one form or another, such as life assurance, critical illness cover, income protection, and private medical insurance (although it can have broader definitions).
Within this review, there are two specific considerations:
- Do you have any insurance in place? (Many law firms will not.)
- If you do have insurance, is it still structured correctly?
The second question refers specifically to the fact that, if you change the structure of your business, you must also change the business protection policy underlying it. As an example, if you have partnership protection, but change your structure to become a limited company, the new company will be neither the owner nor the beneficiary of the policy.
A further example: if a shareholder in a firm were to die and no instructions were in place as to the disposal of their shares, their beneficiary would inherit. However, if you are not registered as an ABS with the Solicitors Regulation Authority, and the beneficiary is not a solicitor, they can not retain the shares, so would need to be compensated, or find an alternative buyer, who may not be in your plans as a business partner.
Some recent research has highlighted the need for business protection, and the correct tax, trust and shareholder agreement advice to complement it. Legal & General’s (L&G) ‘State of the Nation’ business protection report for SMEs reveals that:
- over 50 per cent of businesses have left no instructions as to what happens to company shares on death
- average business debt is £176,000, of which 51 per cent is secured by a personal guarantee or a charge against personal assets
- 26 per cent were not aware that a director’s loan account needs to be repaid on death.
2. Go specialist
Another route to help future-proof a law firm is to specialise in niche or smaller areas of expertise (eg gaming, or sports-related disputes), or at least have key departments and individuals within the firm that do.
This is often driven by key individuals who build up a reputation and client pool by becoming renowned in their area of expertise. Such specialisms can involve a lot of travel and expense. These specialists will often work on large cases that continue over many months.
The risk here is the reliance on the individual, who is pivotal to that sector specialism, and ultimately the profit it generates. If that individual were to become ill or die, how does the firm cover that financial gap?
In the L&G survey:
- 39 per cent of businesses said that the death or critical illness of a key employee would have the biggest impact on their business
- 53 per cent of business said they would cease trading in under a year if they lost an owner or key person.
3. Stand out as the best employer
A further consideration is staff retention. Some incentivising policies that could be offered to employees include:
- private medical insurance
- income protection (all incomes continue to be paid)
- death in service benefits.
The L&G survey identified that 70 per cent of business owners had not heard of ‘relevant life plans’ – a life insurance policy for directors of limited companies that can be paid by the company to provide a tax-free lump sum to their family on death.
We often spend so much time working in our business that we fail to spend enough time working on our business. A strong and progressive law firm will always be looking for ways to improve the business, its profit and the experience for its staff and clients.
The key is to ensure that whilst the focus is on obtaining growth and profit, equal attention is paid to issues that could potentially undermine progress to a significant degree.
Some key questions to ask
- Are our key fee-earners / staff insured, so that the income they generate is protected in the event that they die, are unable to work or become seriously ill?
- Do we have insurance in place to repay the firm’s debt (including director’s loan accounts) in the event of death or illness?
- Do we have funds or policies in place to pay out the value of partnership capital accounts and/or shareholders’ shares in the event of death – not only to pay what is owed to the family, but also to retain control of the business?
- Do we have an up-to-date shareholders’ agreement or partnership agreement in place, specifically detailing what happens on death?
If you do have policies, ask yourself:
- Are the policies currently owned by the correct legal entity (company, individual, partnership)?
- Do the policies provide sufficient capital or income in the event of a claim? When was this last reviewed?
Justin Rourke is a financial planning consultant at Armstrong Watson LLP. He specialises in working alongside our specialist legal sector team, which advises law firms throughout the UK on strategic, structural and other business improvement issues as well as providing efficient accounting, tax and SRA accounts rules services.
The Law Society has partnered with Armstrong Watson LLP, who provide accountancy services to law firms throughout the whole of the north of England.
This article is a general guide to the issues that we see in practice. It is not a substitute for professional advice which takes account of your personal circumstances. No responsibility can be accepted for any loss occasioned by any person acting or refraining from action on the basis of this article.