Positive outlook for midsize to large firms, accountants' review finds

The financial outlook for larger legal practices is improving, according to the latest annual benchmarking review conducted by a group of accountancy firms.

The review for the MHA association of independent accountancy firms around the UK, whose eight members include Scottish firm Henderson Loggie, points to encouraging signs of growth as firms feel the benefit of the improving economy, most notably through an upturn in commercial and residential property work, with confidence also returning to many practices active in corporate transactions.

After three years of limited growth in income, last year saw significant growth of 13% in the 11-25 partner group and 18% in firms with more than 25 partners. Total income for the firms in the 11-25 partner bracket rose from an average of £5.27m in 2013 to £5.94m in 2014. Over the same period average total income for the 25+ partner firms rose from £10.29m to £12.21m. Growth in smaller firms continued to be limited, with 5-10 partner practices growing by 3.6%, up from £2.96m to £3.07m.

Fee income per equity partner also improved noticeably in larger firms, with 11-25 partner practices showing an average rise from £479,000 to £582,000, and firms in the 25+ partner bracket reporting an average fee income per partner of £751,000. 

Profits per equity partner in 5-10 partner firms, despite the lower top line growth, were up 9.9%, compared with 17% for 11-25 partner firms and a "staggering" 44.7% in the 25+ partner firms.

Angela Haig, who leads Henderson Loggie’s Professional Practices Sector Group, commented: “Financial stability is a key objective for many law firms and one of the benchmark statistics that has a direct correlation with financial stability is lockup (unbilled work in progress and uncollected debtors). The trend over the last year has generally been a good one. By far the best improvement was achieved by the 11-25 partner firms, whose lockup reduced by an impressive 15%, which equates to 22 days of lockup. To put this into a financial context, if an 11 partner firm had turnover of £5m and lockup of £2m, then the lockup days would be 146. If the firm improved its lockup by 22 days to 124 days, then this improves the cash in bank by approximately £301,500. This is the equivalent to over £27,400 being available now to each partner.”

Other report highlights include that wage costs are still reducing as a percentage of fee income, as are practice costs of rent, marketing, IT and professional indemnity insurance.

Ms Haig added: “Merger activity is continuing in the sector at all sizes of practice. Much of the growth in fee income per equity partner, especially in the 25+ partner practices, has been driven by merger activity, which has had a reduction of the equity ownership group as one of its key drivers. Economies of scale have also played a part in reducing costs in areas such as IT, property rentals and marketing.

“I expect the merger activity to continue and in the smaller practices the challenges of succession planning will remain a major factor in driving mergers.”