Outside funding ‘compelling’ reason to take the ABS route

The Legal Services Act (LSA) has so far had ‘minimal’ impact on law firms, but the reforms have acted as a ‘catalyst for change’ and increasing numbers in the profession are keen to explore outside funding, two surveys have revealed.

Since the Solicitors Regulation Authority was able to license alternative business structures (ABSs) in March, only seven firms have been granted a change of status, allowing them to access external investment.

Research carried out by Jures for City firm Fox Williams describes a ‘profession in flux’. Almost four in 10 (39%) of the 100 commercial firms responding to a survey published today said they had changed their management strategy as a result of the act, and 63% had considered changing their partnership structure.

One third of respondents (33%) were looking to spin off services through an ABS and 29% to access external investment to fund growth.

Over half (54%) thought accessing private equity or other third-party investment to finance their firms’ growth was a ‘compelling’ or ‘very compelling’ reason to become an ABS; 35% said that ‘ownership by a recognised brand’ was a ‘compelling’ or ‘very compelling’ reason to convert. But the survey revealed opposition to such changes, with a ‘loss of control’ identified as the biggest barrier to ABS conversion, cited by 62%, followed by resistance from partners, cited by 51%.

Commenting on the research, Fox Williams senior partner Tina Williams said: ‘It would be wrong to dismiss a generally low profile start to the new regime as evidence of disinterest by the profession in the legislation liberalising agenda.’

She said: ‘The possibility of using the ABS model as an opportunity to refinance firms to enable growth or better facilitate survival in a newly competitive environment is clear to see. The introduction of ABSs is a catalyst for change in the profession.’

A second survey, carried out by accountants HW Fisher and Company among 75 small- and medium-sized firms in London, the south and south-east, revealed that 89% of respondents claimed they had not been affected by the LSA. Just over half (52%) expect the act will not affect them over the next 12 months, but 15% think they will lose business, due to new entrants to the legal market.

More positively, 22% believe the reform will help them gain business over the next 12 months, due to merger plans or other opportunities created by a broader legal services market.

This research, the second annual benchmarking survey undertaken by HW Fisher, reveals an increased interest by firms in attracting outside funding. Last year 11% of firms said they had considered external investment, this year that had risen to 26%.

The report says the impact of the LSA to date has been ‘minimal’, but notes: ‘One possible effect of the LSA, not openly admitted though, is that it has hastened the transformation of legal services from a profession to a business.’