Law firms are entering into ‘gentlemen’s agreements’ with investors in anticipation of the rule changes that will allow them to sell equity stakes in their businesses from October 2011, a leading consultant told the Gazette this week.

Giles Murphy (pictured), head of assurance and business services at accountants Smith & Williamson, said funders were providing loans to law firms on the basis that these would convert to an equity stake when the new rules come into force.

He said: ‘I have talked to a number of funders who are interested in this market, and we have seen offers from funders to law firms.’ Murphy added that firms were entering into ‘a gentlemen’s agreement’ with funders. He said: ‘Investors provide borrowing to the firm which is on terms that are renewable in two years’ time, and they have had discussions in which they say that in two years, it will convert to an element of equity.’

Murphy believes that many law firm managing partners are unaware of the level of discussions going on between funders and law firms. ‘A lot of managing partners think it is zero, and it’s definitely not zero,’ he said.

Murphy noted that as banks’ interest in lending to professional practices is waning, external investment could become more attractive to law firms.

Law firm consultant Nick Jarrett-Kerr said: ‘Firms are beginning to look at different ways of structuring themselves and their governance arrangements, not necessarily having agreed a deal with anyone, but with a view to having the option to do so.’

A Solicitors Regulation Authority spokeswoman said that, while loans were permitted under SRA rules, much would depend on what strings were attached to the loan as firms cannot pass ownership or equity to a third party under present rules.