Mid-tier law firms are using increasingly high levels of bank financing, with many seeking to merge to secure their financial position, according to an authoritative survey by accountants PwC published today.
The figures show that firms in the top 11-25 bracket now receive 40% of their funding from external sources rather than partner capital, 13% more than in 2009 and the highest level ever recorded by PwC.
At top-10 firms, external funding comprised 26% of partnership funding, while it accounted for a third of funding at top 26-50 firms, according to PwC’s annual law firm survey 2010. The vast majority (83%) of mid-tier firms said it was ‘fairly likely’ that they would merge in the next two to three years, up from half in 2009.
‘We were worried that banks would be closed for business, but they weren’t, and firms have taken on extra debt,’ said PwC partner and report author Alistair Rose. ‘They key for the firms is keeping that debt under control. Many mid-tier firms want to merge to protect their financial position.’
Rose added that the collapse of north-west firm Halliwells was a ‘salient warning’ for the legal sector.
Corporate firms have also been affected by bad debts from international operations. Bad debts from western Europe accounted for 36% of gross debts at mid-tier firms, while top-10 firms reported average bad debts of 19% of gross debtors in central and eastern Europe.
Rose said that, historically, firms have not undertaken credit checks when taking on clients, although they have improved in this respect.
Average profits per equity partner (PEP) stabilised across the top 50 in 2010, with the top 11-25 the only group to suffer a decline, from £444,000 in 2009 to £441,000 in 2010.
Top-10 firms saw average PEP rise 5% to £917,000, while the top 26-50 saw it rise 1% to £380,000. Top 51-100 firms saw average PEP grow 3% to £278,000. Around half of firms in the top 25 recorded lower overseas fee income.
Some 60 firms, including 80% of the top 50, responded to the survey, which covered the 12 months to April 2010.