Small firms may be tempted to get out of PI fast, but a more pragmatic approach could suit them better.
The introduction of the Jackson reforms has created a narrative that small firms are looking to get out of personal injury (PI) sharpish, and there is no shortage of buyers willing to do a deal on their work-in-progress (WIP).
Some of this has been created by buyers, but more noise has arguably been made by intermediaries looking to make a turn from arranging WIP sales.
The situation has been exacerbated by the news that 175 firms were unable to arrange professional indemnity insurance by 1 October, and I wouldn’t be surprised if failures to notify the Solicitors Regulation Authority (SRA) that firms are taking advantage of the new 30-day extended indemnity period mean the figure is actually higher.
But is selling the right option? In some circumstances it will be, but I fear that in this fevered atmosphere, firms are not properly considering whether they would be better off with other options, such as running down their WIP, to best realise the true value of their practices.
Law firms do not easily accept failure and find it difficult to look outside of their inner sanctum for business advice, nor do they find the SRA an easy avenue to take when they are under pressure. But this problem is not going away, as evidenced by the current law firm failures due to lack of PII and cashflow issues, most recently hitting Harris Cartier, a firm that had done so much good in the wake of the Bristol babies scandal.
But there are options. Firstly, there are specialist advisors providing quick and direct access to brokers and underwriters. For some it will make no difference. If you have a poor PII claims history and no viable prospect of trading profitably going forward, shutting the doors and exiting from the market with an orderly wind down is your only realistic option.
However, looking to PII brokers who are specialist at risk underwriting and banking specialists who understand the legal sector can make a world of difference.
Too many law firms keep their funders at arm’s length but this is a risky strategy, those with a specialist relationship manager who understands the sector and your business have the greater advantage. At a time when many will be looking for any increased credit facility, law firms need to engage with their bank immediately. Banks do not want to see law firms fail but at the same time they’re not willing to offer financial support without evidence of long-term business model and strategy, along with cashflow forecasts which hold up to scrutiny. This, too, needs specialist advice.
Sound business and banking advice creates options such as whether to trade out whole or part of services that are no longer profitable, or to sell part or all of the business.
If you decide on a sale, in whole or in part, be warned that the world of buying law firms and caseloads is akin to The good, the Bad and the Ugly. It is my view that too many law firms are being sold off without proper thought, resulting in poor value for the firm and OFR nowhere in sight; such ‘back room’ deals that prey on the worries of troubled firms has to stop.
Earlier this month, I advised accountants instructed by two law firms that are considering selling their PI cases as part of a bigger financial picture of streamlining and horizon planning. Both want to stay in the market to provide legal services but are torn regarding the value of their PI work.
The make-up of the caseloads were similar – approximately 95% low-value PI and 5% higher-value multi-track cases. Both firms have staffing costs, redundancy and notice periods to consider. They are also aware of their duties to clients under outcomes-focused regulation.
The lower-value work is likely to be completed within 6-18 months, and the rest in up to 24 months. While many might consider a quick sale so that they can move on with their strategy, my advice has been for the firms to consider the costs of motivating employees otherwise losing their jobs within three months and instead having a 9-12 month period to work at the cases, provide the highest client service and as a result, generate fee income in-house that is likely to provide a greater return on investment than selling for, say, 40p in the pound and paying redundancy and other associated costs.
Also take into account that both firms want to stay in the market (albeit not doing PI) and they have their market reputation to consider. Shipping their clients out to another firm for a cash value may not sit well with a consumer of legal services. I’m not sure firms could get away with that if the client was a large corporate rather than a consumer.
In most situations a measured trade-out of PI will make a law firm more money; keeping the maximum return on investment in-house is better than selling if you can.
Regardless of what route firms take, they need to be confident in the true value of the PI work in their firm before they make a decision. A granular review of the following is essential: work types and length of time cases have to run; likely fee income to be derived; WIP; debtors; creditors; overheads; and trade-out/closure costs – legal, accounting, redundancy.
There are some professional and commercial acquisitive law firms and ABSs looking to create options for law firms that are at a crossroads so exit and selling files need not be a fait accompli.
Contrary to popular belief, it is still a sellers’ market if sellers would only realise the true value of their work. PI law firms should be asking themselves: if there is no value in PI why are so many in the sector grouping together to swoop in and make a steal? New business models have been created on the back of LASPO and ‘exit specialists’ are appearing almost weekly to value PI work to feed a growing number of large acquisitive buyers with deep pockets.
But who is advising on these deals and more importantly – who is regulating them? When law firms hit a wall of potential insolvency, can their clients’ cases be sold as a commodity for the highest pence in the pound? Is OFR being applied to these deals to protect vulnerable consumers of legal services?
This leads to a further complication; in many cases insolvency practitioners and banks are taking hold of the reins in deals which are not being properly marketed to credible and selected potential purchasers. There is no clear guidance from the SRA as to how they should protect clients in these situations.
Fire sales can be avoided in almost all cases with a managed process in the interests of the law firm, its clients and its creditors but law firms must remember:
- Don’t accept defeat and sell your cases to the first interested buyer;
- Look to specialist advisors both legal and in PII and finance to assess your options;
- Communicate with your bank – they don’t want to see you go under and should be doing all they can to support you – but will need robust forecasts;
- Consider all options: turnaround, trade-out and sale;
- If you do sell, make sure a specialist is instructed as lead advisor before you go to market and your cases achieve highest value, not just for WIP but also future opportunity value;
- To go to market in a measured and strategic way rather than what we have seen in recent times;
- If you do have a book of PI cases, can you collect cash on any cases that are settled or liability admitted? Cash gives breathing space to consider options and service debt.
Ensuring you achieve the best return on investment for your business, whatever course you take, means accessing timely advice and not waiting until your business is on a burning platform of distress that leaves you with only one path to walk down.
Lesley Graves is managing director of Citadel Law