Dwindling profit margins are putting one-third of firms outside the top 10 at financial risk, according to an annual survey of the sector by a big four accountancy firm.
The 2013 Annual Law Firms’ Survey from accountancy firm PwC shows a widening gap between the biggest firms and the rest, with profit margins declined in all groups of firms outside the top 10. For the top 11-50 firms profit margins fell by an average of two percentage points to 24.4%, the fourth consecutive drop since 2009 when margins averaged around 30%.
Margins fell by nearly one percentage point to 22.9% for firms in the top 51-100, compared with around 26% in 2009.
Around one-third of firms reported net profit margins of less than 20%.
Top-10 firms recorded an increase in UK net profit margins, with growth averaging about two percentage points to 38.5%.
David Snell, head of the PwC law firms advisory group, said 2013 has been a turning point for the legal sector with the gap between best and worst performing firms widening.
‘Worryingly, with almost a third of law firms outside the top 10 recording disappointing net profit margins, our view is that unless these firms can radically restructure their business, their short- to medium-term survival must be in doubt.’
Competition is likely to squeeze mid-tier firms’ profits further, as larger firms extend their dominance, smaller niche firms seek to capitalise on their specialisms and new players enter the legal market, said PwC.
Top-10 UK profit per equity partner averaged £1m, up 6.1% from 2012 as a result of increased focus on cost reduction and tight management of headcount, said the survey. Average UK PEP for the top 11-25 firms fell 7% to £448,000.
Around 83% of top-25 firms believe a merger is very or fairly likely by 2016, with 42% of top 26-50 firms considering a merger to be very or fairly likely, said PwC.
According to figures from the Solicitors Regulation Authority, there were 10,726 practising firms in England and Wales in September, a month-on-month fall of more than 200 and the smallest number since the regulator began keeping records in August 2009.