Restructuring in the Legal Sector

Introduction

Every law firm, indeed every business, goes through phases dependent upon the economy, its clients, its staff and its partners. On occasions the firm will face challenges which need to be addressed in order to ensure that future success (or even survival) of the firm. This article focuses on the shorter term issues of timing, cash management, forecasting and understanding the strategic position.

In each situation the key questions are:

  • Do we need restructuring?
  • If so, where are we now?
  • Where do we want to get to?
  • How do we pragmatically get from where we are now to where we want to be?
When do I need to think about restructuring my practice?

Restructuring is more than just the routine management of your practice. It is about a need for significant change – be it structure, personnel, clients, work types, offices or funding. If you need your practice restructuring, the key financial signs are likely to be:

  • Insufficient profits to allow partner drawings at a level to cover desired lifestyles
  • Overdraft always at the limit
  • Partners being requested to increase capital
  • An inability to keep pace with market rates of pay for key staff
  • Poor productivity from demotivated staff
  • All resulting in poor performance by comparison to benchmark KPIs
Cash is King

Businesses can survive for many years without making a profit – but without cash, trading will have to cease very rapidly. So the first key step for a firm with challenges is to check the short term cash flow position. 

Use can be made of a 13 week cashflow model. Included within the forecasts should be very realistic inflow assumptions and very pessimistic outflow assumptions. Once prepared consideration must then be given to including a contingency expense provision in addition – any restructure is likely to generate an unexpected cost, or maybe advance a cost that would normally be expected following the end of the forecast period.

With the 13 week forecast in hand the results can be compared to the funding resources available – be they overdraft, invoice finance, term loan or partner capital. This forecast should be updated and extended on a weekly basis, to ensure that the actual performance of the business (by comparison to the forecast) is accurate and that any pinch points can be identified early.

Forecasting

The importance of creating and extending (on a weekly basis) the 13 week cashflow is explained above. However this is not the only forecast likely to be required – a three year forecast is also likely to be necessary.

The aim of this forecast is to communicate to partners and then funders the position of the business now and where it expects to go over the next 36 months. In the course of drafting, adjustments to the forecasts may be required for early strategic decisions made in parallel with the forecasting process.

When the forecast is ready for presentation to partners and, subsequently funders, consider the following final checks:

  • Leave it overnight and review it with fresh eyes first thing the following morning
  • Ask yourself how it will read to your fellow partners
  • Consider what it will mean to your funders, and how they might react
  • Get a trusted advisor to review and discuss it with you as a preparation and final sanity check

Any funder will expect all partners to be in agreement with any forecasts presented, especially if seeking an increase in facility. So ensuring proper partnership understanding of the position and buy-in to the strategy is key.

Understanding the strategic position

With the short term cash position under active management the firm’s management board can focus on where it is strategically. Each review will be different, but key questions will be:

  • What makes parts of the practice successful today?
  • Which elements of the practice are under performing?
  • For successful elements – what can be done to make them more successful?
  • For challenged elements – what would need to be changed in order to make the element successful? And is that input available/worth it in the circumstances?
  • If resources are scarce, which elements of the practice make the best return in relation to the scarce element?
  • Which elements of the practice offer hope of significant growth in the future?
  • Which partners/teams show a desire to succeed?
  • What is the position of key stakeholder groups?
  • In particular what is the personal position of equity partners?

Overall you need to understand where you are now – and you need to have a very realistic view of that reality. There is no point in overstating your position as you will have to justify your position to others as the restructuring process continues, and they will challenge you if they believe that your stated current position is a fantasy. With your understanding of where you are currently you can also focus on where you want to get to. It is the business owner’s decision as to where they wish the business to go, usually the equity partners in a legal context. 

Conclusion

In this article we have considered when you should restructure your legal business, and the short term cashflow issues that will inevitably result. Every restructuring is different, and every one will create challenges, so remember:

  • Every plan will be forced to change as you have to react to outside events
  • With a positive plan you will amaze yourself with what can be achieved
  • But do know where the point of no return is
  • Taking advice from appropriate professionals is not a sign of weakness (it’s what you would advise your clients!)
  • The vast majority of restructurings do turn around

If you like this article and would like our FREE updates sent straight to your inbox then subscribe to our monthly newsletter

Subscribe

Get in touch

To find out more about how we can help you or your business, call us on 0808 144 5575 and speak to a member of our team. Alternatively use our contact form to send us a message or arrange a callback.

CALL 0808 144 5575

or

Contact Us

All content © 2015 Armstrong Watson. All Rights Reserved. Website by Simon Pighills.

Armstrong Watson LLP is a limited liability partnership registered in England and Wales, number OC415608. The registered office is 15 Victoria Place, Carlisle, CA1 1EW where a list of members is kept. Armstrong Watson Accountants, Business & Financial Advisers is a trading style of Armstrong Watson LLP. Armstrong Watson LLP is regulated by the Institute of Chartered Accountants in England and Wales for a range of investment business activities.

Armstrong Watson Audit Limited is registered to carry on audit work in the UK and Ireland by the Institute of Chartered Accountants in England and Wales. Registered as a limited company in England and Wales No. 8800970. Registered office: 15 Victoria Place, Carlisle, CA1 1EW

Armstrong Watson Financial Planning Limited is authorised and regulated by the Financial Conduct Authority. Firm reference number 542122. Registered as a limited company in England and Wales No. 7208672. Armstrong Watson Financial Planning & Wealth Management is a trading name of Armstrong Watson Financial Planning Limited. Registered Office: 15 Victoria Place, Carlisle, CA1 1EW