Is it worth being a partner in a law firm?

The Law Society Law Management Section (“LMS”) benchmarking survey for 2017 has arrived. It’s a great read and there is something useful for everyone in there. Although, there is a reason that we at Armstrong Watson do individual benchmarking exercises for our legal clients, rather than rely on these UK wide trends – it can be tricky to spot the key metrics hidden in so many pages of data and ask yourself the pertinent “so what”.

By coincidence, as it was being released, I was working on a succession plan for the handover from one set of partners in a high street law firm to the next.  Therefore the figures around capital account requirements and profits per partner got me thinking – is it worth being a partner in a law firm?

Being an employed fee earner is certainly lower risk, but with average salaries ranging from £35-75k (sometimes higher in niche or international firms) and the median (£42k) increased by nearly 4% from last year it can still result in a decent return.  This tallies with what we see with our legal sector clients – fee earners wages have had to increase recently due to a real lack of good quality lawyers in the 2-7 years PQE area.  So if being a “senior” fee earner is a decent job, paying a decent wage and you have received some decent pay rises recently; why take the leap into the extra risk of partnership?

The accountant’s answer may well be the “super profits” (i.e. the additional share of profits available to partners after their notional remuneration has been allocated for doing the “day job”). The LMS survey suggests that this equates to a median of £56,000 per partner – or £34,000 assuming the partner is a higher rate tax payer.  Whilst our own figures (that we collate for our clients for similar exercises) are a little lower than this, at face value it would seem to be attractive to earn approximately 230% of a senior fee earners wage “just” for being a partner.

However, what are the partners doing for that extra remuneration?  Quite apart from their own fee earning and fee generating responsibilities, (which could well be set at levels higher than “normal” fee earners) there is the additional management, leadership and running of the firm.  Each partner’s role in their firm will be different but on the assumption that these leadership responsibilities involve just four additional hours a week (and that is very likely to be much higher) then we have an additional 10% of workload. In practice therefore, it is likely that much of the “extra” 130% comes from this workload (what one senior executive I spoke to refers to as her “5-9pm workload”).

Further than this, and unlike other senior executives, partners are investors in their business – through their capital and current accounts.  Our own data suggests that the average capital account is £164k (with the LMS survey picking a range between £20k and £561k depending on the size of the firm).  Often these capital accounts are funded through personal lending, which could well be costing the individual 2-4% in interest and can fluctuate as the business needs working capital.  Were the solicitors firm to go to the bank and ask for sudden injections of cash month to month with no security and no clear repayment plan you can imagine that the headline interest rates offered could be very much higher, if they were offered at all!  There is a notional cost to the partner of providing this capital instead of an external party, and especially as it is often provided at short notice (e.g. by changing drawings from one month to the next).

Thus the median figure of £56k above is swiftly eroded by the additional tax paid on it, the additional fee earning work, the additional management responsibilities, the need to service personal debt and the risk of having considerable personal capital tied up in the business (often for years).  Is it worth being a partner? There is a weak financial argument based on the above, but much better ones in terms of career development, in having the freedom to set your own agenda, in having a say in the future of your firm, and in turning an average firm per the benchmarks into a high performing one.

Is it worth being a partner in a law firm – yes absolutely, but the “worth” cannot solely be measured by figures in the LMS survey…

 

Tom Blandford is a Legal Sector Director at Armstrong Watson LLP, specialising exclusively in advising law firms.  The legal sector team advises law firms throughout the UK on strategic, structural and other business improvement issues as well as providing efficient accounting, tax and SRA accounts rules services.  Further information can be found at:  www.armstrongwatson.co.uk/legalsector

This article is a general guide to the issues that we see in practice.  It is not a substitute for professional advice which takes account of your personal circumstances.  No responsibility can be accepted for any loss occasioned by any person acting or refraining from action on the basis of this article.

The Law Society has exclusively endorsed Armstrong Watson for the provision of accountancy services to law firms throughout the whole of the North of England.             

                        

The ability to compare the financial performance of your law firm with that of other firms within the Legal Sector is a powerful and valuable tool. For further information on benchmarking please contact Tom

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