A key specialism for Howard Hackney LLP is professional practices with Howard having advised perhaps 18 practices in the last two years on a non routine projects based approach, with a dozen on a recurring basis. These range from sole practitioners to three of the Top 100 law firms and his advice has focused on what are perhaps the most important issues facing professional practices.
These issues are the same whether or not they are for a firm of lawyers, surveyors, architects, accountants or patent agents and whatever the size – from 2 partners to 200 partners. Implementation of the solutions and how you go about identifying the issues, let alone the solutions, will be different depending on size and strategic positioning and objectives but nearly every practice should have these issues close to, if not at the top, of their agenda.
Profit protection and improvement
“Turnover is vanity, profits are sanity and cash reality” is as valid a saying as it ever was. In the longer term practices do not survive because their strategy is no longer appropriate to the market conditions but in the short term they fail through lack of cash. Getting your strategy right for the long term is key, as is deciding whether the lowest cost provider model (volume based process driven) or the more normal collegiate service led approach should be used.
Management of the practice (and more importantly a group of partners) is key and this we believe should be via a zero based budgeting approach looking at the productive capacity of the firm in comparison with the available work. It is then that it is vital to identify and actively use a series of KPIs, to set key benchmarks and to manage fee income and collect the cash while engendering a culture that focuses on profit. If you need to make cuts do so only once and do so quickly and perhaps most controversially consider linking drawings to cash collected.
“The only constant is change” is particularly appropriate to legal firms with the implications of the Legal Services Act and the impact of the SRA on how practices will operate in future. However all professions face similar change and such change provides opportunities – a significant one being the potential for merger. Merger is an option for the majority of practices and many embarking on this route lose sight of the fact that a merger must increase profits, whether in fact they are the acquirer or the target and the strategic reason for doing so. The majority of those that embark on merger discussions fail to reach agreement and there are many reasons for this, the most important of which is the lack of an appropriate “people fit”.
If this is right many of the other potential deal breakers such as financial disparities surrounding the value of assets, the level of profits, capital contributions and level of bank gearing can be overcome. Finding an appropriate merger partner can be difficult and it is often appropriate to use external advisers such as ourselves to help identify those firms and to then make confidential approaches or if seeking a “sale” to manage a formal process. Once a deal has been agreed we then work alongside our clients to implement the merger and in particular to address the practical issues. Do remember as a rule of thumb if negotiations take more than six months a deal is unlikely to be concluded.
Profit sharing regime and capital structures
Profit sharing in professional partnerships is probably the most emotive issue in practicing life and the larger the partnership the more difficult. We advise on the types of regime and on the mechanics that may be used to allocate profits whilst recognising that in most partnerships the only thing that partners look at at the end of the year is how much they can draw on their current account and how their draw compares with their peers!
An integral part of profit sharing is to link it with the capital structure and to determine the “right” level of borrowing from the bank. Having done this it is then necessary to consider the structure within which to operate – unlimited partnership, LLP or Limited Company and the tax issues surrounding each.
With the increased level of tax to 50% (and more) that will apply to many partners the mitigation of this liability has become a top priority. Whilst we are not in favour of technically complex “schemes” because of the likely attack by HMRC and the damage to the reputation with HMRC, there are a number of structural techniques that are available to mitigate these liabilities. They mainly focus around the conversion of income to capital and the use of limited companies alongside LLPs.
This is an evolving and complex area but one which we are closely watching, and advising our clients accordingly.
Many of these issues are addressed in a series of podcasts.