Norman Kenvyn Editorial, Modern Law Magazine, Feb 2017
Question: Is there a link between Brexit, Trump and the growing number of law firms going into administration?
Answer – Of course not!
Clearly there is uncertainty following the UK’s decision to leave the European Union. Combine this with the appointment of Donald Trump as President and the shockwaves that were sent through the UK economy, the financial sector in particular, and you can see why these two events are being cited as the reason for many things. The reality is that UK business has continued to perform, the stock market has risen to record highs but there is a growing increase in law firms going into administration. The reason is uncertainty, (and lack of cash flow), but this is not driven by Brexit or Trump.
The high street banks are the primary funders to the legal sector and do not like uncertainty. This is compounded by the rising numbers of law firms going into administration making the banks even more nervous about the sector as losses are being incurred. Well regarded law firms such as GT Law, Prolegal, Parabis and only this month KWM, are a clear demonstration that size, or profitability, does not prevent failure, it is the lack of cash as the adage TURNOVER VANITY; PROFIT SANITY; CASH IS KING clearly reiterates.
For the modern PI law firm, and due to the very nature of their business, achieving certainty is not easy. From changing industry reforms that affect their business (outside of the law firm’s control), the financial management (within the law firm’s control) is critical and it should not be under estimated how much reliance a funder will put on strong financial management.
Financial management is making sure the law firm has the appropriate resources; knowing how possible changes and reforms will impact the law firm’s business model, ensuring the company has access to sufficient financial resources to be able to continue trading though the peaks and troughs of the changing business.
The law firm therefore requires funding to cover these vagaries however banks continue to be nervous of the legal sector as referred to above. Combine this with the fact that when a bank assesses the risk of a law firm (putting legal sector exposure/performance, regulatory and capital requirements to one side), they look to the balance sheet, stability, certainty, security and no surprises – they do not like change! This inevitably leads to a smaller facility being provided by the bank and less than the law firm actually needs, this is the paradox facing the law firm and a funding gap that the banks cannot bridge. This is the funding gap that can be filled and why alternative funders such as VFS Legal Funding are crucial to helping law firms achieve certainty in terms of cash flow.
VFS understand the challenges a law firm faces and can provide the additional funding required; aligning facilities to match expected cash flow and not a short term expensive loan. The law firm can achieve its business objectives, smooth irregularities in cash flow through uncertainty in case settlement for example, and to ensure the firm is not reliant solely on their bank to be able to move forward, helping the law firm increase its profitability by increasing their financial muscle.
Modern Law, Issue 28, February 2017