Member Article

Law firms will feel the heat in July

Law firms in Yorkshire will be feeling the heat in the coming weeks as partner tax payments are due to be paid in July.

In the past, firms would turn to short-term unsecured lenders to bridge the funding shortfall, but this may no longer be an option with the legal sector facing volatile times. The risk to lenders has therefore increased, particularly in Yorkshire where mergers, acquisitions, and administrations have been widespread.

To counter the risk lenders have increased rates, but with many firms finding cash flow a challenge, they will have to look for alternative options come July. Banks will also be reluctant to allow short term lenders to take security over law firms.

They recognise that unless their security is supported by personal guarantees of partners or even mortgages on partners’ properties, their own security may be a lot less valuable than they originally thought.

And July could just be the beginning. September will also see professional indemnity policy payments due, which again would normally have been covered by a short-term loan.

Gordon Singer, tax partner, PwC Leeds, said: “The legal sector has gone through radical changes over the past few years, having to adapt to a number of legislation changes as well as the “new normal” economy of low transactional activity.

“We anticipate there will be more volatility in the market with a significant number of firms hit hard over the summer months as partner tax and professional indemnity policies are due and loans hard to come by.

“Some firms have used mergers to create security in scale, but partners need to be in a strong position to ensure it doesn’t become a takeover. Others are looking to operate more efficiently to save costs and be more agile in such an unstable market, with lower headcount and simpler processes.

“While these actions will ensure long term cost savings, the impact will not relieve the short-term difficulties.

“Law firms which start negotiations early with banks, partners, landlords, staff and pension funds to prepare them for the July and September payments, will be the ones that weather the storm.”

This was posted in Bdaily's Members' News section by Mark Lane .