The Growth of Start-Ups in the Legal Sector

Offering flexible, agile working and the ability to serve national and international markets arguably better than traditional firms, individuals are now frequently breaking away to set up their own niche practices. However, the growing trend isn’t all about reward, and individuals shouldn’t sleepwalk into setting up a new practice without first mapping the risk.

Meanwhile, traditional larger firms need to confront the competition, and should be trying to retain talent and make the option of staying harder to resist. We hear from Ian Johnson, a Director in the Professional Practices team at Crowe UK, on the growth of legal start-ups.

There is no escaping the fact that we are in a period of economic and political uncertainty, so it is encouraging to see that the number of practice start-ups remains robust. When you consider the drivers, as well as the personalities driving these new firms, the reasons are clear.

It is no secret that the legal market has become more and more price-driven in recent years and the availability of free, and of course unfiltered, legal advice online has been a key factor in this trend. It is unlikely that this will change any time soon.

However, where the consumer is looking for particularly specialist advice, a firm’s pricing structure, and even its overall reputation, often takes second place to an individual professional’s reputation and that can be a hard driver to resist for the professional who feels that they are contributing to their current firm’s success more than others.

Recent SRA consultations have focused on driving innovation and seem to actively encourage individuals to operate beyond the framework of the traditional law firm. Couple this with a shift away from the traditional assumption that the sole aim of a fee earner is to become a partner in the firm with which they trained, and it becomes clear that the conditions for new legal start-ups are becoming more favourable.

Of course, no individual should strike out alone without first considering the risks as, although it is unlikely that they would outweigh the potential benefits in the long run, there are many different factors to consider.

There has been a growing number of niche firm start-ups and the work types that these firms focus on can be relatively high risk, from both a financial and professional liability perspective, so it is common for new firms to start out as either a Limited Company or Limited Liability Partnerships (LLP) in order to try to protect against this risk. Over the last two years, the percentage proportion of law firms operating as limited companies has increased, while the percentage of unincorporated practices has decreased, and there is nothing so far to suggest that this trend will slow down or change anytime soon. However, different structures bring different statutory obligations, as well as varying taxation regimes, and so this all needs to be explored from the outset.

Although many new practices have a lower starting cost base, operating from smaller office spaces, with fewer support staff, for individuals who have worked as employees in larger firms, they may find that they have been protected from the harsh financial reality of owning and operating a business in a competitive industry and the learning curve can be steep. The competitiveness is exacerbated for new firms, so detailed financial modelling and stress testing, backed up by a realistic business plan is crucial.

Lawyers breaking away from larger firms, who may have enjoyed a strong business and administrative support network in the past, may suddenly find themselves having to be much more hands on with basic administrative duties. They could learn quite quickly why many managing partners in law firms actually carry out relatively modest amounts of chargeable work.

Individuals shouldn’t sleepwalk into setting up a new practice without first mapping out the regulatory risks too. Getting the regulatory ‘must do’ actions in order at the start is critical, and the cost of getting it wrong can be even more critical. The SRA provides guidance on setting up a new law firm, but it only really scratches the surface. It is important that individuals don’t try to handle it all alone and the initial cost of bringing in other experts to help at the start will pay further down the line.

Ian Johnson

Director

Crowe UK

Ian Johnson is a Director in the Professional Practices team at national audit, tax, advisory and risk firm Crowe UK. He is based in the firm’s Cheltenham office. 

He has considerable experience in assisting professional practice firms with all aspects of financial reporting and accounting matters, including statutory accounts audit issues. He also advises law firms on the SRA Accounts Rules, financial and regulatory compliance, restructuring (including mergers, de-mergers and business acquisitions), internal management reporting, financial forecasting and tax compliance.

With a special interest in training and development, he lectures nationally on the SRA Accounts Rules.