What difference has external investment made so far to English law firms, and does it affect the Scottish market?

When I practised as a solicitor, my firm acted for high-growth businesses, young companies with ambitious plans. Most of these companies had external investors, providing the capital to finance growth.

As everybody knows, in 2011 law firms in England & Wales were permitted to form alternative business structures, allowing external investment in return for an equity stake. In Scotland, this still isn’t possible. Has this caused huge changes in the English legal market, and is Scotland now at a competitive disadvantage?

In England & Wales, as far as I can tell, the jury is still out. A number of law firms have received external investment, and many are using it to pursue a growth strategy, such as the Australian Stock Exchange-listed Slater & Gordon, which has bought up several English firms. However, the predicted “revolution” has not (yet?) come to pass.

I suspect the issue lies mainly in the nature of law firms, traditionally not “growth businesses”. It seems to me many lawyers enjoy working in relatively small business units, with a few like-minded individuals, focusing on their clients, and their clients’ business, rather than their own. In a well run firm, partners can manage funding via partners’ capital, prompt billing and credit control, and if necessary, bank lending.

It has taken time for lawyers and external investors to work out how investment in law firms might work, and more particularly the advantage it gives to firms getting it right. The obvious first choices were firms focused on consumer and volume work, where investment can build scale and efficiency, for example through IT.

Investments in more traditional firms are rarer. One potential investor was reported as saying: “You don’t have the infrastructure, people and processes that make things lean and mean, and you don’t have the clear decision making because you have these wretched partnerships!”

However, things are moving on. Earlier this year, the Business Growth Fund invested £5 million in London-based McMillan Williams. MW has grown from five offices in 1995 to 20 today. It plans to have an office in every high street south of Bristol! This firm has a proven track record, a clear vision of why it needs the funds, and a strong management team the investor has confidence will deliver on that vision.

For ambitious firms in England & Wales, external funding is an intriguing option, and one that will become more popular as investors and firms work out how best to deploy that capital. However, for most firms, I suspect that tighter management of costs, work in progress, billing and credit control is far more realistic.

Are Scottish firms at a disadvantage? Put simply, yes. If one firm has fewer funding options than another, the firm with more options has an advantage. The question, however, is what impact that will have. I suspect not much.

Or rather, not much until a “Scottish” McMillan Williams gets an investment of £5 million or more to put an office on every high street north of Berwick. The question then will be – how can firms that operate as small business units continue to enjoy the very real benefits of doing so, but still reap the benefits of scale enjoyed by a much bigger entity.

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