External funding threatens partnerships

Half of commercial law firms plan to obtain external funding when the Legal Services Bill becomes law, research shows—a move which could radically affect potential new partners.

The survey by Clearwater Corporate Finance reveals that the 50% considering outside investment would use the cash to
finance acquisitions or investment in new service lines (73%), take money out (36%) or sell the business (30%).

Many felt that, with no need to rely on partners’ equity, the concept of partnership could become defunct and that a ‘share valuation mentality’ may develop instead.
Others felt partners would have to be more business-orientated and pay a higher price for entry.

Gary Hyem, director at Clearwater Corporate Finance, says: “Traditionally equity partners have only realised the capital they invested. Now their share of the business is potentially worth more. This will create issues such as the management of partners’ expectations and incentivisation for rising stars who may have to pay for the goodwill when they do become equity partners.”
Of the 30 commercial law firms questioned, 56% are thinking about adopting an alternative business structure, while 79% predicted overseas firms acquiring or investing in UK practices.