This article is relevant to solicitors and lawyers working in smaller sized high street and niche commercial practices. For obvious reasons it has no relevance at all to anyone at larger firms or in house legal departments.
Typical Career Paths in Law
In smaller law firms (high street and niche commercial) there is a traditional route through a law career. Firstly, you find a law firm to get some experience with. That experience is very often as a paralegal or administrative assistant, which then leads you to be able to apply for a training contract because you have some experience in a practical setting. You complete your contract and qualify as a solicitor with the firm you trained with. After 12–24 months you start to look around for your first serious professional role and join another practice, probably on a fairly substantially larger salary than you were getting with the practice you trained with. After about three to five years of hard graft your boss has a chat with you about your future career plans and will often bring up the idea of succession; namely that you join the firm as a junior partner on a salary before taking equity, possibly over a period of time, and finally acquiring ownership of the business, whether with or without other partners.
Shifting Sands
Over the last 20 years this process has changed dramatically. There are a few reasons for this. Firstly there has been a relative decline in salaries in the majority of the legal profession (outside the larger commercial practices of course) and secondly the commercialisation & conglomeration of medium to larger practices has removed career progression paths. Finally there is a general reluctance to go down the traditional route, mainly because of the somewhat threatening omnipresence of the insurance industry that now virtually dictates business terms for smaller high street law firms.
Age is an Asset
We spend a lot of time providng exit strategy advice and valuation reports for law firm owners approaching retirement. The number one issue for all of them is recruitment of mid and senior level lawyers and the ensuing succession issue. If a firm are unable to find a solicitor between two and 10 years PQE who is willing to come in and in future consider taking equity in the business then the only options the law firm owner has is to either close the practice down and pay the run off cover to their PII broker, or to find someone to take the practice over either as a sale or as a merger.
So when you get to about five years PQE with a smaller sized law firm, the number one conversation you need to be having with your employers is to ask them about future plans for partnership and a future equity stake.
Salaried Partnership – any point?
Partnership without equity is completely worthless to you other than giving you a bit of an ego boost. It is very valuable to the firm for matters such as lender panels for conveyancing and various accreditations, but if you take a role as a salaried partner or non-member partner without an accompanying salary increase, you are often acquiring risk without any benefit. If anything happens within the firm the SRA will almost inevitably hold you partly responsible even though you may have had absolutely nothing to do with it. See the back of the Gazette for lots of horror stories involving SRA investigations!
Equity Partnership
Partnership with equity is completely different. If you can get a firm to agree to offer you a share in the business then provided the business is profitable or potentially profitable this is a very good career move indeed. It will often mean you will be getting a particular level of income for the remainder of your career provided you are business savvy enough to keep the business going.
Get advice
There are of course a lot of issues around buying into a law firm and the number one bit of advice is to make sure you get as much information about the business before you sign any agreements.
No offer?
If your current firm have not offered you anything at all in terms of equity, then you need to be wondering why that is and to be looking around on the market for something that does offer you the chance to progress to equity partnership. Security in your career if you are with a smaller practice is dependent on you achieving this status. Anything else and you will forever be chasing a higher salary and be unable to reap the benefit of your own billing. Your bosses know this because they take the benefit at the moment of your billing whereas if you join as an equity partner you then get some share of it.
Interview Questioning
When you are going for roles at this sort of level you do need to be asking the question about equity. Always bear in mind that you are not the weaker party in negotiations. Your potential employers will be looking out for somebody like you to come in and take an interest in acquiring ownership of the business. Show an interest at the very least because it is going to be a conversation they will probably want to have with you at some stage.
The Holy Grail
What a lot of employed solicitors do not realise is that if you want to close down a law firm then in most circumstances you have to pay an insurance company a substantial amount of money in order to do so unless you can find someone to take over the business. To put this into context we have recently been involved in a practice paying £75,000 in professional indemnity insurance on an annual basis. If they want to close down they will need to find c£200,000 to pay their insurance firm in order to shut the business down. Whilst this might sound completely crazy (we think it is!), it is because solicitors firms have to insure themselves for six years post closure in order to cover any issues that may arise.
Over a Barrel
So when your boss says they’re not sure about offering you equity you could point out that if they’re in their 50s or 60s, then at some point they are going to have to think about succession or closure. Ask them to think about how much that’s going to cost them rather than getting you involved on the equity side.
Equity can mean prosperity
Just to put things into perspective when it comes to equity: in most of the firms we value partners at pretty much all sized practices will be earning somewhere between £65,000 – £175,000, whereas most of their staff will be lucky to every get more than £65,000 themselves unless the practice is particularly profitable. This is why taking equity can make such a difference to your future life and prospects and it is definitely something to think about.
Further information
If you would like any discussions or coaching in relation to your career or your future prospects or indeed the value of any practice, please get in touch with us as we would be delighted to assist. We regularly value law firms of all shapes and sizes and can tell you exactly how much a practice is likely to be worth on the open market before you make any decision whether or not to take equity. We will also equip you with the questions you need to be asking around any partnership issues.
Jonathan Fagan is Managing Director of Ten Percent Legal Recruitment and Jonathan Fagan Business Brokers Limited. He has coached solicitors across the UK for over 20 years in terms of career decisions and is regularly involved in the sale and purchase of law firms and accountancy practices. If you have any questions please contact him via the contact page and he will be delighted to have a conversation with you.
