Alternative Business Structures: A Monumental Shift in the Legal Landscape

Alternative Business Structures: A Monumental Shift in the Legal Landscape

The acronym ‘ABS’ has gained notoriety amongst lawyers in that it is a catalyst for change. Some refer to it as ‘Tesco Law’ with the slightest hint of disdain, whilst others refer to it as an exciting opportunity. The former description usually comes from the peaks of the profession whereas the latter comes from the budding high street practice. Regardless of the description, one thing is certain: the legal sector is on the verge of revolution.

The effect of the implementation of key provisions in the Legal Services Act would translate into a radical departure in the manner in which legal services are bought and sold. The government policy that has influenced said changes is predicated on access to funding – something that has become increasingly important in recessionary times. The sections of the LSA that enable access to funding do so in three main ways.

The first, probably the most prominent, is the private equity or venture capital investment route. This would mean that LLPs would be able to sell an equity stake in their business for cash. The far reaching consequences of this can hardly be understated. In essence, it would entitle the holder of the equitable interest to participate in any ‘capital profits’ generated by the sale of all or part of the business of the firm or any of its capital assets. In addition, it would act as an incentive for partners to develop their business further. The ready cash that comes as a result of the capital partnership model could be used to finance expansion projects. Said benefits come at a cost however. A potential third party investor would ideally want a 15–20 % return on their investments. For a firm to be able to accept an investment, it must demonstrate high levels of sustainable profitability. A third party investor could be of any profession, meaning that a non-lawyer could own part of a practice. For the orthodox members of the profession, this facet of change is particularly disturbing. The prospect of being held accountable to an investor who has a purely financial interest in the partnership isn’t exactly appealing; lawyers usually tend to have enough people breathing down their necks.

The second method by which the LSA enhances access to funding is by listing on the stock market. The flotation of a law firm would undoubtedly have its ups and downs. Funds raised in the stock market could be used to finance acquisitions, but there is a potential grey area in respect of the manner in which those funds would be used. A listing on the stock market may be beneficial to retiring partners but younger, ambitious associates wouldn’t exactly find it appealing. Earnings in Public Limited Companies tend to be smaller than traditional partnerships. In the eyes of the external investor, the junior associates would be the key to the future of the firm.

This leaves room for friction between the seasoned lawyers and their junior counterparts. With the introduction of shareholders in the arena, the traditional law firm environment would be transformed; firms would be responsible to shareholders. This would translate into an additional burden in terms of transparency and compliance. One could assume that the funding generated by listing on the stock market may be outweighed by this additional burden. Shareholders would want returns on their investments, thereby making the company profit-driven. It is the view of this author that a company must embrace a form of social enterprise as opposed to being purely profit driven.

The third method, and probably the most appealing for the consumer, is the introduction of provisions which enable multi-disciplinary practices to be legal. The LSA legalises the opening of a firm which is comprised of various disciplines to provide legal services. A potential illustration of this can be seen by Blakemores. Here is a firm which has, to a certain extent employed a marketing operation. They entered into a part franchise, part marketing arrangement with to get more business. It resulted in 4,800 clients being generated with a conversion rate of 15–38%. A good way to do business, but could it be the cheapening of a prestigious profession? In the opinion of the author, in times like this, prestige can be justifiably compromised.

The road to hell is paved with good intentions

This article does not attempt to illustrate all the changes emanating from the LSA, rather to demonstrate the significance of the changes which are afoot. Considering the stance set out by the government, it seems they are pushing for reform with the consumer at the forefront of their minds. But at the risk of sounding overly cynical, and in the words of Boswell, ‘The road to hell is paved with good intentions’.

Prashant Sagar

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