When the COVID 19 Crisis struck the Chancellor acted very quickly to help affected businesses and employees with the CJRS Furlough and a range of Government backed loans.
But most of the measures have done little to mitigate the impact on Law Firm Owners, who will still be hit hard.
The Furlough scheme is a real help and has prevented (or at least deferred) many redundancies, in the hope that the recession, whilst deep, may only be short lived. But the loans only spread the impact – they do not reduce it. They turn a major hit into a series of smaller ones over (up to 6 years), and they make the cash flow consequences survivable for most – But the total damage is still there.
So far as I can see for most well-run firms with a typical mix of Residential Property, Private Client and Owner Managed Business clients the likely hit will be in 6 Figures.
How do I arrive at that?
I start with the position of the firm Pre-COVID – actual or budget, as the benchmark, (many firms have March or April year–ends, which coincide with the start of COVID)
I then look at the likely reductions in Fee Income. Of course, this varies by Department/work type, but for most mixed/high street practices this is unlikely to be less than 20% in this financial year – for many it is more.
There are some cost savings to be made – including the impact of the Furlough grant. In most cases these staff cost savings are less than half of the lost income – often closer to one third, but this depends on a range of factors specific to each firm. And then, there are some savings to be made in other overheads, but many of these, such as Rent, PI Insurance, IT are fixed – so the savings are likely to be modest.
This scenario assumes that the economy recovers fully by mid-2021 and that there is no second spike.
So how can we evaluate the impact on partners let us take a simple example of a £5m turnover firm which loses 20% of its revenue (£1m) and saves £350k in staff costs and £50K in other overheads. This firm would suffer a profit reduction of £600K – so simply divide by the number of equity partners to arrive at the impact per PEP. Suppose there are 8 Partners, this would produce a hit per partner of £75K.
If the fee income fell by 30%, and the other ratios followed, the hit per partner would be over £100k. There would be less tax to pay, but that is scant consolation.
It is important to understand that this damage is being done here and now and there is little that can be done to avoid it hitting the profit and loss account, and thence Partner capital. Borrowing money merely spreads the cashflow impact.
For some Partners, the COVID damage may wipe out their Capital/Current accounts. For other looking to retire, this may affect their life plans. There has been plenty of publicity about the impact on other industries such as hospitality. The impact on Law Firm Partners seems to have gone below the radar.
