The law firm of choice for internationally focused companies

+263 242 744 677

admin@tsazim.com

4 Gunhill Avenue,

Harare, Zimbabwe

Law Firms Trying Not To Go Bankrupt This Next Recession

While superficially the economy continues to slowly inch forward, cracks in the foundation are becoming increasingly glaring to anyone willing to look. With the last recession still fresh in their minds, law firms are committed to not entering this next downturn with their pants around their ankles like last time.

When the last recession hit, a bunch of once-stable law firms got curb-stomped by reality when the check came due on their heavily leveraged lifestyle. Firms were borrowing big from banks and living high on generous lines of credit. It allowed firms to fool themselves into thinking they’d survive the economic catastrophe working its way through their clients and that rosy revenue projections would keep the cash flowing. Dewey know how that turned out?

American Lawyer has a new piece highlighting how firms have spent the intervening years turning away from the banks and toward keeping more capital in-house:

“The debt load carried by firms today is quite a bit different from the debt load that was carried by firms in 2008 and 2009,” [Citi Private Bank Law Firm Group Managing Director Michael] McKenney said, looking at a sample of 60 law firms in the Am Law 100, which does not include any firms that completed significant mergers or acquisitions in the past 10 years.

Among that sample, he said, bank debt per equity partner was $94,000 at the end of 2008. At the end of 2018, bank debt per equity partner was $57,000 at the same 60 firms.

But on the flip side, McKenney said, capital contributions per equity partner have jumped, from $330,000 in 2008 to $549,000 in 2018. The increase is due in part to law firms’ success in recent years, he noted, as capital contributions are often taken as a percentage of a partner’s earnings.

Upping the ante and lowering the debt is all well and good, but the comparison missing from this analysis is the slashing of the equity partner ranks over the last decade. If bumping up capital contributions per partner by 66 percent is impressive, but if that move corresponded with reducing equity partner headcount by 30-40 percent, it’s not as big a leap as it would seem.

Whether it’s these increased contributions or a general belt tightening elsewhere, it’s definitely enough to reduce firm debt loads which is all that’s important. Still, the consolidation of the firm’s capital in the hands of fewer and fewer equity partners does make the firm more reliant on those partners for its financial wherewithal. At a certain point, a firm puts itself in the unenviable position of a five-partner poaching representing a significant dent in the firm’s rainy day funds. There are advantages to spreading out the risk.

But this is all academic if the recession guts demand so badly that firms can’t keep revenue coming in the door. As we watch the barbarians gather at the gates, law firms are furiously repairing their ramparts. We’ll learn whether or not they’re successful soon enough.

Law Firm Debt Levels Shrink as Partners Put More Skin in the Game [American Lawyer]