Employee Ownership within Law Firms – a growing trend?

Of the approximately 9,500 solicitors firms in the UK, an estimated 20 are now employee-owned, in most cases through an employee ownership trust (EOT).  A tiny percentage, yes, but one which I believe is set to grow over the coming years as practices grapple with multiple challenges which for many will make the traditional partnership model no longer fit for purpose.

The radically changing legal environment

For some years already, a growing number of firms have been finding it difficult to achieve succession and continuity by creating new partners.  Associates, no matter how talented and engaged, are often unwilling and/or unable to invest in partnership.  Flexible working and a healthy balance between work and other parts of their lives is prized over the time, emotional and financial commitment required of a partner, despite the significant financial rewards that can come from a successful practice.

This is compounded by the growing recognition that for the modern law firm to succeed, it must be both agile and attach far greater importance to other factors beyond being good at legal advice, including leadership, technology and teamwork.  Some practices wishing to invest in technology are looking for significant inward equity investment.

These are some of the drivers encouraging practices to incorporate. This makes it much more practical to widen the ownership to include non-lawyers, including both employees and investors, building an environment which facilitates a highly motivated and adaptive culture, more likely to embrace regular change.

SRA approval is generally likely to be needed for a law firm to become employee owned in this way.  The SRA, although exacting in its requirements, appears to be familiar with EOTs and in our experience is responding reasonably quickly and helpfully to applications.

Employee ownership

For those firms that have not only incorporated but gone a significant step further by placing the company under employee ownership through an EOT, a number of additional potential benefits can result.

For any business dependent for its success on the skills and commitment found throughout its staff (so not just the performance of a handful of lawyer superstars), an EOT can help foster a strong collaborative culture where everyone feels part of the same with a common purpose.

Sharing profits with all employees is encouraged by allowing an annual bonus (up to £3600 per person) free of income tax,  as long as it’s paid to all employees.  The EOT model is flexible enough, though, to ensure that reward is delivered to the right people in the right places.  The amount of income tax free bonus per employee can take into account factors such as salary, and it is perfectly possible – and very common – also to have more targeted (fully taxable) incentive arrangements according to role, and/or equity ownership for key people, for example through share options.

Employee ownership is compatible with raising external equity, so long as the EOT retains at least 51% of the company.

Practice owners who sell to an EOT can do so free of capital gains tax.

Can a partnership or LLP be employee-owned?

The majority of employee-owned law firms are companies that are wholly or majority owned by an EOT.  There are some examples, though, of a partnership or LLP which has one member holding an ownership stake for the benefit of the firm’s employees.

Our own story 

As a firm whose core legal specialism is employee ownership (and having advised several law firms on moving to ownership by an EOT) and which prizes a strong collaborative culture, the argument for doing the same is naturally compelling.  After three years of planning (a period which should have been significantly shorter but for Covid-19), I’m pleased to say we are now 100% owned by an EOT.

EOTs all round?

Our advice is always that, whilst employee ownership offers benefits for many businesses, it will not be right for all.  This is certainly true of law firms.  For some, partnership (or a series of separate partnerships in international firms), including through an LLP, will remain the gold standard.  Others may move to a corporate structure but continue to concentrate ownership among a relatively small group of people, sometimes including outside investors, or become part of a larger group.

I do anticipate, though, an accelerating growth of interest in employee ownership for law firms.  Some of the most fertile ground may be found in successful and well managed practices, already benefiting from an open and collaborative culture, with a clear plan for leadership succession where current executive partners plan to step back.

That is not to rule out employee ownership as one part of a plan to revive an underperforming firm, but it should not be a defence mechanism seeking to stave off insolvency.  There must be a credible and deliverable business plan and the current owners may find that that value of the practice is low.

Intrigued and want to find out if EO could work for your firm?

We have helped over 120 companies become employee owned, a few of which have been law firms. If you’d like to find out more on employee ownership and if it could be right for your firm please contact Robert Postlethwaite for a no obligation chat.