Employee Ownership for law firms is a phrase that would have been almost unthinkable a decade ago. Employee ownership is for retailers like John Lewis, right…but surely not for a law firm? Roll on nearly 100 years from when John Lewis adopted the employee ownership model and we see law firm succession planning embrace new legal practice ownership models.
Thanks to beneficial tax treatment under the Finance Act 2014, increasing numbers of owners are revisiting the employee ownership model. However, the benefits are not limited to owners when considering law firm succession planning; there is substantial evidence that, in a more values based economy, employee-owned law firms are able to attract and retain talent.
In 2016, Stephens Scown was the first large law firm in the UK to adopt an employee ownership model. Since our own law firm transition planning, we have advised many businesses on succession planning, including employee ownership for law firms.
What is Employee Ownership in a law firm?
Employee ownership for law firms is about as flexible as employee ownership for other businesses. The employee ownership model is not a “one size fits all”. Put simply, the model enables the employees of the business to have a voice and harnesses the power of diversity of thought. Legal practice ownership models could vary in the amount of the stake being sold, whether a small percentage to the entirety of the firm.
Why law firm owners are exploring this model
It might remain absolutely appropriate for law firm succession planning to follow a traditional route of finding new providers of equity to join the partnership, or to merge or something similar. Those who find such routes unattractive are drawn to succession planning without having to find and sell to a third party.
One of the distinguishing features of employee ownership sales is that the seller has a buyer (a purpose built trust for the benefit of the employees) readily available, as opposed to going out to market with all the distraction, stress and issues of confidentiality that are part and parcel of a business sale. As a result, when progressing an EO sale, the sellers tend to have more control over law firm transition planning and the timetable for completing the project. All of which enables a closer resemblance to “business as usual” whilst the transaction is completed.
Whilst the ownership might change on “completion day”, the impact on culture might take longer to find itself and settle down. Another key benefit of a sale to the employees is that the culture of an employee-owned law firm has more likelihood of staying intact. Where creation of a legacy is sought (whether in the community or otherwise), employee ownership for law firms has clear advantages.
For more information on what employee ownership is, please read our guide to employee ownership.
The business case for Employee Ownership
The research carried out by the Employee Ownership Association (and its supporters) makes compelling reading for those interested in understanding the benefits of professional services employee ownership. As examples, the report from the EO Knowledge Programme entitled “People Powered Growth” shows:
- a stronger growth economy: employee owned businesses are 8% – 12% more productive than non-employee owned businesses
- a healthier economy: 83% of those surveyed reported increased employee engagement and motivation since adopting an EO model and 73% reported increased job satisfaction
- a higher skilled economy: employee owned businesses share high levels of critical business information and provide channels to directly influence decision-making, which in turns supports employee learning and contribution
- a more financially resilient economy: employee owned businesses were less likely to see their profits decline over the five years (from 2018 to 2023) including through the pandemic and supply chain crises.
In a crowded marketplace for professional service providers, “differentiation” becomes important. In 2023, the White Rose Employee Ownership Census found that “Professional Services” was the top sector for transitions to employee ownership, within which was a significant number of legal service providers. In our experience, the move to employee ownership creates different behaviours (everyone being even more vested in the success of the business). This differentiation can unlock great examples of superlative client service giving marketing teams plenty of firepower to stand out from the crowd.
Common concerns (and why they’re usually unfounded)
For some, employee owned law firms may be an exciting prospect. For others, concerns might be around control, viability, longevity and compliance.
If employee ownership for law firms is being considered, a firm with a growing profit line each year might tend towards a steady and predicable income stream. A strong business will need to continue to be a strong business that can (through careful cashflow modelling) absorb the stresses of a vendor loan.
If the sellers wish to take advantage of the capital gains relief available, control of the business will need to be ceded: confidence in the successor management team will be important. The sellers, leaving a debt within the business, could justifiably impose some controls on the way in which monies are spent by the business whilst the debt remains due.
Sharing of information circulating around the business will also need consideration. Not all information need be shared. Care will be required to make sure the information is regular, clear and relevant. Owners will need to think whether anything is required to strengthen the future of the business. What is the culture of the legal practice today and how does the culture grow into the new model?
Employee owned law firms will not be the preferred route for everyone. Those in equity (and those aspiring to be in equity – current or future) will think hard about the balances between risk and reward for their stake in the business. The existing models of revenue and reward (such as the “eat what you kill” model) may need revisiting before moving to an employee owned structure.
Compliance in a heavily regulated industry will need to continue. The Solicitors Regulation Authority has approved employee ownership for law firms. Alternative Business Structures have enabled wider ownership of law firms to reflect a more inclusive culture and harness the power of greater diversity.
In our experience, close co-ordination with the firm’s professional indemnity supplier will be required. Again, there are insurers available who are familiar with employee owned law firms.
Our journey: 8 years as an Employee-Owned law firm
In 2015, Stephens Scown successfully ranked for the first time in the Sunday Times 100 Best Companies to work for list, which saw the start of seven consecutive years appearing in the list. The firm was on an exciting journey, investing in its people and implementing a raft of employee engagement initiatives,
Meanwhile, employee ownership was already being explored as an interesting business model to give everyone a real stake in the business. Employee ownership felt like the next natural step for the business. With the transition, employee ownership became embedded in the DNA of the business at every level. It released some of the opportunities that employee ownership delivers and which those within and outside the business have been able to observe. This includes year on year growth and a continuous focus on improving client service, driving efficiencies and looking after our people and communities.
The business itself displayed features that enabled a move to happen. And do so at its own pace. This year, we were listed again in the Sunday Times Best Places to Work 2024 and employee retention continues to increase.
How to get started: transitioning to Employee Ownership
The steps required to move a law firm into an employee ownership, include engaging with the Solicitors Regulation Authority, establishing the employee ownership trust and transferring ownership of the shares to the trust. This involves setting up a trust deed, appointing trustees, and ensuring the trust operates for the benefit of all employees. Depending on the size of the firm and the pressures of generating income, the project can take several months to complete.
We have been pleased to support law firms and other businesses wishing to follow our own journey into employee ownership. With nearly 10 years of experience, we can provide insights not just into the transaction, but also into the continuing life of an employee-owned law firm with around 350 employees.
A model built for the future of law
In the right circumstances employee ownership for law firms can release considerable benefits. Like any succession plan, careful consideration of the impact on the owners, clients, community, culture and stakeholders will be important. External advice should be taken.
Law firm succession planning through employee ownership (like all sales) is not without risk. However, a seller would be well advised to explore, understand and consider, employee ownership as a succession plan within the range of options.
Employee ownership might unlock and deliver more than originally foreseen; the results could be pleasantly surprising.
To discuss employee ownership please contact our Employee Ownership team on 0345 450 5558 or enquiries@stephens-scown.co.uk