No pot of gold at the end of the rainbow

A year has now passed since it became possible for the world to invest in law firms in England and Wales. If there has not quite been a stampede, there have at least been one or two fairly high profile moves in that direction, and information from the SRA suggests that there is more to come. But are there any lessons to learn from what we have seen so far in the process of firms becoming ABSs? Do they look or feel any different to clients, or to those working in them? The answer, at the moment, seems to be “no” but in the longer term it seems likely that the impact of ABSs will be felt more keenly – and perhaps mostly so by those lawyers who strive to further their careers within them.

Different entity

What is fundamentally different about conditions inside an ABS, for a young and ambitious lawyer, is that they are working for a very different entity. The traditional law firm model (perhaps reflected in lockstep arrangements and “plateau points”) was that partners in a law firm were tenants, who one day would relinquish their position to the next generation of partners. While they were in occupation as partners they could expect a safe and secure existence. Those who worked hard and earned their way into partnership could similarly look forward to a rewarding and stable future.

Everyone appreciates that, in private practice, those days are for the most part far behind us. But the position is further changed, these days, by the introduction of the ABS.

What the ABS means, for lawyers who are working their way up into partnership or, perhaps, further up into the equity, is that the pot of gold may no longer be waiting ?for them at the end of the rainbow.

This is because the business of a law firm in which there has been outside investment is owned, even if only in part, by someone else. In effect, where conversion to an ABS has taken place, the farmer’s children, having worked the land for their parents for many years, in the expectation that one day they would inherit it, have discovered that, shortly before retiring, the parents sold the farm to someone else.

All of a sudden, all those years of hard effort, with a promise of eventual reward, seem hollow. Worse than that, our allegorical farmer’s children find that they are welcome to continue working the land, but on the basis of a working wage and with a greatly reduced prospect of long term substantial gain, in contrast to what they had historically been told awaited them.

Satisfying investors

Investors in ABSs will be looking for a return on their money. In other words, profits made by a law firm will need to satisfy investors, rather than being distributed among owners who run the business only for themselves. So ABSs are likely to become much more similar to corporate structures, where dividends are paid out to investors but those working within the corporate entity (except perhaps for a few at very lofty heights) can look forward to many years of hard graft and remuneration at a fair or standard level.

Historically, partners have been ambitious and anxious to generate profits for themselves. While the conversion to an ABS may result in the short term release of equity to those partners who have climbed to the top of the ladder, the question is whether, when a law firm converts to an ABS, this has the effect of cutting off the prospects of those at the foot of the ladder.
It will be interesting to see whether, as a result of this, firms which avail themselves of the ability to become an ABS, encounter any difficulty in recruiting or retaining talented and ambitious staff who wish to progress ever upwards.

Of course, that is not to say that it is impossible to arrange an ABS so that it is able effectively to incentivise its ambitious young star performers.
However it seems likely that, where part of a firm’s profits are paid out to investors, there will be less distributable profits to pay to partners.
And the question for those who do not wish to grind away for years on end (in light of the ever increasing age of retirement) may become whether ABSs offer the same attraction as businesses which are owned only by those who run them.