The lasting effects of the pandemic are having a dramatic impact on work practices across every industry, and the contingency fee legal industry is about to feel the pinch.
The stay-at-home orders had an immediate impact on many contingency fee law firms due to fewer accidents and injuries resulting in a significant decline intakes particularly for law firms that specialize in personal injury and workers compensation litigation.
Also, the compounding effect of court closures have extended case durations and potential settlements or verdicts — ultimately delaying any revenue coming into the law firms.
To make matters worse for the cases that were in litigation during the pandemic, without a solid trial date or even the threat of jury trial, insurance companies had leverage to offer subpar settlement offers well below the underlying claims’ full value.
Law firms have had to operate using settlement income from years prior, and as such they haven’t yet fully experienced the ramifications of 2020’s slowdown — but they are about to.
Many legal industry experts predict, including the law firm banking specialists at Esquire Bank, that the lasting consequences of the pandemic could lead to significant consolidation in the contingency fee practice as the law firms that have built a sizeable war chest go shopping for acquisition targets through 2022 and beyond. In this new reality, unless your law firm has built the internal departments that lead to sustainable growth (like marketing, finance, and IT departments) consolidation or acquisition will be a key theme moving forward.
The pandemic lingers on the balance sheet and smart money law firms are looking towards lending now
Courts in nearly every state had to extend, indefinitely delay, or shut down trials altogether, dramatically impeding law firms’ cash flow. Practices that stand firm post-pandemic may experience a revenue decline that could have a significant impact on their balance sheets in 2022. As a result, many firms that understand the way that lenders work (looking backwards at previous financial performance) are seeking lending from banks and other finance companies while their revenue figures still look to be intact. Delaying this will likely mean that the pandemic’s stain on balance sheets will negatively affect a law firm’s ability to secure advantageous interest rates from the banks and potentially force law firms to seek financing at more punitive rates through litigation finance companies.
At the same time, affordable lending is likely to dissipate as inflationary pressures are poised to increase interest rates as the Fed fights to mitigate inflation. These factors could discourage many law firms from borrowing, even when they need financing most.
This is why it is key that law firms seek out a bank like Esquire Bank, which is able to collateralize the value of the firm’s case inventory and future revenue for law firm lending, helping law firms to continue business operations and potentially expand during this opportunistic time.
Consolidation is coming – buy or be bought?
The pressure that comes with these sudden financial changes has encouraged consolidation and acquisition across the legal landscape. New laws have established non-attorney law firm ownership in Utah, Arizona, and other larger states like California, New York, and Florida are also considering these changes. Large-scale litigation funders and equity investors are keeping a close eye on consolidation opportunities. Additionally, larger law firms that have maintained their stability through the pandemic are beginning to seize on smaller, distressed firms.
Now, the big question many are asking across the industry is, “Buy or be bought?” Law firms that have a sizeable war chest are looking to buy law firms, while law firms that are in financial peril and have not adequately set up their business for the new digital consumer, will struggle to survive or be bought out. Often one of the biggest inhibitors to contingency fee law firm liquidity is the self funding of case costs. As personal injury law firms take on more clients, their case costs are paid up front and locked away for years. This money could’ve been deployed during opportunistic periods like now and law firms that have financed their case costs have stronger balance sheets and are now looking to acquire.
That’s why now is the time to know your practice’s response and gauge your firm’s placement on the acquisition and consolidation spectrum. Assess your growth level and growth potential in light of the pandemic’s lasting aftereffects and explore key areas of opportunity through a thorough dissection of your internal objectives, resources and capabilities. This level of discovery and introspection is essential at this industry inflection point — and it can position your practice for long term sustainable growth.
Take advantage of Esquire Bank’s Growth Assessment Tool
By answering nine short questions you can see your law firm’s trajectory for growth. By using Esquire Bank’s new online Growth Assessment Tool, it can help equip contingency fee law firm partners with the ability to assess their company’s growth potential, while offering strategic recommendations and best practices for future expansion.
Esquire Bank’s assessment tool is a free resource, with no obligations. Visit assessment.esquirebank.com to complete your assessment now — and take the first steps to managing growth and mitigating competitive risk in the new, post-pandemic legal landscape.
